Malta’s Reinsurance Special Purpose Vehicles Regulations

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By virtue of legal notice 452 on the 27th December 2013, Malta’s Reinsurance Special Purpose Vehicles (RSPV) Regulations are now in force. This follows both consultation and feedback proceedings which were handled by the Malta Financial Services Authority in light of the proposed regulations earlier on in 2013.

This is in line with Directive 2005/68/EC of the European Parliament and of the Council of the 16 November 2005 on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC as well as Directives 98/78/EEC and 2002/83/EC (the “Reinsurance Directive”) which provides Member States with the framework to allow special purpose vehicles to assume risks from insurance or reinsurance undertakings. These special vehicles are used as a means to issue Insurance Linked Securities (ILS) such as catastrophe bonds, collateralised reinsurance and sidecars which are all methods of transferring risk outside the traditional reinsurance pool.

Special purpose vehicles are now allowed to assume risk from a ceding undertaking which fully funds its exposure to such risks through the proceeds of a debt issuance or any other financing mechanism where the repayment rights of the providers of such debt, or financing mechanism are subordinated to the reinsurance obligations of such a vehicle.

In line with the newly enforced regulations, in order to operate as a reinsurance special purpose vehicle an undertaking may operate in or from Malta in accordance with an authorisation which must be granted by the Malta Financial Services Authority. Such authorisation will state the uses for which the special purpose vehicle is authorised, and will be granted or refused within six months of receipt of the authorisation application. Moreover, it may only assume risks from a single ceding undertaking or those belonging to the same group.

Eligibility for authorisation requires a number of criteria to be met. These include that the business must be a limited liability company formed or constituted in Malta, its object should be restricted to operating as a reinsurance special purpose vehicle and that it assumes risks from a ceding undertaking through reinsurance contracts, or assumes insurance risks through similar arrangements. Moreover, as per solvency requirements it should be fully funded at all times with its assets valued in accordance with generally accepted accounting principles and practice, which value should be equal or greater to maximum risk exposure and the proceeds of the debt issuance or any other financing mechanism are to be fully paid-up. Overall, all contractual arrangements relating to the transfer of risk from a ceding undertaking to the reinsurance special purpose vehicle and its investment in assets must satisfy a number of mandatory conditions as set out by the law.

Furthermore, any persons who will either direct or manage the RSPV or be a trustee of it must be fit and proper persons, briefly meaning that they must be qualified, knowledgeable and experienced enough to manage whilst also being of good repute and integrity. Moreover, the identity of the shareholders or members having a qualifying shareholding in the RSPV must be disclosed.

Other requirements for authorisation also include the demonstration of an effective system of governance being in place having sound administrative and accounting procedures, adequate internal control mechanisms and an effective risk management system. Finally, the RSPV will be subject to supervisory reporting to the Authority while meeting a number of solvency requirements.

For more information please contact Dr. Jonathan De Giovanni, Director of Legal and International Tax