The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published policy statements on the authorisation and supervision of Insurance Special Purpose Vehicles (ISPV). ISPVs issue insurance linked securities (ILS) which transfer risks to the capital markets.PRA policy statement
The PRA has published Policy Statement PS26/17: Authorisation and supervision of insurance special purpose vehicles. PS26/17 provides feedback to responses to CP42/16. PS26/17 includes Supervisory Statement SS8/17: Authorisation and supervision of insurance special purpose vehicles as well as amendments to the ISPV part of the PRA Rulebook and to application and notification forms.
SS8/17 sets out the PRA’s expectations in relation to the application process for authorisation, fit and proper requirements and the requirement for ISPVs to be fully funded at all times.
The rules, forms and SS8/17 will be formally adopted once the Risk Transformation Regulations 2017 (RTR) have passed through Parliament (they began their passage on 12 October 2017). The rules and SS8/17 cannot be made if the RTR are not passed.
In the light of responses to CP42/16 and to the June 2017 consultation paper Strengthening accountability in banking and insurance: optimisations to the SIMR, and changes to SMR forms (CP8/17), the PRA has published details of how the final approach set out in the rules and SS8/17 differs to their earlier proposals. The main points to note are:
- New cell notification for MISPV. CP42/16 originally required multi-arrangement ISPVs (MISPVs) to notify the PRA of a proposal to establish a new cell ten working days before the cell is set up. Due to responses received, the PRA has decided that post-transaction notification of a new assumption of risk is acceptable provided that it falls within the Scope of Permission of the ISPV. HM Treasury has amended the RTR with the effect that when a Protected Cell Company assumes risk from an undertaking it must notify the PRA within five working days.
- Application timings and documents. The PRA has not amended its proposed application review timings of six to eight weeks. To meet concerns that the approval period is not commercially viable the PRA has amended SS8/17 to strongly recommend that applicants engage early with the regulators in order to reduce authorisation times. The PRA has clarified that it does not require the submission of third party opinions for authorisation applications but applicants are encouraged to submit opinions where they may aid the PRA in their assessment. In terms of when funding should be received in the authorisation process, the PRA has conceded that there are legitimate issues that can arise in terms of getting funding in place during the application process. In some cases the PRA may be prepared to authorise an ISPV before funding is received.
- Qualifying holdings. Respondents to CP8/17 asked the PRA to clarify the types of investors that would have a “qualifying holding” (within the meaning of Solvency II) on the basis that they may exercise a significant influence over the management of an MISPV. The PRA plans to carry out fit and proper assessments of all shareholdings within the core of an MISPV. These shareholders will have a qualifying holding as they may have a significant influence over the management of the MISPV. Shares in the cells cannot amount to a qualifying holding requiring an assessment under Solvency II. For ISPVs, the PRA will conduct fit and proper assessments of shareholders with 10 per cent or more voting rights (or who may have a significant influence over the ISPV). The ISPV should carry out a fit and proper assessment of the remaining passive, non-voting shareholders who meet the qualifying holding threshold. The PRA will review ISPVs’ ability to assess these individuals.
- SIMR requirements. Respondents to CP8/17 questioned whether it was necessary to have three senior insurance manager function (SIMF) roles within an ISPV. The PRA continues to believe that these three roles are appropriate, however it clarifies that one person may be able to perform more than one of these roles and that a SIMF role need not be held by an employee of the ISPV.
- Requirement to be fully funded. Solvency II requires that ISPVs are fully funded at all times. This means that they should have assets the value of which is equal to or exceeds the ISPVs aggregate maximum risk exposure (AMRE) and that the ISPV is able to pay its liabilities as they fall due. The PRA states that it will not be possible to rely on a limited recourse clause as an alternative to holding assets to cover the AMRE. The PRA states that the use of limited resource clauses should be reviewed on a case by case basis but that they should not be used to justify underfunding on the assumption that off-balance sheet support is available or to deal with a risk of funds being delayed. The PRA will not expect any risk transfer to the ISPV to become effective until the corresponding funds have been received by the ISPV. The PRA also clarifies that contingent assets cannot form part of an assessment of whether an ISPV is fully funded.
FCA policy statement
The FCA has published a Policy Statement entitled Handbook changes to reflect the new regulatory framework for Insurance-Linked Securities – Feedback to CP16/34 and CP17/3 and near-final rules (PS17/24). PS17/24 includes feedback on CP16/34 (published jointly with the PRA in November 2016) and CP17/3 (published in January 2017). PS17/24 does not contain any significant differences to the proposals in the previous consultations