Draft Guidance Note - Special Purpose Insurers (2019)

Summary

This is a draft revised Guidance Note from the Bermuda Monetary Authority updating its 2009 guidance on Special Purpose Insurers (SPIs), the vehicle class used to transfer insurance risk to capital markets via insurance-linked securities. It sets out the Authority's expectations for licensing, full collateralisation, governance, disclosure and ongoing supervision of SPIs, and was open for industry comment before a stated implementation date.

• Application and registration: SPI applications must include full (re)insurance application documentation plus a completed SPI Checklist; the Authority aims to approve a compliant application within one week and issue a licence within three business days of registration.
• Full collateralisation: SPIs must fully collateralize the aggregate limit of potential claims, with strict rules on grace periods (max 15 business days), funding agreements, limited recourse clauses, and subordination of debt/financing to policyholder claims.
• Rollover, release and top-up: Detailed conditions govern rolling collateral into renewed contracts, reducing aggregate limits on collateral release, prohibiting clawback of released collateral, and using (optional) top-up provisions for asset impairment, including a duty to notify the Authority promptly if impairment triggers a top-up.
• Governance and participants: SPIs must maintain governance and risk frameworks proportionate to risk, with unrestricted SPIs required to avoid conflicts of interest in Board/service-provider composition, and business restricted to defined sophisticated investors, cedants and licensed insurance managers.
• Asset quality and disclosure: SPIs must disclose investment guidelines and collateral composition/valuation to cedants and investors, including monthly (or more frequent, on request) reporting of asset values.
• Letters of credit and reinsurance: Letters of credit used as collateral must meet issuer regulation and rating standards; outwards reinsurance is generally not accepted as collateral funding except in limited approved cases.
• Material change and capital: Material changes to an SPI's business (new risks, contract changes, new capital raised, etc.) require prior Authority approval under Section 30JB; SPIs are exempt from the Section 31C capital reduction restriction.
• Filing requirements: SPIs must file Statutory Financial Returns per the Special Purpose Insurer's Accounts, Returns and Solvency Rules 2019, generally with audited GAAP financial statements unless writing only restricted business or granted an annual audit waiver.

As a draft, the Note invited stakeholder comments by 29 November 2019 and stated an intended coming-into-force date of 1 July 2020; readers should confirm whether a final version has since superseded this draft.

Key obligations

• SPI applications must include a fully and accurately completed SPI Checklist with page references to all supporting documentation.
• (Re)insurance contracts must clearly define the aggregate limit, collateral requirements and, where a grace period (max 15 business days) is used, a legally binding funding agreement executed before the reinsurance contract.
• Debt or financing used to fund SPI liabilities must be contractually fully subordinated to policyholder claims.
• Reinsurance contracts must contain a limited recourse clause capping recoverables at the lower of the aggregate limit or available collateral.
• On full release of collateral, the cedant must discharge the SPI of all past, present and future liabilities under the contract; SPIs may not agree to return released collateral.
• The Principal Representative must forthwith notify the Authority and furnish a written report when asset impairment triggers a top-up obligation.
• Unrestricted SPIs must structure governance/Board composition to avoid a single service provider controlling all Board seats or a majority of key roles.
• SPIs must fully disclose investment guidelines and provide cedants/investors with collateral composition and valuation data monthly (or on request, not aged more than 30 days).
• Letters of credit used as collateral must be issued by a regulated financial institution meeting minimum rating or Authority-assessed quality standards.
• Any material change in SPI business (new risks, contract changes, new capital, disclosure modifications, etc.) requires prior Authority approval under Section 30JB.
• SPIs must prepare and file Statutory Financial Returns per the Special Purpose Insurer's Accounts, Returns and Solvency Rules 2019.
• SPIs must have GAAP financial statements audited unless writing only restricted business or granted an Authority audit exemption, which must be reapplied for annually.
• Industry stakeholders were invited to submit comments on the draft Note to SPInsurers@bma.bm by 29 November 2019.

Applies to

Special Purpose Insurers (SPIs), restricted and unrestricted SPIs, licensed insurance managers, licensed (re)insurance entities acting as cedants, investors and debt-holders in SPIs

Deadlines

• Friday 29 November 2019: Deadline for stakeholders to submit comments on the draft Guidance Note to SPInsurers@bma.bm
• 1 July 2020: Stated date the Guidance Note will come into force
• within one week: Authority's target to process a vetted, compliant and complete SPI application
• within three business days: Authority's target to issue a licence once registration documentation is thoroughly completed
• not exceeding 15 business days: Maximum grace period after contract execution/inception within which collateral may be provided, if expressly permitted by the reinsurance contract
• as soon as commercially practicable after each calendar month: Frequency for disclosing asset composition and market/net asset value of collateral to cedants and investors
• not aged more than 30 days: Maximum age of asset valuation data provided on request of a relevant participant, unless otherwise agreed
• annually: Frequency at which audit exemption waivers are considered by the Authority, relating to the relevant financial period