We often get asked at Artemis why catastrophe bond and insurance-linked security Special Purpose Vehicles (or special purpose insurers) are generally domiciled offshore. The Cayman Islands and Bermuda are the two domiciles of choice for the cat bond market, with the Cayman Islands currently leading the way, Dublin in Ireland has also domiciled a few SPV’s for cat bond transactions.
Usually, the reason for this is assumed to be that either the regulatory environment is more conducive to setting up an SPV in an offshore domicile or that there are tax benefits to be gained by using domiciles that some consider a ‘tax haven’. However, according to this great article written by lawyers at Cadwalader, Wickersham & Taft LLP, the truth is that it’s very hard to identify any reasons against using a United Kingdom domiciled SPV for UK based re/insurers.
The article looks at the regulatory and tax evolution of Insurance Special Purpose Vehicles (ISPV) in the UK and examines why they haven’t attracted the attention of insurers in the same manner as offshore domiciles.
The article concludes that since 2007 when tax and regulatory changes such as the EU Reinsurance Directive were made there have been no significant impediments to prevent UK insurers from keeping insurance-linked securities and other risk transfer solutions which require an SPV onshore. They suggest that the reason for the continued preference for offshore SPV domiciles is primarily because this is what insurers have become accustomed to.
The article finishes:
It is also possible that the absence of UK ISPVs being used for the issuance of ILS might also have something to do with a lack of familiarity with the onshore structures. Whatever the cause, three years after the implementation of the Reinsurance Directive, and the complementary tax regulations, UK ISPVs continue to be rarely used. The time for waking a sleeping giant seems to be at hand with its concomitant innovation and benefits.
It’s a very good article for anyone interested in this aspect of the ILS and cat bond market so we recommend you read it. Also, we’re interested to hear the views of any insurers as to why they choose to domicile their ILS SPV’s offshore and whether there are any factors that discourage them from using the UK as a domicile.