Guidance Note - Special Purpose Insurers (1 July 2020)

Summary

This Guidance Note sets out the Bermuda Monetary Authority's regulatory and supervisory approach to Special Purpose Insurers (SPIs), a licence class created under the Insurance Amendment Act 2008. It replaces the October 2009 guidance and explains how SPIs must structure their fully collateralized (re)insurance arrangements, govern themselves, and report to the Authority in order to comply with the Insurance Act 1978 and related rules.

• Full collateralization: SPIs must provide collateral covering the full aggregate limit of potential claims, generally on or before the contract's effective date, with any grace period capped at 30 business days and backed by a binding funding agreement.
• Contract terms: (Re)insurance contracts must include a limited recourse clause, clear provisions on aggregate limit changes, and full subordination of any debt or financing to policyholder claims.
• Rollover and collateral release: Where collateral is rolled over or released, contracts must clearly document the effect on aggregate limits, and released collateral cannot be subject to clawback obligations.
• Top-up provisions: Optional contractual top-up provisions to manage asset impairment are permitted under specified conditions, and the principal representative must promptly notify the Authority if a top-up is triggered.
• Governance: SPIs must maintain governance and risk management frameworks proportional to their risk profile, and unrestricted SPIs must structure boards to avoid a single service provider dominating key roles.
• Sophisticated participants: Only defined categories of sophisticated investors, cedants, and licensed insurance managers may participate in SPI business.
• Disclosure: SPIs must disclose investment guidelines and asset composition/valuation data to cedants and investors, generally monthly and on request (data no more than 30 days old).
• Letters of credit and reinsurance: Letters of credit used as collateral must meet specified issuer and rating conditions; outwards reinsurance is generally not accepted as collateral funding.
• Material change and capital release: Material changes to an SPI's business require prior supervisory approval under Section 30JB, while Section 31C capital reduction restrictions do not apply to SPIs.
• Filing and audit: SPIs must file Statutory Financial Returns under the 2019 Rules and have GAAP financial statements audited unless writing only restricted business or holding an Authority-granted audit exemption.

The Note took effect on 1 July 2020 and applies on an ongoing basis to all licensed SPIs, their boards, principal representatives, insurance managers, cedants and investors.

Key obligations

• An SPI must be fully collateralized to cover the full aggregate limit of potential claims, generally by the effective date of the (re)insurance contract, with any grace period not exceeding 30 business days.
• Where a grace period is used, the SPI must enter into a binding funding agreement, enforceable by the SPI, before executing the (re)insurance contract.
• Each (re)insurance contract must contain a limited recourse clause limiting recoverable amounts to the lower of the aggregate limit or available collateral.
• Debt or financing used to fund (re)insurance liabilities must be fully subordinated to policyholder claims.
• Contracts involving multiple (re)insurance agreements must be structured so full collateralization is met individually for each contract.
• The principal representative must forthwith notify the Authority and provide a written report when asset impairment triggers a top-up obligation.
• SPIs must maintain governance and risk management frameworks proportional to their risk profile in accordance with the Insurance Code of Conduct.
• Unrestricted SPIs must structure board composition to avoid a single service provider holding all board seats or a majority of key roles.
• SPIs must disclose investment guidelines for collateral and provide asset composition and valuation data to cedants and investors, as soon as commercially practicable after each calendar month end and on request (data no more than 30 days old unless otherwise agreed).
• Letters of credit used as collateral must be issued by a regulated institution meeting specified rating or quality standards.
• Material changes to an SPI's business (new risks, ancillary contract changes, disclosure modifications, additional capital raises, or other material changes) require prior supervisory approval under Section 30JB of the Act.
• SPIs must prepare and file Statutory Financial Returns in accordance with the Special Purpose Insurer's Accounts, Returns and Solvency Rules 2019.
• SPIs must have GAAP financial statements audited unless they write only restricted special purpose business or have been granted an audit exemption by the Authority.
• Audit waiver applications must be made annually and relate to the relevant financial period, and the SPI must be in good standing with the Authority for the application to be considered.

Applies to

Special Purpose Insurers (SPIs), insurance managers, principal representatives of SPIs, cedants, investors and debtholders in SPIs

Deadlines

• within one week: The Authority endeavours to process approval of a vetted, compliant and complete SPI application within one week.
• within three business days: Once approved, a licence is generally issued within three business days after registration documentation is thoroughly completed.
• not exceeding 30 business days: Maximum grace period after contract execution/effective date within which collateral may be provided, if expressly allowed by the (re)insurance contract.
• as soon as commercially practicable after the end of each calendar month: SPIs must disclose the latest market/net asset value of collateral assets to cedants and investors/debtholders.
• not aged more than 30 days: Asset valuation data provided to relevant participants on request must not be older than 30 days unless otherwise agreed.
• 1 July 2020: Effective date of this Guidance Note.
• annually: Audit waiver applications are considered by the Authority on an annual basis relating to the relevant financial period.