Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Insurers could get exemption from Volcker Rule, but what about ILS issuers?

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The U.S. Securities and Exchange Commission (SEC) is now considering giving insurers an exemption from the Volcker Rule, which was added as part of Dodd-Frank. The ruling looks to restrict financial institutions from certain types of speculative investment strategies. SEC chairman Mary Schapiro said on Tuesday that they are now considering exempting insurers activities in covered funds as well as investments in their general accounts from the Volcker Rule.

So it seems that the SEC are beginning to realise that the Volcker Rule could be restrictive for insurers and hinder the way they do business currently. However what about ILS issuers who have also been raised as a type of financial institution that could be impacted by the ruling?

We wrote recently that SIFMA had raised concerns about the Volcker Rule and how it could be applied to insurance-linked securities (and hence catastrophe bond) issuers. SIFMA’s concern is that ILS issuers could be considered a hedge fund or private equity fund under the new rules and under Volcker this would preclude banking entities from sponsoring or having ownership in issuers. The ruling could also change the way banking entities can do business in securitizations including ILS and cat bonds due to restrictions in the way issuers can operate.

If the SEC exempt insurers would that include Special Purpose Insurers as the majority of ILS and cat bond issuers in Bermuda, for example, are classified? It’s not very clear and the ruling is sufficiently broad that issuers could still be included or restricted in other ways. As with many of the rulings within Dodd-Frank much the nuance of the interpretation is all important and we won’t attempt to comment on something we certainly aren’t qualified to. We hope to see further information coming from SIFMA on this issue when/if they receive a response from the SEC, or from law firms who work in the ILS and cat bond sector, to help clarify this matter for the market.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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