The southern European country of Malta is targeting the insurance-linked securities (ILS), catastrophe bond and reinsurance convergence sector with a legislative effort to put in place a legal framework allowing for the formation and domicile of Special Purpose Reinsurance Vehicles (SPRV) in Malta.
The Malta Financial Services Authority (the MFSA) put forward for consultation a draft version of the SPRV regulations at the end of May. The consultation period was open until mid-June and the MFSA is now in the process of considering responses received before it is expected to deliver feedback and an updated version of the law which will likely be passed on to lawmakers for implementation. The MFSA aims to have the SPRV legislation in place during the second half of 2013.
There are a number of domiciles which have legislation specifically aimed at special purpose vehicles for the reinsurance industry. Most famous are of course Bermuda and the Cayman Islands, which between them play host to the majority of SPRV’s, catastrophe bond issuers and sidecar reinsurers. However domiciles such as Ireland and Guernsey (which has also targeted ILS) are more than capable of being a home to these vehicles, in fact it’s possible to domicile SPRV’s in many locations including even the UK.
Malta has clearly noticed the growing ILS and cat bond market as well, as the continuing convergence of reinsurance and capital markets, and has decided it should make its shores a more attractive domicile for the market to consider in future. This is a good move for the domicile and there is no reason it could not, in the future, attract issuers of ILS to the domicile particularly European based transactions.
In the draft regulations, an SPRV is defined as:
An undertaking, other than an existing insurance undertaking or reinsurance undertaking, which assumes risks from a ceding undertaking and which fully funds its exposure to such risks through the proceeds of a debt issuance or any other financing mechanism where the repayment right of the providers of such debt or financing mechanism are subordinated to the reinsurance obligations of such a vehicle.
The SPRV regulations would allow for SPRV’s to be authorised, formed and regulated in Malta.
The consultation document further explains an SPRV (or RSPV as it prefers to term them) as:
Reinsurance Special Purpose Vehicles can play a major role in facilitating alternative risk transfer, thus offering management solutions that enable insurance and reinsurance undertakings to better align their risk profile with their risk tolerance. These vehicles may also provide additional reinsurance capacity at times in which cover through more traditional channels is limited.
In a typical RSPV transaction, an insurance or reinsurance undertaking, collectively termed as a ‘ceding undertaking’ in the draft Regulations, uses a RSPV to cede risks through a reinsurance contract, or similar arrangement. The ceding undertaking transfers risks to the RSPV upon paying an agreed premium. The RSPV funds its maximum liability under the contract through the issuance of notes or bonds to the capital market, and invests its assets for profitability.
Once the regulations are officially in place sponsors and arrangers of ILS and catastrophe bonds will be able to look to Malta as a potential domicile for the issuing special purpose vehicles. Special purpose reinsurers are also widely used by ILS and reinsurance-linked investment managers, who use them to transform risk into note form for use in investment funds and accounts. It will also make the island a potential home for reinsurance sidecars, which often use a special purpose vehicle and even for organisations such as hedge funds which wanted to get into the reinsurance business.
Putting the regulatory framework in place is, of course, the easy piece of the much harder task of attracting ILS business to a new domicile. Malta will then have a much harder and more expensive job marketing itself as a suitable domicile to the market and differentiating itself from the established domiciles such as Bermuda and the Cayman Islands.
You can access a copy of the consultation document here and draft regulations on the MFSA website.