Guidance Note #20 - Special Purpose Insurers

Summary

This guidance note explains how the Bermuda Monetary Authority licenses and supervises Special Purpose Insurers (SPIs), a class of insurer created by the Insurance Amendment Act 2008. It sets out the streamlined application process, the fundamental requirements an SPI must meet to be considered fully funded, and the ongoing reporting and disclosure expectations that apply once an SPI is licensed.

• Application process: SPIs apply using an SPI Application Form (SAF), which the Authority aims to consider promptly, at minimum at its weekly Admissions and Licensing Committee meeting.
• Full funding conditions: To be treated as fully funded, an SPI must disclose that recovery is limited to the lower of the contract limit and available assets, subordinate any financing to (re)insurance creditors, restrict its activities to its special purpose, and meet fully funded requirements individually for each contract if it has more than one.
• Sophisticated Participant requirement: Only investors/cedants meeting defined Sophisticated Participant criteria (high income, high net worth, sophisticated investors, approved investment funds, entities with assets of at least five million dollars, listed companies, etc.) are expected to participate in SPI structures.
• Asset and disclosure obligations: SPIs must fully disclose investment guidelines and asset composition to cedants/insureds and investors, and provide asset value or net asset value data within 10 business days after each calendar month end and within 2 business days of a participant request.
• Contingent assets as collateral: Where an SPI relies on contingent assets (e.g. reinsurance, letters of credit), the issuer must generally be a regulated financial institution rated at least A- (or otherwise of sound financial quality), and any material deterioration below expected recoveries must be reported to the Authority immediately by the Principal Representative.
• Multiple cedants and reuse: Structures involving multiple unrelated cedant/investor groups, or any reuse of an existing SPI for new business, require prior Authority approval, which may involve special reporting or separately incorporated cells.
• Material change approval: Additional reinsured risks, material contract changes, changes to original disclosures, further capital raises, or other material changes to an SPI's business require prior supervisory approval.
• Capital reduction exemption: Section 31C of the Insurance Act (restrictions on reduction of capital) does not apply to SPIs.
• Filing and audit relief: Where the Authority grants a Section 56 modification, it will accept unaudited management accounts (prepared under IFRS, Bermuda/Canada/UK/US GAAP, or another recognised standard) in place of audited financial statements, subject to minimum reporting timelines.

The note is guidance rather than binding rule text, and the Authority notes it may revise the approach over time, generally after industry consultation, as new SPI scenarios emerge.

Key obligations

• An SPI must ensure it meets the fully funded criteria set out in the Note (disclosure of limited recourse, subordination of financing, restriction of activities to its special purpose, and individual full funding per contract where multiple contracts exist).
• An SPI must provide full disclosure of its investment guidelines and permissible instruments to cedants/insureds and investors/debt-holders.
• An SPI must make available data on total asset composition, latest market value and/or net asset value within a maximum of 10 business days after the end of each calendar month, and within 2 business days of a participant's request.
• Where an SPI relies on contingent assets, it must demonstrate the issuer is a regulated financial institution rated at least A- (or otherwise of sound financial quality) and disclose all contingent assets in the notes to its accounts.
• The Principal Representative must forthwith inform the Authority if the value of an SPI's available assets falls below expected reinsurance recoveries or aggregate liabilities by a specified margin.
• An SPI must obtain prior Authority approval before being reused for new business or before any material change in its business (additional reinsured risks, material contract changes, changed disclosures, further capital raised, or other material changes).
• Where management accounts are accepted for regulatory reporting under a Section 56 modification, the SPI must provide the Authority a copy as soon as practicable after submission to participants, and at minimum within four months of the end of each financial year.

Applies to

Special Purpose Insurers (SPIs), cedants/insureds using SPI structures, investors/debt-holders in SPI structures, Principal Representatives of SPIs

Deadlines

• within a maximum of 10 business days after the end of each calendar month: SPI must provide asset composition, market value and/or net asset value data to cedants/insureds and investors/debt-holders.
• within 2 business days of the request of any relevant participant: SPI must provide requested asset value data (unless aged data is agreed otherwise), where such data may not be aged by more than 30 days unless agreed.
• within four months of the end of each financial year: SPI must provide the Authority a copy of accepted management accounts, at minimum.