Insurance Special Purpose Vehicles

1.1

Unless otherwise stated, this Part applies to a UK ISPV.

1.2

In this Part, the following definitions shall apply:

assumption of risk notification

means:

1. (1) for a UK protected cell company, a notification by a UK protected cell company of the assumption of a risk required under regulation 60 of the Risk Transformation Regulations; and
2. (2) for a UK ISPV other than a UK protected cell company, a notification under 5A.13.

cell

has the meaning given in regulation 2 of the Risk Transformation Regulations.

contractual arrangement

means an arrangement that:

1. (1) comprises one or more risk transformation transaction; and
2. (2) if it comprises more than one risk transformation transaction, satisfies the following criteria:
   1. (a) the UK ISPV only assumes risk from the same undertaking;
   2. (b) the risk assumed by the UK ISPV under the risk transformation transactions relates to the same underlying risk;
   3. (c) more than one risk transformation transaction is used only for the purpose of renewing a risk transformation transaction or dividing the risk assumed by the UK ISPV into more than one tranche for the purpose of funding the UK ISPV's exposure to that risk; and
   4. (d) the UK ISPV has effective arrangements in place to separately identify the assets, cashflows and liabilities attributable to each respective risk transformation transaction.

group of cells

has the meaning given in regulation 3 of the Risk Transformation Regulations.

group of cells notification form

means the form in 6.2.

inter-cell arrangement notification

means a notification by a UK protected cell company of:

1. (1) the creation of an arrangement within a group of cells, as required by regulation 69 of the Risk Transformation Regulations; or
2. (2) the amendment or cancellation of an arrangement within a group of cells, as required by regulation 70 of the Risk Transformation Regulations.

multi-arrangement special purpose vehicle

means a UK ISPV which assumes risks:

1. (1) from more than one undertaking; or
2. (2) under more than one separate risk transformation transaction, whether with one or more undertakings.

new risk assumption notification form

means the form in 6.1.

qualifying holding

means a direct or indirect holding in an undertaking which represents 10% or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of that undertaking.

Risk Transformation Regulations

means the Risk Transformation Regulations 2017 (2017/1212).

risk transformation transaction

means a transaction of insurance risk transformation pursuant to which a UK ISPV assumes a risk from an undertaking and fully funds its exposure to that risk in accordance with section 284A of FSMA.

UK protected cell company

means a protected cell company formed under the Risk Transformation Regulations.

2.1

A UK ISPV must ensure that, subject to 2.1A at all times:

1. (1) it is fully funded; and
2. (2) if it is a multi-arrangement special purpose vehicle:
   1. (a) it is fully funded in respect of the risks assumed pursuant to each risk transformation transaction; or
   2. (b) if it is a UK protected cell company:
      1. (i) each cell is fully funded in respect of the risks assumed by the cell pursuant to a risk transformation transaction; or
      2. (ii) in the case of cells that are part of a group of cells, that group of cells is fully funded in respect of the risks assumed by the group of cells pursuant to a risk transformation transaction.

2.1A

The requirements in 2.1 are subject to a grace period not exceeding 30 business days after the later of:

1. (1) the date on which the risk transformation transaction is executed by all parties; and
2. (2) the inception date of the risk transformation transaction,

where the requirements in 2.1B are satisfied.

2.1B

The requirements to be satisfied to apply the grace period referred to in 2.1A are:

1. (1) the risk transformation transaction clearly defines any applicable grace period and the implications of the grace period on the UK ISPV's payment obligations to the undertaking transferring risk to the UK ISPV pursuant to the risk transformation transaction; and
2. (2) the UK ISPV has effective arrangements in place to mitigate the risk of not having adequate and sufficient financial resources to pay any amounts that it may become liable to pay to the undertaking transferring risk to the UK ISPV pursuant to the risk transformation transaction during the grace period.

2.2

In order to be considered fully funded in accordance with 2.1, a UK ISPV must satisfy all of the following requirements:

1. (1) the assets of the UK ISPV are recognised and valued in accordance with Valuation 2;
2. (2) the UK ISPV has at all times assets the value of which is equal to or exceeds the aggregate maximum risk exposure and the UK ISPV is able to pay the amounts it is liable for as they fall due; and
3. (3) the proceeds of the debt issuance or other financing mechanism are fully paid-in.

