Standard characteristics of SPIs
SPIs allow investors to make a direct investment in insurance risks alongside an existing underwriting company for a limited term. In its basic form, an SPI is a special purpose, single transaction, or single customer (re)insurance company which assumes (re)insurance risks. It typically fully funds its exposure to such risks through the proceeds of a debt issuance or some other financing mechanism. Examples of such risks include sidecars and catastrophe bonds. The SPI regime is conceptually very similar to the special purpose reinsurer regime introduced in the EU by the Reinsurance Directive.
The new regulatory framework
The Bulletin sets out a broad framework of the BMA’s regulatory approach to SPIs. Participants will be expected to be sufficiently sophisticated to engage in SPIs and the new regulatory framework will expect higher levels of transparency and disclosure, particularly around identifying and valuing collateral.
The BMA is of the view that once licensing for an SPI has been achieved and, in line with the risk characteristics of these (re)insurers, attention should then be placed upon the original cedant/insured. This shift in focus, from the SPI to the ceding entity, arises from the fact that the SPI is, by definition, fully funded and, therefore, perpetually solvent. As such, the risks inherent to these structures are left with the ceding entity as the sole entity transferring risk to the SPI and the principal party concerned with the SPI’s financial ability to satisfy its (re)insurance obligations. The BMA is of the opinion that as the ceding entity benefits from capital relief associated with its risk transfer to the SPI, it is expected to be adequately capitalised and technically equipped to manage all risk characteristics associated with the SPI cession.
Finally, the BMA seeks to ensure that those operating in Bermuda have a sound understanding of the BMA’s approach to implementing the Insurance Act 1978 in the context of SPIs. To this end, the BMA has established an SPI Advisory Group, comprised of a broad cross-section of practitioners, who assisted in the finalisation of the Bulletin and are to develop guidance in the context of current market developments, review the SPI legislation and provide guidance for future amendments.
A full copy of the BMA Bulletin can be found by clicking here.
