knowledge 14 May 2018 |

Solvency II Special Purpose Vehicles

Background

A Special Purpose Vehicle (“SPV”) is used to transfer insurance risks to the capital markets. The Solvency II Directive 2009/138 contains provisions relating to the authorisation, regulatory requirements and supervision of a SPV. Commission Delegated Regulation 2015/35 (the “CDR”) and Commission Implementing Regulation 2015/462 (the “CIR”) set out more detailed requirements for SPVs relating to these provisions.

The Solvency II Directive has been transposed into Irish law by the European Union (Insurance and Reinsurance) Regulations 2015 (the “Solvency II Regulations”).

The Guidance

The Guidance sets out some of the Central Bank’s specific expectations in terms of an SII SPV’s compliance with the relevant Solvency II requirements, including those regarding the requirement for approval, mandatory contract conditions, the approval process, governance, reporting, investments and supervision.  

The Requirement for Approval

Pursuant to the Solvency II Regulations, an SPV which proposes to (i) assume risks from a (re) insurance undertaking through reinsurance contracts or (ii) assume insurance risks through similar arrangements, must seek authorisation from the Central Bank prior to establishing in Ireland.

The Central Bank expects a multi-arrangement SPV (“MA SPV”) to seek prior approval where at least one of its arrangements meets the above criteria. 

According to the Guidance, when considering whether an SPV is assuming insurance risks “through similar arrangements” the Central Bank will consider whether the method proposed for the transfer of insurance risks constitutes the transfer of such risks through an arrangement similar to a reinsurance contract, notwithstanding the nature or form of contract used to transfer that risk or the trigger type (eg, an industry loss index, a parametric trigger).

Mandatory Contract Conditions

An SII SPV must be fully funded at all times and must be able to demonstrate this both within its application for approval and in its annual supervisory report to the Central Bank. Limited recourse clauses should not undermine the effective risk transfer from the cedant (re) insurer and contingent arrangements should not be relied upon to meet the fully funded requirement. 

An SII SPV may wish to consider the provision of independent legal opinions in assisting it to demonstrate its compliance with the requirements of:

• Article 320 of the CDR with regard to effective risk transfer; and
• Article 321 of the CDR as regards subordinating the rights of the providers of debt or financing mechanisms to the SII SPV’s obligations to its cedants.

System of Governance in SII SPVs

The Central Bank’s expectations regarding the governance of SII SPVs, include the following:

• an SII SPV must be able to demonstrate its compliance with the CDR’s general system of governance and fitness and probity requirements both within its approval application and in its annual supervisory report. It must also demonstrate its compliance with the fitness and probity requirements in any relevant interim report;
• in certain circumstances, in the context of the organisational structure of an SII SPV, the Central Bank will consider whether there is a need for the appointment of direct employees, with relevant expertise and skill, to the SII SPV;
• an SII SPV must notify the Central Bank of its intention to outsource a critical or important function or activity in its approval application. It must also notify the Central Bank at least 10 days in advance of making any material changes to an existing outsourcing arrangement in respect of such a function or activity; and
• an SII SPV must provide evidence in its application for approval that the investors in the instruments it issues meet the definition of a Professional Client as set out in the European Union (Markets in Financial Instruments) Regulations 2017.

Approval Applications

Applications for approval of an SII SPV must comply with Article 5, and, where relevant, Article 7 of the CIR, as well as the Central Bank’s Checklists for completing applications for the approval of an SII SPV. Depending on the application’s complexity and the level and adequacy of the detail provided, approval may take less than the six months set out in the CIR.

The approval process for a MA SPV will involve 2 stages.  Stage 1 will be the main assessment stage. The stage 2 assessment will occur just prior to any planned future arrangement commencing and will determine whether the arrangements comply with the original approval received and the relevant Solvency II requirements.  The Central Bank will aim to decide on this stage 2 assessment within 10 working days of receipt of the required information.

Supervisory Reporting

The Central Bank expects each SII SPV to provide the quantitative content of its annual supervisory report in XBRL format and the qualitative context of the report in word or PDF format.

The Central Bank will send each SPV that it approves as an SII SPV a notice requiring the relevant SPV to provide a compliance statement to the Central Bank specifying whether the SII SPV has, during the period specified in the Notice, complied with its relevant obligations.

SII SPVs must also submit to the Central Bank an annual directors’ certification of the accuracy of the information provided in the annual supervisory report.

Solvency Requirements on Investments

Each SII SPV must be able to demonstrate its compliance with the requirements of Article 327 of the CDR with regard to the investment of its assets both within its approval application and in its annual supervisory report to the Central Bank.

Supervision of SII SPVs

The Central Bank will supervise SII SPVs in line with with its Probability Risk and Impact SysteM (PRISM) framework.