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Insurance special purpose vehicles - the wheels of change in motion

01 June 2020. Published by Lauren Murphy, Associate

On 22 May 2020 the PRA published updates to its approach to the authorisation and supervision of insurance special purpose vehicles (ISPVs).

These updates are a result of the PRA's experience gained since the launch of the UK Insurance Linked Securities (ILS) Regime in December 2017, which is the corporate, tax and regulatory framework for UK domiciled ISPVs which sponsors and arrangers can use in ILS or CRe transactions. The PRA stated that it wished to refine the framework to facilitate the issuance of ILS through ISPVs in the UK by taking into account the insight gained.

These updates (a number of which are detailed below) are designed to reflect the logistics of ILS transactions and the authorisation process, and to clarify the PRA's expectations in this regard:

Documentation requirements

  • the ‘documentation requirements’ section of the SS8/17 ‘Authorisation and supervision of insurance special purpose vehicles’ (SS) (which is a flexible framework for firms, incorporating the PRA's new and existing expectations in relation to the authorisation and supervision of ISPVs, designed to help firms understand whether they are meeting these expectations)has been amended to clarify the PRA’s expectations regarding;
  • the documentation that is required to be submitted at the point of application for authorisation of an ISPV – the PRA has clarified that it recognises that all the final documentation might not be available for submission at the time an applicant wishes to apply. The PRA will take a pragmatic approach, and when an applicant identifies that this may be the case it expects the applicant to engage with the PRA, explain what information is likely to be available and how this may affect the application; 
  • where certain outstanding commercial terms may only be finalised post PRA approval – the PRA has clarified that it understands that in ‘live’ transactions, some of the transaction documents may not be legally executed prior to obtaining PRA authorisation, and that certain commercial terms may remain outstanding until execution. The PRA is adopting a proportionate response whereby the applicants may submit the final documentation post authorisation, upon execution; and
  • independent third party opinions to support an application (particularly, legal opinions) – the PRA has clarified: (i) that it does not generally expect to request such opinions in all cases; (ii) the circumstances in which the PRA believes such third party opinions may be helpful to support an application; and (iii) the circumstances in which the PRA would expect an applicant to provide such opinions

Funding arrangements

  • additional details in the ‘funding arrangements’ section of the SS have been added to provide examples of where there may be changes to the risk transferred (being some or all of the risk under a contract of insurance) and/or funding of the ISPV
  • clarity has been provided regarding market participants being able to structure mechanisms under the UK ILS regime which include provisions to ‘roll-over’ funding, while meeting the fully funded requirement

Risk transfer requirements

  • chapter 3 of the SS has been amended to clarify the PRA’s expectations with regards to risk transfers. Those expectations address the number and type of risk transfer arrangements an ISPV may assume, the specific requirements that must be complied with, and the information that must be provided to demonstrate compliance

MISPV New Risk Assumption Notification Form

  • the PRA has amended the MISPV New Risk Assumption Notification to limit duplication with regards to information that has been provided at the initial application stage