Swedish parliament hears pitch to become cat bond & ILS domicile

A proposal has been heard in Riksdagen, the Swedish Parliament, suggesting that lawmakers bring in a regulatory framework for special purpose vehicles for the transfer of insurance risk, which would make Sweden into a catastrophe bond and ILS domicile.

Per Åsling, of the Swedish Centre Party, raised a motion which aims to turn Sweden into a competitive domicile for structuring and domiciling of catastrophe bonds and other insurance-linked securities (ILS).

The motion says that this would make Sweden “attractive as a domicile for specialty businesses in the insurance sector,” strengthen its financial centre and make it easier for Swedish insurers and others to offload their catastrophe or disaster risks to the capital markets.

The motion proposes that an SPV regulatory framework would have a comparable tax regime to other jurisdictions, ensure that the regulatory burden is not excessive, and would also allow for segregated account companies to facilitate insurance-linked securities (ILS) business.

That would also facilitate collateralised reinsurance transactions in Sweden as well, something any budding ILS domicile now needs to consider.

The motion notes the trend towards securitisation of insurance risks and the closer ties between insurance, reinsurance and the capital markets, adding that this is good ultimately for competition, pricing and the insurance consumer.

With the trend towards alternative forms of reinsurance capital and reinsurance and capital markets convergence, the motion says that any country seeking to have an international financial centre should be able to support these activities in the future.

The motion notes that Swedish companies face their own disaster risks which could be transferred to the capital markets using such a regulatory framework, citing risks including forest fires, crop damage, dam bursts, nuclear accidents or flood damage to infrastructure.

Åsling notes the ambition of the UK to become a hub for ILS, seeing it as evidence that all mature financial centres should support this type of business if they want to be serious players in the global insurance and reinsurance market.

Swedish ILS and catastrophe bond investment fund manager Entropics AB explains that Solvency II is also a driver:

With the adoption of the Solvency II Directive (as proposed in a Government bill in September), the European legislation regarding Special Purpose Vehicles (SPVs) will become fully harmonized. As SPVs are at the core of ILS deals, this entails a uniform and predictable regulation for companies interested in setting up ILS deals in Europe. As ILS are treated quite favorably on both the asset and liability sides of the balance sheet for companies facing capital requirements, the harmonization effort could be an important driver for increased interest in cat bonds with a European domicile.

Entropics also highlights that in Sweden under Solvency II there could be uncertainty about how SPVs would be regarded from a taxation perspective, something that Åsling’s proposal suggests needs to be rectified.

Åsling also highlighted a risk of over-regulation when bringing the framework into force, which could introduce excessive supervision of SPV’s.

He also proposed a change to Swedish corporate law to allow for the establishment of Protected Cell Companies (PCCs) for ILS deals, which again would facilitate more efficient ILS and collateralised reinsurance transactions to be effected in Sweden.

It’s an interesting development. Over recent years a number of domiciles have sought to launch special purpose insurance vehicle legislation with a goal of attracting some catastrophe bond, ILS and collateralised reinsurance business to their shores.

Sweden may be right, that any mature financial centre with an ambition to be a globally relevant player should be able to support this type of business in future, which could be very good for the ILS and reinsurance market as a whole, allowing local re/insurers or companies to tap into capital markets risk transfer from home soil.

It will be interesting to see whether this proposal in Sweden progresses.