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Guernsey Proposes 'Special Purpose Insurer' Rules

by Jason Gorringe, Lowtax.net, London
19 October, 2016

Guernsey's financial services regulator, the Guernsey Financial Services Commission, is consulting on proposed rules for Special Purpose Insurers.

The proposed rules would codify the Commission's existing practice in relation to Insurance Linked Securities and, in particular, entities offering collateralized reinsurance.

The proposed rules are in response to requests from the industry for distinct rules for Special Purpose Insurers. It believes these would attract Insurance Linked Securities business such as collateralized catastrophe reinsurance to the island.

The Special Purpose Insurer class includes insurers offering certain types of insurance-linked transactions business in Guernsey, including collateralized reinsurance, catastrophe bonds, and life-based securitizations.

Special Purpose Insurers must be fully collateralized to the extent of their liabilities, meaning that, unlike traditional insurers, they carry no risk gap between their liabilities and assets. Typically, cash assets will be applied against liabilities, however the Commission recognizes that the commercial intentions of counterparties may be satisfied by the use of (re)insurance, letters of credit, or partly paid shares, and the Commission may apply its discretion to approve the use of such assets (or a combination of them). When considering approval of the use of contingent assets, the Commission will take into account the regulatory status, regulatory domicile, financial credit rating of the counterparty, and any other information it deems relevant.

The proposed rules also allow an established Special Purpose Insurer structure to apply to the Commission to form further Special Purpose Insurer cells in a single application. These proposed rules formalize current discretionary practice of the Commission under the Insurance Business (Licensing) Regulations 2010.

It is further proposed that the Insurance Business (Solvency) Rules 2015 be amended to expressly include a Special Purpose Insurer within the definition of a Category 6 insurer. Under that category, a Special Purpose Insurer would not be required to comply with the Minimum Capital Requirement or the Prescribed Capital Requirement, or conduct an Own Risk and Solvency Assessment.

If approved it is proposed that the Special Purpose Insurer rules will come into effect on January 1, 2017.

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