Insurance linked securities, insurance special purpose vehicles, and collateralised reinsurance—essentials
Insurance linked securities, insurance special purpose vehicles, and collateralised reinsurance—essentials

The following Insurance & Reinsurance guidance note provides comprehensive and up to date legal information covering:

  • Insurance linked securities, insurance special purpose vehicles, and collateralised reinsurance—essentials
  • What are insurance linked securities?
  • What is an insurance special purpose vehicle?
  • What is a Protected Cell Company?
  • What is a basic structure for an ILS deal?

What are insurance linked securities?

Insurance Linked Securities (ILS) are an alternative form of risk mitigation for insurance and reinsurance firms. The Financial Conduct Authority (FCA) describes ILS as ‘financial instruments where the value of the security is linked to an insurable loss event’.

In contrast to conventional cover arranged with a reinsurance company, ISL offer insurance and reinsurance firms a means of transferring risk to the capital markets. An ILS transaction typically involves the following steps:

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What is an insurance special purpose vehicle?

An insurance special purpose vehicle (ISPV) is a mechanism or entity created for the sole purpose of taking on specified contractual risks from an insurance or reinsurance firm. If an ISPV concurrently takes on more than one contract of risk transfer from one or more 'cedants' they are known as Multi-arrangement ISPVs (MISPVs). The FCA defines an ISPV as: an undertaking whether incorporated or not, which has received authorisation in accordance with article 211(1) or (3) of the Solvency II Directive and: (a) which assumes risks from a regulated insurance entity; and (b) which 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 undertaking's obligations to the insurance

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