Isle of Man publishes Insurance Special Purpose Vehicles framework

The Isle of Man has joined the domicile race to attract insurance-linked securities (ILS) and catastrophe bond business, with the release of its Insurance Special Purpose Vehicles (ISPV) regulatory framework.

The regulatory framework was brought into effect on the 5th March 2015 and the Isle of Man Government’s Insurance and Pensions Authority said that had been “developed in close consultation with industry and the Isle of Man’s Department of Economic Development.”

ISPV’s are a new specialist class of re/insurer which can be domiciled on the Isle of Man to facilitate insurance linked securities, such as cat bonds or mortality bonds, and other collateralised insurance and reinsurance transactions, such as industry loss warranties (ILW’s) and reinsurance sidecar arrangements between sophisticated parties.

The Isle of Man government consulted upon the new ISPV framework from 8th May 2014 to 19th June 2014, after which the framework has been further refined following that consultation with industry players. A summary of the consultation process can be found here.

John Garland, Head of Corporate Financial Services from the Isle of Man Government’s Department of Economic Development, said; “We have been working and consulting closely with industry and the Insurance and Pensions Authority on introducing this legislation and already have enquiries in the pipeline. We believe that our framework for ISPVs offers excellent features for potential users as well as the proportionate and focused legislation that we are renowned for.”

“This new framework promises to open up new business streams for the Isle of Man and provide welcome competition in this area, particularly given our close proximity to London.”

The regulator explains the following distinctions between ISPV’s and traditional reinsurers:

An ISPV must only have (re)insureds and investors (together its “participants”) which are suitably sophisticated for this specialist form of business. Prospective participants should refer to the ISPV regulations and guidance for further information on qualifying criteria.

In addition, an ISPV must be fully funded by way of contractual arrangements with its participants such that the ISPV’s liability to its participants is limited to its available assets.

The resulting reduced risk to vulnerable stakeholders and reduced risk of insolvency is reflected in the simplified regulatory requirements and lower fees applicable to ISPVs.

An ISPV must also be administered by an insurance manager registered under Part 6 of the Insurance Act 2008.

The ISPV application process is designed to facilitate fast licensing, with a target of 5 days or less from a fully completed application.

The full regulations and regulatory guidelines can be found here.

The Isle of Man now joins a growing list of new domiciles seeking to enter the ILS and catastrophe bond market with newly drawn up regulatory frameworks. As we always say, it’s not going to be easy to enter the space in a meaningful way versus the established players such as Bermuda, the Cayman Islands, Dublin and Guernsey.

Garland continued; “We can offer speed to market with the licencing process designed to take just 5 days following receipt of fully prepared applications. We can also offer a highly competitive fee structure – that may be fixed for the lifetime of any ISPV with a determinable lifespan – along with simplified regulatory requirements, including returns.

“I am confident that our framework will prove of great interest to potential users in this specialist area who want to place their business in a highly respected and responsible international finance centre with a long track record of attracting high quality insurance business from around the world.”

Simon Nicholas, Partner at KPMG Isle of Man and Deputy Chair of the Isle of Man Captive Association, commented;  “ILS is a very exciting and fast evolving area of insurance and the Isle of Man legislation has been market tested by several global well respected players in the ILS market, including some of those who already have a presence on the Island. With a promising pipeline, we expect this to complement the Isle of Man’s already successful and diverse financial services industry.”

The Isle of Man has an active captive market and so has some of the necessary service providers already present in the domicile, which should help it to build some interest. Other domiciles targeting the sector include Gibraltar, Malta and Puerto Rico. However, with further growth of the ILS market predicted, there seems room for more choice to enable sponsors to locate their ILS vehicles in a variety of domiciles.