Reinsurance Special Purpose Vehicles (RSPVs)

David Joseph Borg | 25 Jul 2019

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1. Definitions
The ‘aggregate maximum risk exposure’ refers to the sum of maximum payments, including expenses that the authorised reinsurance special purpose vehicle may incur, excluding the following expenses:
‘Ceding undertaking’ means an insurance or reinsurance undertaking which has transferred risk to a reinsurance special purpose vehicle.
‘Reinsurance special purpose vehicle’ refers to an undertaking, other than an existing insurance or reinsurance undertaking, which assumes risks from a ceding undertaking. The RSPV would fully fund its exposure to such risks by means of the proceeds of a debt issuance or some other financing mechanism. 
A ‘triggering event’ in relation to a RSPV would be an event or condition specified in the contract which would oblige the RSPV to make one or more payments to the ceding undertaking under the contract.
2. Licence requirement
An undertaking must obtain a licence from the Malta Financial Services Authority (MFSA) to carry on business as a reinsurance special purpose vehicle in or from within Malta. An authorised RSPV may only assume risks from a single ceding undertaking and shall not engage in any other activity. If the ceding undertaking is established in a country outside Malta, MFSA will consult the overseas regulatory authority prior to issuing its authorisation. MFSA is bound to decide on an application within six months of its receipt, and any person aggrieved by a refusal may appeal against the decision to the Financial Services Tribunal.
3. Eligibility criteria for authorisation
An undertaking will only be eligible for authorisation to act as an RSPV if all the following criteria are met:
(a) It is a limited liability company formed or constituted in Malta;
(b) Its objects are restricted to operating as a reinsurance special purpose vehicle;
(c) It either assumes risks from a ceding undertaking through reinsurance contracts, or alternatively assumes insurance risks through similar agreements;
(d) The contractual arrangements should fulfil the mandatory conditions specified in the regulation, such as that the RSPV is at all times fully funded, and that the transfer of risk is effective in all circumstances;
(e) The persons who effectively run the reinsurance SPRV fulfil the ‘fit and proper’ requirements;
(f) The RSPV has disclosed the identity of the shareholders or members having a qualifying shareholding, and such persons satisfy the fit and proper criteria.
(g) It has an effective system of governance, in particular sound administrative and accounting procedures and adequate risk-management requirements.
(h) The RSPV is able to supply to the MFSA all the information which the latter may request in conducting its supervisory duties.
(i)  It fulfils the solvency requirements as laid down in the regulation, as well as abides by the prudent person principle.

4. Application for authorisation and supporting documents
An application must be made in writing by the RSPV in line with the insurance rules, and it must be accompanied by:
i. A scheme of operations;
ii. A copy of the proposed special purpose vehicle contract or a statement containing a description thereof;
iii. A copy of the memorandum and articles of the RSPV

It must also be shown that the directors, controllers and any other person directly or indirectly involved in the management of the RSPV, as well as any trustee, are fit and proper persons to ensure its sound and prudent management.
5. Mandatory conditions for all contractual arrangements
These conditions must be included in the contractual arrangements relating to the transfer of risk from a ceding undertaking to an authorised RSPV:
a. The RSPV must be fully funded at all times;
b. The transfer of risk is effective in all circumstances;
c. The extent of risk transfer is clearly defined and incontrovertible.
d. The claims of the providers of debt or financing mechanisms are at all times subordinated to the reinsurance obligations of the RSPV;
e. No payments are made to providers of debt or financing if this would result in the RSPV no longer remaining fully funded;
f. The providers of debt or financing have no right of recourse to the assets of the ceding undertakings;
g. The providers of debt or financing have no right to apply for the winding up of the authorised RSPV.