2.2A

A UK ISPV may only use assets that are used to cover its aggregate maximum risk exposure under a risk transfer agreement (‘risk transfer A’) to cover all or part of its aggregate maximum risk exposure under a different risk transfer agreement (‘risk transfer B’), subject to the following conditions:

1. (1) the assets are not used to cover the aggregate maximum risk exposure of the UK ISPV under both risk transfer agreements, simultaneously;
2. (2) the risk transformation transaction relating to risk transfer A and the risk transformation transaction relating to risk transfer B clearly define the extent to which the assets may be used to cover the aggregate maximum risk exposure under each risk transfer agreement, respectively;
3. (3) subject to 2.2B, the assets that are used to cover the aggregate maximum risk exposure under risk transfer A are identified and kept separate from the assets that are used to cover the aggregate maximum risk exposure under risk transfer B, and the UK ISPV has effective arrangements in place to ensure that those assets are not co-mingled;
4. (4) using the assets to cover all or part of the aggregate maximum risk exposure under risk transfer B would not result in the UK ISPV not satisfying all the requirements under this Part in respect of the risk transformation transaction relating to risk transfer A or in respect of the risk transformation transaction relating to risk transfer B, including the requirements in 2.1, 2B.2 and 2B.4.

2.2B

The requirements in 2.2A(3) that assets are kept separate and are not co-mingled do not apply when there is a sole investor that is the same investor in relation to both risk transfer A and risk transfer B.

2.3

A UK ISPV must satisfy the requirements in 2.1 taking into account all of the following:

1. (1) the liquidity risk of the UK ISPV;
2. (2) the quantifiable risks of the UK ISPV; and
3. (3) the arrangements for holding assets in the UK ISPV.

2.4

The UK ISPV must:

1. (1) report on the matters referred to in 2.3(1) and 2.3(2) and demonstrate to the PRA that it satisfies the requirements set out in 2.1, in the report referred to in 5A.2; and
2. (2) be able to demonstrate to the PRA that it satisfies the requirements set out in 2.1, if requested to do so.

2.5

Payments relating to existing contracts of insurance and reinsurance contracts, that are expected to be received in the future by the UK ISPV from the undertaking that has transferred risk to the UK ISPV, may be included in the assets of the UK ISPV, provided that all of the following requirements are met:

1. (1) the future liabilities of the UK ISPV to the providers of debt or finance only arise subject to the receipt of the payments from the undertaking that has transferred risk to the UK ISPV;
2. (2) where the undertaking which has transferred risks to the UK ISPV is:
   1. (a) a UK Solvency II firm or Lloyd’s, there is no scenario under which the basic own funds of the undertaking would be negatively affected by the payment not being received by the UK ISPV;
   2. (b) a third country insurance undertaking, there is no scenario under which the basic own funds of the undertaking  determined as if it were a UK Solvency II firm, would be negatively affected by the payment not being received by the UK ISPV;
3. (3) the UK ISPV continues to meet the conditions set out in 2.1 in the event that the payments from the undertaking that has transferred risk to the UK ISPV are not received; and
4. (4) the payments do not relate to expenses that are excluded from the aggregate maximum risk exposure.

2.6

A UK ISPV must invest all its assets in accordance with all of the following requirements:

1. (1) with respect to the whole portfolio of assets, UK ISPV shall only invest in assets and instruments whose risk the UK ISPV can properly identify, measure, monitor, manage, control and report;
2. (2) assets shall be invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole. In addition, the localisation of those assets shall be such as to ensure their availability;
3. (3) all assets shall be invested in a manner appropriate to the nature and duration of the UK ISPV's liabilities. All assets shall be invested in the best interest of the undertakings transferring risks to the UK ISPV;
4. (4) the use of derivative instruments shall be possible insofar as they contribute to a reduction of risks or facilitate efficient portfolio management;
5. (5) investments and assets which are not admitted to trading on a regulated market shall be kept to prudent levels;
6. (6) assets shall be properly diversified in such a way as to avoid excessive reliance on any particular asset, issuer or group of undertakings, or geographical area and excessive accumulation of risk in the portfolio as a whole; and
7. (7) investments in assets issued by the same issuer, or by issuers belonging to the same group, shall not expose the UK ISPV to excessive risk concentration.

2A.1

A UK ISPV must ensure that the following conditions are satisfied at all times:

1. (1) the UK ISPV only assumes risks from an undertaking through reinsurance contracts or assumes insurance risks through similar arrangements;
2. (2) where the UK ISPV assumes risks from more than one undertaking, the solvency of the UK ISPV is not adversely affected by winding-up proceedings of any one of those undertakings; and
3. (3) the UK ISPV has not determined, on the basis of an assessment carried out in accordance with 2C.5, that any shareholder or member having a qualifying holding in the UK ISPV fails to satisfy the criteria set out in 2C.5(1) to 2C.5(4).

