FSA consults on rules to introduce Insurance Special Purpose Vehicles
Thomas Huertas
Introducing ISPVs will give insurers and reinsurers access to more diverse sources of capital and enable them to manage their capital more efficiently. 
FSA/PN/058/2006
20 June 2006
The Financial Services Authority (FSA) is today consulting on rules to introduce to the UK, a new fit-for-purpose regime for Insurance Special Purpose Vehicles (ISPVs). The proposals form part of a wider consultation on the implementation of the EU Reinsurance Directive (RID).
ISPVs are special purpose reinsurance vehicles which must be fully funded, typically by issuing debt. If the ISPV has to pay out under its reinsurance obligations, the repayment rights of the debt holders are reduced accordingly. Currently an ISPV would be regulated on the same basis as a firm conducting traditional reinsurance business and would be subject to the full authorisation process for such a firm.
Under the RID the FSA will introduce authorisation requirements that are proportionate to the lower risks resulting from the structure of ISPVs. These will remove unnecessary information requirements and place greater focus on self-certification than for a traditional insurer or reinsurer. The FSA will largely supervise ISPVs through its supervision of the ceding insurer, which will ensure that an adequate level of consumer protection is maintained at all times. The introduction of an ISPV regime will allow insurers to manage their capital more efficiently.
Thomas Huertas, FSA Director for Wholesale Firms, said:
"The implementation of the Reinsurance Directive gives the FSA an opportunity to make the UK an easier place for insurers to do business in. Introducing ISPVs will give insurers and reinsurers access to more diverse sources of capital and enable them to manage their capital more efficiently.
"We can now also give greater investment flexibility to pure reinsurers, whilst life reinsurers will benefit from reduced capital requirements. These changes will provide an important contribution to our provision of the 'Regulatory Platform of Choice'."
The insurance industry has indicated that the two main factors determining the location of innovative vehicles such as ISPVs, are the regulatory and taxation regimes in a jurisdiction. On 13 June 2006, HM Revenue and Customs (HMRC) proposed the implementation of a new taxation regime for Special Purpose Vehicles involved in the securitisation of financial assets, to take effect from 1 January 2007, and issued a set of draft regulations. As part of its proposals, HMRC is seeking industry views on whether ISPVs should also be brought within the scope of that regime.
The FSA consultation paper proposes a new rule to cover financial reinsurance and other innovative insurance transactions. This will require firms to assess the level of risk transfer arising from a transaction, including whether the associated documentation reflects the economic substance of the transaction. Firms would only be able to take account of the risk transferred by the transaction when calculating their minimum capital requirements.
The impact of introducing the RID will be limited to certain specific areas for UK reinsurers, as the FSA already applies similar rules in many areas. For non-life reinsurers, the FSA believes that the impact of its proposals will be negligible. For pure life reinsurers the FSA anticipates a reduction of around £730m in the amount of capital they are required to hold for regulatory purposes.
The RID also requires the FSA to replace its detailed admissible asset rules with broader 'prudent person' investment principles for pure reinsurers. The FSA will remove the existing admissible asset rules and quantitative limits for pure reinsurers (both life and non-life). Instead the FSA will put in place five 'prudent person' investment principles which are intended to ensure the sufficiency, liquidity, security, quality, profitability and matching of assets. This will provide pure reinsurers with greater investment flexibility, particularly when investing in new or innovative products.
Notes to editors
- Consultation Paper 06/12 'Implementing the Reinsurance Directive', can be found on the FSA website.
- The EU Reinsurance Directive came into force on 10 December 2005 and must be implemented by 10 December 2007. The FSA intends that its rules should be in place by December 2006, to enable firms to benefit from the proposed changes as at 31 December 2006 for year-end reporting purposes.
- ISPVs must meet the definition laid down in the Reinsurance Directive which is as follows:
- HMRC have set a deadline of 6th July 2006 to receive industry views regarding their taxation proposals. The proposals are available on HMRC's website.
"any undertaking, whether incorporated or not, other than an existing insurance or reinsurance undertaking, which assumes risks from insurance or reinsurance undertakings and which fully funds its exposure to such risks through the proceeds of a debt issuance or some other financing mechanism where the repayment rights of the providers of such debt or other financing mechanism are subordinated to the reinsurance obligations of such a vehicle".