The Financial Services Authority (FSA) is looking at the development of new rules to establish U.K.-based insurance special purpose vehicles (ISPVs). This puts the sector in step with other offshore jurisdictions. The proposals form part of a wider consultation on the implementation of the European Union reinsurance directive (RID) due to be implemented by December 10, 2007.

The introduction of an ISPV regime would allow insurers to manage their capital more efficiently and potentially open the field to a greater variety of reinsurance structures in the U.K. similar to the catastrophe bonds and companies that are set up to underwrite for a limited period only.

The ISPVs are special purpose reinsurance vehicles that 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, in the U.K., ISPVs must apply for authorization as a reinsurer, and are regulated as such. The FSA is proposing for more leniencies in the authorization regime that would require lighter supervision of the ISPVs, reflecting the lower risks resulting in these vehicles.

Under the new rules, the FSA would remove some of the information requirements for the ISPVs and place a greater emphasis on self-certification than what is required for traditional insurers and reinsurers in the U.K. Insurers have indicated that the two main factors determining the location of these vehicles are regulatory and fiscal regimes in the jurisdiction. "The implementation of the Reinsurance Directive gives the FSA an opportunity to make the U.K. an easier place for insurers to do business in," said Thomas Huertas, the FSA director for wholesale firms. "Introducing ISPVs will give insurers and reinsurers access to more diverse sources of capital and enable them to manage their capital more efficiently."

"The attention given by regulators in key EU jurisdictions to the framework for insurance securitization confirms the increased importance of this instrument [ISPVs] for the industry and will only help to further promote its broader applications by creating a clear framework for all those involved, thus facilitating the application of this technology to insurers in the U.K.," said Luca Albertini, head of European insurance linked securities at Swiss Re Capital Markets.

Uncertain times

The U.K. FSA is more advanced than other regulators across Europe. Its RID takes the first steps to put into perspective the changes that will be made under the EU wide directive, Solvency 2. Under Solvency 2, the European Commission intends to create a single European reinsurance market and remove remaining barriers to trade within the EU that arise from the existence of varied supervisory regimes across member states. "Until now, there have been no EU directives specifically relating to the prudential supervision of reinsurance business, although in the U.K. we have broadly carried over the requirements of the existing direct insurance directives to reinsurers," the FSA said.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.