Guidance Note on Special Purpose Insurers

Summary

This guidance note explains how the Guernsey Financial Services Commission (GFSC) applies the Insurance Business Rules, 2021 to Special Purpose Insurers (SPIs) - vehicles used for insurance linked securities business such as collateralised reinsurance, catastrophe bonds, side cars and life based securitisations. It sets out the characteristics, application process, collateral, monitoring and business plan requirements that apply to SPIs, reflecting their lower regulatory risk profile compared to traditional insurers.

• Full collateralisation: An SPI must at all times hold assets whose value equals or exceeds its aggregate maximum risk exposure, and must be able to pay amounts due as they fall due.
• Applications: New SPI structures or new controllers must submit a standard application, due diligence and detailed business plan; new cells or transactions within an approved business plan may be pre-approved by the Commission.
• Fee/documentation waiver for established SPIs: For established SPI structures, the Commission may waive submission of application documentation and fee for up to 7 days after deal closing, but relevant documentation must be kept at the SPI's business premises for Commission inspection.
• Collateral flexibility: Cash is the typical collateral, but the Commission may permit reinsurance, letters of credit or partly paid shares, considering counterparty regulatory status, domicile and credit rating; use of partly paid capital for long term contracts (e.g. mortality swaps up to 5 years) must be disclosed to the cedant.
• No solvency/capital requirements: As Category 6 bodies under the Insurance Business (Solvency) Rules, 2021, SPIs are exempt from the Minimum Capital Requirement, Prescribed Capital Requirement and Own Risk and Solvency Assessment, but boards must still monitor legal, collateral, FX and counterparty risks.
• Monitoring and reporting: The general representative is expected to monitor, disclose and report on collateral or solvency issues, with board oversight of these activities.
• Material business plan changes: Any material change to an SPI's business plan (e.g. change of controller, significant increase in counterparty risk, capital structure changes outside agreed limits) must be notified to the Commission before implementation, though the licensee need not wait for approval before proceeding.
• Recycling of cells: PCC and ICC cells may be reused after contract termination without further permissions, provided there is no material change to the associated business plan.
• Dividends: No notification or prior consent is required for dividend payments or settlement of instruments such as loan notes by an SPI.
• Fees and continuing obligations: SPI specific application and annual fees follow the Financial Services Commission (Fees) Regulations, and SPIs (or the associated protected cell company) remain subject to the Insurance Business (Bailiwick of Guernsey) Law 2002.

Overall, the note codifies the Commission's existing discretionary practice for SPIs rather than introducing new statutory requirements, aiming to enable a prompt regulatory response given the seasonal concentration of insurance/reinsurance renewals.

Key obligations

• An SPI must at all times hold assets equal to or exceeding its aggregate maximum risk exposure and be able to pay liabilities as they fall due (full funding requirement).
• Material changes to an SPI's business plan (e.g. change of controller, significant counterparty risk increase, capital structure changes outside agreed limits) must be notified to the Commission prior to implementation.
• Where partly paid capital is used for long term insurance contracts (e.g. mortality swaps of up to 5 years), this must be disclosed to the cedant.
• For established SPI structures relying on the documentation/fee waiver, relevant transaction documentation must be maintained at the SPI's business premises for inspection by Commission staff for up to 7 days after deal closing.
• The general representative must monitor, disclose and report on collateral or solvency issues, with the board providing oversight of these activities.
• Reuse of PCC/ICC cells without further permissions is only permitted if there is no material change to the business plan associated with the cell.

Applies to

Special Purpose Insurers, protected cell companies, incorporated cell companies, general representatives of licensed insurers

Deadlines

• up to 7 days after deal closing: Period during which the Commission may waive submission of application documentation and fee for established SPI structures, provided documentation is retained on-site for inspection.
• not longer than 5 years: Maximum term for reinsurance contracts (e.g. mortality swaps) for which the Commission will consider use of partly paid capital, subject to disclosure to the cedant.