Malta to legislate for insurance securitisation

The draft RSPV Regulations provide for the authorisation and regulation of SPRVs in Malta, being special purpose vehicles that assume risks from a ceding insurance / reinsurance undertaking and which fully fund their exposure by means of a debt issue or other financing mechanism.

In a nutshell

• Malta’s financial services regulator, the MFSA publishes for consultation draft regulations for reinsurance special purpose vehicles.
• When in force, regulations will serve as a basis for catastrophe bonds, longevity risk transfer, insurance sidecars, collateralised reinsurance and other insurance risk securitisation transactions in Malta.
• Draft regulations mark first attempt of Solvency II compliant delegated legislation on the subject.

SPRVs (or ISPVs as the entities are known in some jurisdictions) are central to a wide variety of alternative risk transfer structures that bridge the insurance industry with the capital markets including catastrophe bonds, longevity risk securitisation and sidecars. RSPVs may also be useful as alternative capital sources for Lloyd’s syndicates.

The publication of the draft RSPV Regulations was followed by a two-week consultation process that ended on the 17th June 2013. We understand that the MFSA is now in the process of digesting all feedback received during the consultation period and will be publishing its feedback shortly.

What is a Reinsurance Special Purpose Vehicle?

The draft RSPV Regulations define a Reinsurance Special Purpose Vehicle as an undertaking other than an existing insurance undertaking or reinsurance undertaking which assumes risks from a ceding undertaking and which fully funds its exposure to such risks through the proceeds of a debt issuance or any other financing mechanism where the repayment right of the providers of such debt or financing mechanism is subordinated to the reinsurance obligations of such a vehicle. SPRVs are expressly recognised by the EU Reinsurance Directive (2005/68/EC) and Solvency II Directive (2009/138/EC).

Limited liability companies formed or constituted in Malta whose objects are limited to operating as an SPRV may apply for authorisation.

RSPVs within the scope of the draft Regulations are required to obtain MFSA authorisation prior to entering into any transaction.

What are the main uses of SPRVs?

Reinsurance Special Purpose Vehicles may be used in catastrophe bond, sidecar, collateralised reinsurance and transformer structures.

What requirements is an SPRV required to satisfy in order to obtain authorisation?

In terms of the draft RSPV Regulations, an applicant wishing to obtain an SPRV authorisation in Malta is to:

• be organised as a limited liability company under Maltese law;
• have its objects restricted to operating as an RSPV;
• assume risks from a ceding undertaking through reinsurance contracts, or assumes insurance risks through similar arrangements;
• ensure at all times that the maximum liability of the RSPV is fully funded requirement by the proceeds of the debt issue or any other financing mechanism;
• demonstrate that the contractual arrangements relating to the transfer of risk from a ceding insurance / reinsurance undertaking to the RSPV, and the investment in assets by the RSPV, satisfies the conditions set out in the draft RSPV Regulations;
• demonstrate that persons effectively running the RSPV satisfy fitness and propriety criteria;
• disclose the identity of the shareholders or members having a qualifying shareholding in the RSPV;
• demonstrate sufficient governance arrangements, in line with the principle of proportionality including sound administrative and accounting procedures, adequate internal control mechanisms and risk-management processes;

The authorisation process commences with the submission of a scheme of operations outlining the proposed structure and acticvities of the vehicles. Additional documentation is to be submitted in conjunction with the scheme of operations including:

• a copy of the risk transfer contract (eg reinsurance or retrocession agreement or treaty) or a statement containing a description of the contract which shall include any triggering event and the maximum aggregate exposure limits of the RSPV to the ceding undertaking;
• a copy of the constitutional documents of the RSPV;
• information on any directors, controllers and all persons who will effectively direct and manage the RSPV including a Personal Questionnaire, where applicable;
• information on any trustee holding the assets or shares of the RSPV;

What are the governance requirements that SPRVs are to satisfy?

In terms of the draft RSPV Regulations, an SPRV is required to have a system of governance including:

• sound administrative and accounting procedures;
• written policies in relation to various aspects including risk management, internal control, administrative and accounting procedures and, where relevant, outsourcing;
• internal controls to ensure that the debtholders are subordinated to the claims of the ceding undertaking under the risk transfer contract;
• an effective risk management system comprising processes and reporting procedures necessary to identify, measure, monitor manage and report on an ongoing basis, the risk to which an RSPV could be exposed.

Does the principle of proportionality apply to SPRVs?

Yes. The governance arrangements of an SPRV are to be drawn up taking into account the nature scale and complexity of the proposed of the risks that the SPRV will assume and the uses of the SPRV.

What are the capital requirements of an SPRV?

An SPRV is to be fully funded at all times to the maximum aggregate exposure under the risk transfer contract. In this regard, claims of debtholders and investors providing financing to the SPRV are to be subordinated to the claims of the ceding undertaking in terms of the risk transfer contract.

The assets of an SPRV are to be valued in accordance with generally accepted accounting principles and practice. The proceeds of the debt issuance by the SPRV are to be fully paid-up.

What are the investment requirements of SPRVs?

The proceeds of any debt raised by the SPRV to finance its contingent liability under the risk transfer contract are to be invested in accordance with the prudent person principle. The draft SPRV Regulations require authorised vehicles to sufficiently diversify investments taking into account the nature and duration of the vehicles’ contingent liabilities. Assets are to be invested in a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole.

When will the new rules come into force?

It is anticipated that the RSPV Regulations will become law during the second half of 2013.

About Malta

Malta is a European Union domicile with an established reputation in the captive insurance and protected cell company market. As of 31 December, 2012, 58 insurance undertakings operated from Malta, including 8 protected cell companies (PCCs).

Once these regulations come into force, Malta’s offering as a domicile for ART transactions will be significantly enhanced.

For more information or if you have any questions, please feel free to contact the author (Dr. Matthew Mizzi (Advocate, Insurance Securitisation)) or Dr. Matthew Bianchi (Partner, Insurance & Reinsurance) or Mr. Richard Ambery (Partner, Capital Markets).