2A.2

A UK ISPV must be able to demonstrate to the PRA that it meets the requirements set out in 2.1 to 2.6, 2A.1, Chapter 2B, 2C.1 to 2C.5, 2D.1 to 2D.3  and 5A.1 to 5A.4.

2A.3

A UK ISPV must immediately inform the PRA of any changes that could affect the compliance by the UK ISPV with 2.1 to 2.6, Chapter 2A, Chapter 2B, 2C.1 to 2C.5 and 2D.1 to 2D.3 .

2B.1

A UK ISPV must ensure that each risk transformation transaction ensures that the UK ISPV is at all times fully funded in accordance with 2.1 to 2.5, subject to any applicable grace period referred to in 2.1A.

2B.2

A UK ISPV must ensure that the risk transformation transaction that transfers risk from an undertaking to the UK ISPV and from the UK ISPV to the providers of debt or financing shall ensure all of the following:

1. (1) the transfer of risk is effective and enforceable in all relevant jurisdictions; and
2. (2) the extent of risk transfer is clearly defined and incontrovertible.

2B.3

The transfer of risk shall not be effective in accordance with 2B.2 where there are connected transactions which could undermine the effective transfer of risk.

2B.4

A UK ISPV must ensure that the risk transformation transaction that transfers risk from an undertaking to the UK ISPV and from that UK ISPV to the providers of debt or finance shall ensure all of the following:

1. (1) the claims of the providers of debt or financing mechanisms are at all times subordinated to the payment obligations of the UK ISPV to the undertaking;
2. (2) no payments are made to the providers of debt or financing, if following those payments, the UK ISPV would no longer be fully funded;
3. (3) the providers of debt or finance to the UK ISPV have no rights of recourse to the assets of the undertaking; and
4. (4) the providers of debt or finance to the UK ISPV have no rights to apply for the winding-up of the UK ISPV.

2C.1

A UK ISPV must ensure that all persons who effectively run the UK ISPV shall at all times fulfil the requirements set out in Insurance – Fitness and Propriety 2.1, 2.2 and 2.3(1).

2C.2

A UK ISPV must notify the PRA of the identity of the persons who effectively run the UK ISPV and must be able to demonstrate to the PRA that those persons meet the requirements set out in Insurance – Fitness and Propriety 2.1, 2.2 and 2.3(1).

2C.3

A UK ISPV must notify the PRA of any changes in the identity of the persons who effectively run the UK ISPV and provide the PRA with all information needed to assess whether any new persons appointed to run the UK ISPV are fit and proper in accordance with the requirements in Insurance – Fitness and Propriety 2.1, 2.2 and 2.3(1).

2C.4

A UK ISPV must notify the PRA if any of the persons who effectively run a UK ISPV have been replaced because they no longer fulfil the requirements set out in Insurance – Fitness and Propriety 2.1, 2.2 and 2.3(1).

2C.5

A UK ISPV must take reasonable steps to keep under assessment whether shareholders or members having a qualifying holding in that UK ISPV are fit and proper, taking into account all of the following criteria:

1. (1) the reputation and integrity of the shareholder or member having a qualifying holding in the UK ISPV;
2. (2) the financial soundness of the shareholder or member having a qualifying holding in the UK ISPV;
3. (3) the level of influence that the shareholder or member having a qualifying holding in the UK ISPV will exercise over the UK ISPV; and
4. (4) whether there are reasonable grounds to suspect that, in connection with the qualifying holding of the shareholder or member having a qualifying holding in the UK ISPV, money laundering or terrorist financing within the meaning of regulation 3(1) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 is being or has been committed or attempted, or that the qualifying holding could increase that risk.

2C.6

A UK ISPV must notify the PRA of the identity of the persons who are its shareholders or members having a qualifying holding.

2C.7

A UK ISPV must notify the PRA as soon as it becomes aware:

1. (1) of any change of the shareholders or members having a qualifying holding; and
2. (2) that any shareholder or member having a qualifying holding may not be fit and proper, taking into account the criteria in 2C.5.

2C.8

[Deleted]

2C.9

[Deleted]

2C.10

[Deleted]

2D.1

A UK ISPV must have an effective system of governance which provides for the sound and prudent management of the UK ISPV and which is appropriate to the nature, scale and complexity of the risks it assumes and the regulated activity for which it is authorised.

2D.2

The system of governance of a