INSPRU 1.6 Insurance Special Purpose Vehicles

An ISPV is a special purpose vehicle which assumes risks from insurance undertakings 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 that vehicle. The special feature of an ISPV, when compared to other reinsurers, is that it is fully funded to meet its reinsurance liabilities. It is, therefore, not subject to insurance risk to the same extent as other reinsurers. The Reinsurance Directive permits ISPVs to be subject to different rules to those applying to other reinsurers.

To satisfy the definition of an ISPV under the Reinsurance Directive the ISPV must be fully funded. The FSA considers that to be fully funded an ISPV must have actually received the proceeds of the debt issuance or other mechanism by which it is financed. The FSA would not, therefore, grant a Part IV permission to an ISPV where part of the financing for its reinsurance liabilities was on a contingent basis, for example, a standby facility or letter of credit.

The purpose of INSPRU 1.6 is:

1. (1)

   to set out the rules applying to UK ISPVs in respect of:

   1. (a)

      their assets and liabilities; and

   2. (b)

      their contractual arrangements; and

2. (2)

   to set out the conditions that must be met in order for an insurer to claim credit for reinsurance with an ISPV.

1The purpose of INSPRU 1.6.5 R is to ensure that a UK ISPV may be viewed as a going concern at all times.

In addition to liability under its contracts of reinsurance, an ISPV will incur liability for other expenses, for example, staff and accommodation costs, claims handling arrangements and professional advisers' fees. INSPRU 1.6.5 R requires a UK ISPV to ensure that it always has sufficient assets to meet its liabilities.

INSPRU 1.6.9 R requires that a UK ISPV's contracts of reinsurance should include terms that secure that its maximum reinsurance liability is capped at a level that is no greater than the ISPV's assets. In the FSA's view, this is a necessary condition of the ISPV being fully funded, as it means that the ISPV should not find that its assets are insufficient to meet its reinsurance liabilities.

As a result of GENPRU 1.3.55 R, GENPRU 2 Annex 7, INSPRU 1.1.92A R and INSPRU 1.2.28 R an insurer may not:

1. (1)

   treat amounts recoverable from an ISPV as:

   1. (a)

      an admissible asset, or

   2. (b)

      reinsurance for the purposes of calculating its mathematical reserves, or

   3. (c)

      reinsurance reducing its MCR, or

2. (2)

   otherwise ascribe a value to such amounts,

unless it first obtains a waiver from the FSA. INSPRU 1.6.14 G to INSPRU 1.6.18 G set out the information which the FSA will expect to receive as part of the application for the waiver. Those paragraphs also set out the factors, in addition to the statutory tests under section 148 of the Act, to which the FSA will have regard in deciding:

1. (i)

   whether to grant such a waiver (assuming the section 148 conditions are met); and

2. (ii)

   the amount recoverable from the ISPV which it will allow the insurer to bring into account for these purposes.

Where the ISPV is a UK ISPV, the FSA will wish to be satisfied that the UK ISPV complies with INSPRU 1.6.5 R to INSPRU 1.6.12 R. The FSA may rely on information supplied in connection with its application for authorisation. However, if the application for a waiver is made some time after authorisation was granted, the FSA may request confirmation that there has been no material change to the information originally supplied.

Where the ISPV is not a UK ISPV, the FSA will expect to receive confirmation that the ISPV has received an official authorisation in accordance with article 46 of the Reinsurance Directive in the EEA State in which it has been established. In addition, it will need details of the debt issuance or other financing mechanism by which the ISPV's reinsurance liabilities are funded. The FSA will also expect to receive information about the ISPV's key management and control functions, including details of the ISPV's auditors and arrangements for claims handling, and any material outsourcing agreements. The FSA will also need information about the structure of any group of which the ISPV is a member.

No credit may be taken for a contract of reinsurance with an ISPV unless the contract meets the risk transfer principle set out in INSPRU 1.1.19A R. The FSA will require evidence that the contract of reinsurance and the extent of the credit that the firm proposes to take for it satisfy the risk transfer principle.

The FSA will require information about the impact of the ISPV arrangement on the ceding firm's individual capital assessment carried out in accordance with INSPRU 7.1. This should include evidence that all residual risks associated with the arrangement (including credit, market, liquidity and operational risks) are reflected in that assessment.

The FSA will also expect to receive an analysis of the potential for risk to revert to the firm or any of its associates under realistic adverse scenarios or for liabilities to arise in respect of the risks transferred for which no provision has been made.