EU and UK regulation of insurance-linked securities
EU and UK regulation of insurance-linked securities

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • EU and UK regulation of insurance-linked securities
  • What are insurance-linked securities?
  • Use of SPVs
  • Outline of EU and UK regulatory regime for ILS
  • Definition of SPV and MSPV under Solvency II
  • Conditions for authorisation of SPVs under Solvency II
  • Mandatory contract conditions for ILS transactions under Solvency II
  • Solvency II fit and proper persons requirements for SPVs
  • Solvency II fit and proper shareholders requirements for SPVs
  • Solvency II governance requirements for SPVs
  • more

BREXIT: The UK is leaving the EU on Exit Day (as defined in the European Union (Withdrawal) Act 2018). This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Brexit planning and impact—financial services, Brexit—impact on finance transactions—Key issues for securitisation transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.

What are insurance-linked securities?

Insurance-linked securities (ILS) are a form of risk management for insurance and reinsurance firms.

Insurers routinely manage their exposure to risk by entering into an arrangement in which:

  1. the insurer retains its direct liability to its policy holders, but

  2. another firm

    1. receives amounts corresponding to part of the premia paid by policy holders to the insurer, and

    2. is liable to pay amounts to the insurer which correspond to an agreed proportion of losses incurred by the insurer

This is also referred to as risk mitigation or risk transfer.

The most common form of insurance risk management is reinsurance, where the insurer enters into a reinsurance agreement with another insurance company which specialises in reinsurance. A reinsurer may itself reinsure all or part of the risk that has been transferred to it. This is called ‘retrocession’ rather than reinsurance. The reinsurer of a reinsured risk is called the ‘retrocessionnaire’.

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ILS are a form of risk management in which:

  1. an insurance