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Why are we issuing this paper?
1. This Consultation Paper seeks public comments on the DFSA's proposals to
introduce a framework for insurance securitisation. The proposals deal with
the establishment of Insurance Special Purpose Vehicles (ISPVs) within the
DIFC, and also the treatment of securitisations by DIFC authorised insurers.
They involve amendments to the
[Prudential — Insurance Business (PIN)],
[General (GEN)], [Conduct of Business (COB)], and [Glossary (GLO)] Modules of
the DFSA Rulebook, and the introduction of a new form (AUT-ISPV) in the
Who should read this paper?
2. The proposals in this paper would be of primary interest to Persons
considering arranging or undertaking insurance securitisation transactions in
or from the DIFC.
How is this paper structured?
3. In this paper, we set out:
(a) definitions — paragraph 6;
(b) proposals relating to Authorised Insurance Special Purpose Vehicles —
paragraphs 7–17; and
(c) proposals relating to the treatment of insurance securitisations by
Insurers — paragraph 18.
How to provide comments?
4. All comments should be forwarded to the person specified below. You may, if
relevant, identify the organisation you represent in providing your comments.
The DFSA reserves the right to publish, including on its website, any
comments you provide, unless you expressly request otherwise at the time of
What happens next?
5. The deadline for providing comments on these proposals is 20 June 2007.
Once we receive your comments, we will consider if any further refinements
are required to these proposals. We will then proceed to enact the changes
to the DFSA's Rulebook. You should not act on these proposals until the
relevant changes to the DFSA Rulebook are made. We will issue a notice on
our website telling you when this happens.
Comments to be addressed to:
PO Box 75850
or e-mailed to: email@example.com
6. In this paper, generally, capitalised terms are defined in the
the DFSA Rulebook. For convenience, the following terms have the meaning
set out below:
(a) "Insurance Special Purpose Vehicle" means an insurer which:
(i) assumes risks by way of reinsurance; and
(ii) fully funds its exposures to such risks through the proceeds of a
debt issuance or some other financing mechanism where the
repayment rights of the providers of such debt or other financing
mechanism are subordinated to the insurer's reinsurance
(b) "ISPV" means an Insurance Special Purpose Vehicle; and
(c) "Authorised ISPV" means an ISPV who holds a Licence.
Proposals relating to ISPVs
7. An insurance securitisation is a transaction intended to transfer insurance risk
to the capital markets. Although various structures are possible, almost all
involve the use of a Special Purpose Vehicle (SPV). In a typical insurance
securitisation, the SPV is a normal company, or in some jurisdictions a cell of
a protected cell company or similar structure. It assumes risk from an insurer
through a reinsurance contract, with an associated premium. It transfers this
risk to the capital markets, normally through the issue of bonds whose
coupon, and sometimes principal, are at risk depending on the claims made
against the reinsurance contract.
8. Regulators commonly require that the SPV in an insurance transaction be
fully-funded. This means that its possible liabilities under the reinsurance
contract should be capped, and it should always have assets which exceed
those liabilities. This requirement is included within our definition of an
Insurance Special Purpose Vehicle (ISPV).
9. Because of the reinsurance contract, an ISPV would be regarded as
conducting insurance business in most jurisdictions, and would thus fall to be
regulated under the normal insurance regime. There is, however, a general
consensus among regulators that this would be disproportionate to the risks.
The European Reinsurance Directive makes specific provision for countries to
introduce a much simplified regime for ISPVs.
10. Amongst other jurisdictions some, for example the UK, have decided to adopt
explicit provisions for ISPVs in their rules. Others, for example Jersey, deal
with proposals on a case by case basis using powers to waive or modify their
regimes. We have taken the former approach, since we believe the industry
will welcome the legal certainty it offers, especially in our position as a new
jurisdiction, but we welcome comment on this point.
11. Our proposals are set out in Annexes A–E. Readers are reminded that only
underlined amendments are relevant for the purposes of this proposal. Text
which is not underlined is unchanged and currently in force. No comments
are required in relation to text which is not underlined, as it is provided solely
to show the legislative amendments in context.
12. Annex AAnnex A
covers our proposals to amend
. In essence, the capital
adequacy and reporting regimes of
are replaced for an Authorised ISPV,
by provisions which require, in substance, that:
• the ISPV's assets exceed its liabilities at all times;
• these assets be held by or on behalf of the ISPV or the ceding insurer;
• its liabilities are capped to no more than its assets;
• the rights of those who finance the ISPV are fully subordinated to its
• its activities are confined to the ISPV activities for which it was
• it maintains a proper risk management system.
These provisions apply to a Cell of a Protected Cell Company as though it
were an Insurer.
13. Annex BAnnex B
contains amendments to the
which cut back somewhat
the systems and controls requirements of
[GEN Chapter 5]
, and also provide for an
ISPV to be subject to a similar fees regime to that for a captive insurer. (Note
[GEN Chapter 8]
is not amended, and an ISPV will therefore still need to submit
audited annual accounts.)
14. Annex CAnnex C
to disapply entirely
[COB Part 4]
, which contains
the conduct of business provisions for insurance business.
16. In considering which parts of the DFSA Rulebook should continue to apply,
we have recognised that it would be normal for an ISPV to outsource all or
most of its management functions. We have assumed that this would be to a
professional firm, which if located in the DIFC, would be required to be licensed as
an Insurance Manager, and that for such a firm it would not be onerous to
comply with other provisions of the Rulebook, so far as they are relevant to
the limited activities of an ISPV. However, we welcome comment on the
overall weight and shape of the regime, as well as its details.
17. Annex EAnnex E
contains the proposed new authorisation form AUT-ISPV. Although
we are not required to consult on new forms, we are doing so in this case to
give an indication of the approach we propose to take to the authorisation of
ISPVs. We envisage that ISPVs would have to submit only AUT-ISPV, plus
forms in respect of each individual for whom Authorised Individual status is
sought. The form provides for independent legal certification of the
arrangements surrounding the ISPV. Apart from this, our main considerations
at authorisation will be the effective capping of its liabilities, the adequacy of
its assets to meet those liabilities, and the fitness and propriety of those
associated with it. On this basis we expect to operate a very streamlined
Proposals relating to the capital treatment of insurance securitisations
18. It is possible that an Insurer operating in the DIFC will wish to transfer risk
through an insurance securitisation. Annex AAnnex A
also contains our proposals to
deal with such transactions within our capital adequacy regime. In essence,
we have followed the approach proposed by the UK FSA, that we shall deal
with any securitisations on a case by case basis, using our
waiver/modification powers. This will enable us to consider in each case the
effectiveness of the risk transfer and the legal arrangements surrounding the
SPV, wherever it is located.
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