Consultation Paper - Guidance Note #20 Special Purpose Insurers

Summary

This is a 2009 Bermuda Monetary Authority consultation paper attaching draft Guidance Note #20 on Special Purpose Insurers (SPIs), the licensing class created by the Insurance Amendment Act 2008 to cover insurance side cars, catastrophe bonds and similar insurance-linked special purpose transactions. The paper explains the Authority's proposed licensing and ongoing supervisory approach to SPIs and poses a series of discussion questions on which it invites industry feedback before finalising the guidance.

• Scope of guidance: Covers SPI licensing and authorisation process, the Fast-Tracked applications process, Sophisticated Participants tests, Asset Quality Test and disclosures, use of reinsurance/LOCs/contingent assets as collateral, capital relief, prudent investment and disclosure requirements, contractual limits of liability, the SPI Application Form, post-closing documentation, fees and filing requirements.
• Discussion points raised: Asset and collateral disclosure/transparency mechanisms, risk retention by cedants, the legislative definition of SPI (including non-commingling of liabilities), whether audited financial statements should be required, the 'fully funded' definition, treatment of reinsurance transformers, whether the Guidance Note should be partitioned by structure type, whether a Loss Reserve Specialist Opinion should be required, acceptability of contingent assets as collateral, the Sophisticated Participants definition, guidelines for Insurance Managers, timing of participant documentation, absence of no-petitioning/extinguishing-of-liabilities provisions, residual risk assessment, index-based structures, and the Asset Quality Test.
• Existing regime described: Under current legislation, SPIs already existing or engaged in fully collateralised (re)insurance activity need not re-register; those wishing to adopt SPI status must apply through standard licensing procedures. An annual registration fee of 10,000 dollars applies, and where a Section 56 request is granted, audited GAAP (or IFRS or other recognised) financial statements are required within four months of the accounting date instead of standard statutory filings.

As a consultation paper, the document itself does not impose new binding rules; it seeks stakeholder comments on the proposed and existing SPI policy positions, with the Authority indicating it will refine the Guidance Note through an SPI Advisory Group before finalisation.

Key obligations

• Interested parties must submit written comments on the consultation questions to the Authority (Gina Smith, Assistant Director - Actuarial Services) on or before 31 May 2009
• SPIs granted a Section 56 direction must file audited GAAP (or IFRS or other Authority-recognised) financial statements within four months of the accounting date in lieu of standard statutory annual filings
• SPIs must pay an annual registration fee of 10,000 dollars
• Entities wishing to convert existing fully collateralised (re)insurance business to SPI status must apply to the Authority for a change of class through standard Licensing and Authorisation procedures
• The Principal Representative of an SPI must ensure at all times that net assets (including contingent assets) are equal to or greater than liabilities valued under GAAP or another approved accounting standard

Applies to

Special Purpose Insurers (SPIs), Insurance Managers, Principal Representatives of SPIs, Independent Professionals involved in SPI formation (AML/ATF regulated), existing fully collateralised (re)insurance entities

Deadlines

• 31st May 2009: Deadline for industry stakeholders to submit written comments on the Consultation Paper for Guidance Note #20
• within four months of the accounting date: Deadline for SPIs (granted a Section 56 direction) to file audited GAAP or other recognised-standard financial statements for annual filing purposes