Reinsurance Risk Structures - Ireland's Reinsurance SPV Regime
There has been a recent marked rise in interest in the Irish Special Purpose Reinsurance Vehicle ("SPRV") regime.
Ireland was the first EU Member State to implement the European Reinsurance Directive, via the European Communities (Reinsurance) Regulations 2006 (the "Regulations"), quickly followed in June 2007 by the guidelines (the "Guidelines") of the Irish Financial Regulator ("FR") which set out the FR's requirements for authorisation as an SPRV in Ireland.
SPRVs – key concepts
The combined effect of the Regulations and the Guidelines is to provide authorisation under the SPRV regime for a bankruptcy-remote entity to be established:
- which issues bonds or enters into loans to fund its exposure to reinsurance risks which it assumes from reinsurance undertakings;
- which has minimal capital requirements; and
- which has no solvency or technical reserve requirements,
- it is "fully funded"; and
- any additional charging of the assets comprising such "full funding" to relevant noteholders/lenders is subordinated to the rights/claims of the reinsurance counterparties.
The SPRV's obligations to any of its debt/finance providers must be subordinated to the obligations of the SPRV under relevant reinsurance contracts.
In order to access the SPRV regime, relevant reinsurance transactions must be structured whereby:
- any payment by the SPRV to the cedent must be dependent on the cedent suffering a loss as a result of indemnifying policyholders for actual loss, and
- the SPRV must be obliged under the structure to indemnify the cedent for such actual loss.
While SPRVs are taxable entities, they can be structured as section 110 entities (Ireland's securitisation vehicles) within the SPRV regime, and thus retained as "flat" or profit neutral vehicles.
Ireland does not impose premium tax on reinsurance premiums in respect of non-Irish risks.
"Fully funded" means that the market value of the assets held, or value of a letter of credit established, by an SPRV and charged in favour of the relevant reinsurance counterparty match or exceed the risk exposure under the reinsurance arrangements with such counterparty.
The concept of fully funded is further divided between reinsurance contracts with specified limits (a maximum amount payable to the ceding insurance company), and reinsurance contracts with no limit, and requires in each case that the market value of the assets held, or value of an LC established, by the SPRV for the benefit of the relevant reinsurance counterparty equals or exceeds such relevant limit, or for an SPRV with no limit equals or exceeds the projected economic reserve requirements of the SPRV under the relevant reinsurance contract (as determined actuarially).
An SPRV must have been approved by the FR in order to operate in Ireland. However, the authorisation process is not onerous: the average timeframe for FR approval is one month.
- In respect of reinsurance contracts without limits (typically life contracts), the SPRV must ensure that actuarial reviews are conducted at least annually to confirm the "fully funded" status of the SPRV on an ongoing basis.
- Any relevant cedent's regulator must be aware of the nature of the transaction and of the SPRV.
- Limited recourse/non-petition is prescribed for all service-provider relationships with the SPRV.
- Delegation of infrastructural support to the SPRV is permitted.
- Unlike with "normal" structured finance SPVs, directors of the SPRV must be insurance professionals.
- There are no specific Irish insolvency rules applying to SPRVs.
The SPRV regime in Ireland is user-friendly. It provides for the establishment of vehicles to securitise insurance risk without the onerous capital or authorisation requirements usual for regulated insurance entities. SPRVs are not otherwise regulated under Irish or EU law as carrying on insurance business or reinsurance business in Ireland. The ongoing operation of SPRVs under the Irish regime is not radically unlike the operation of a structured finance SPV.