The above conditions, with the exception of (a), must also be inserted in the contractual arrangements relating to the transfer of risk from the authorised RSPV to the providers of debt or financing.
6. Fit and proper requirements of persons who effectively run an authorised RSPV
An authorised RSPV must adopt an effective system of governance which ensures the sound and prudent management of the business. In particular, all persons directly or indirectly involved in the effective management of an RSPV must possess professional qualifications, knowledge and experience as well as be persons of good repute and integrity.
The MFSA must be notified of the identity of such persons, and given the necessary information to assess whether they are fit and proper in line with the applicable insurance rules. Any changes in the persons involved in the management of the RSPV must be reported to the MFSA. The RSPV has a duty to notify the MFSA of its own motion if the persons directly or indirectly involved in the management of the RSPV no longer fulfil the fit and proper criteria.
7. Sound administrative and accounting procedures and internal control mechanisms
An authorised RSPV must implement a system of governance which is appropriate in the light of the nature, scale and complexity of the risks it assumes and the uses for which it is authorised, in particular:
- Sound administrative and accounting procedures, including adequate records of activities and transactions
- Adequate internal control mechanisms and an effective risk management system
- Written policies in relation to risk management, internal control, administrative and accounting procedures, asset-liability management, investment, liquidity, reinsurance and, where relevant, outsourcing
- Internal controls to ensure mandatory contract conditions, solvency requirements and prudent person principles are continuously fulfilled
- An effective risk-management system comprising process and reporting procedures to identify, manage and report potential risks on an on-going basis
8. Information to be communicated to the MFSA by the RSPV
a. The value of the assets of the RSPV
b. The aggregate maximum risk exposure
c. Conflicts of interest between the RSPV, the ceding undertaking and the providers of debt or financing
d. Significant transactions entered into by the RSPV during the last reporting period
Any subsequent material changes shall be notified to the MFSA.
9. Solvency Requirements
An authorised RSPV must be fully funded at all times, in accordance with the following conditions:
a. Its assets are valued in accordance with generally accepted accounting principles and practice;
b. The value of its assets is at all times equal to, or exceeds, the aggregate minimum risk exposure, and the RSPV must be able to pay the amounts it is liable for as they fall due;
c. The proceeds of the debt-issuance or other financing mechanism are fully paid-up.

When calculating the assets of the authorised RSPV, payments relating to existing insurance and reinsurance contracts, which are expected to be received in the future by the RSPV from the ceding undertaking, may also be included, provided the following conditions are met:
a. The future liabilities of the RSPV to the providers of debt or financing only arise subject to the receipt of the payments from the ceding undertaking;
b. The own funds of the ceding undertaking would in no circumstance be negatively affected by the payment not being received by the RSPV;
c. The RSPV remains fully funded in the event that payments from the ceding undertaking are not received;
d. The payments are not linked with expenses which are excluded from the aggregate maximum risk exposure.

Should the fully funded requirement no longer be complied with, or where there is a risk of non-compliance in the following three months, the RSPV shall immediately notify the MFSA. The RSPV must in turn submit to the MFSA a realistic financial scheme to restore compliance with the fully funded requirement with such period as established by the MFSA.
10. Application of prudent person principle
The authorised RSPV shall observe the prudent person principle when investing its assets. In particular:
a. It shall only invest in assets and instruments whose risk it can accurately identify, measure, monitor, manage, control and report;
b. The manner in which assets are invested must ensure the security, quality, liquidity and profitability of the portfolio as a whole. Moreover, localisation of those assets ought to guarantee their availability;
c. All assets shall be invested in a suitable manner, taking account of the nature and duration of its liabilities, as well as the best interest of the ceding undertaking;
d. Derivative instruments shall only be used if they contribute to a reduction of risks or enable efficient portfolio management;
e. Prudence must be exercised in so far as investments and assets not admitted to trading on a regulated financial market are concerned;
f. There should be proper diversification of assets to avoid excessive reliance on any particular asset, issuer or group of undertakings, or geographical area, and prevent excessive accumulation of risk in the portfolio as a whole;
g. Investments in assets issued by the same issuer, or by issuers forming part of the same group, must not expose the RSPV to excessive risk concentration.

11. Funding requirement for risk transfer arrangements
The funding requirement for a specific risk transfer arrangement shall not be subsequently re-allocated to satisfy that of another existing or new arrangement assumed by the RSPV, unless prior authorisation is given by the MFSA and the RSPV is in a position to show that there is full legal certainty that the obligations of the first arrangement have been satisfied, and no subsequent claims could be made against the funding in connection to the original arrangement.
12. Withdrawal of authorisation
The MFSA may withdraw the authorisation granted to an RSPV if it does not comply with the fully funded requirement, as well as if it fails to make use of the authorisation within twelve months, expressly denounces its authorisation or ceases to pursue business for more than six months. The same would apply if the RSPV breaches the original conditions of its authorisation, or when it fails in its obligations under any relevant laws, regulations or rules to which it is subject. Any person aggrieved by a decision of the MFSA in this respect may appeal to the Financial Services Tribunal.
13. Offences and penalties
Any person in breach of any of the provisions Insurance Business Act (Reinsurance Special Purpose Vehicles) Regulations shall be liable to a penalty in accordance with article 64(2) of the Insurance Business Act, which establishes a range of not less than €230 and not exceeding €150,000 in respect of any offence. In the case of a continuing offence, a further penalty not exceeding €230 for each day during which the offence continues.

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