The EU Reinsurance Directive (Directive 2005/68/EC) (“Reinsurance Directive”) was implemented into Irish law by the European Communities (Reinsurance) Regulations 2006 (the “Regulations”), which made Ireland the first EU Member State to implement the Reinsurance Directive. Under the Regulations, entities seeking to carry on reinsurance business in Ireland are required to obtain an authorisation from the Central Bank of Ireland (the “Central Bank”). The authorisation process for reinsurers is similar to that which is applied to direct insurance undertakings.
The Regulations are supplemented by Central Bank guidelines published in 2007 (the “2007 Guidelines”) and 2012, EIOPA (formerly CEIOPS) guidelines published in 2009 (the “2009 Guidelines”) and a checklist for completing SPRV applications published in 2012 by the Central Bank (the “Checklist”).
This article sets out the current regulatory regime pursuant to the Regulations and subsequent Central Bank and European guidance (as detailed above) governing special purpose reinsurance vehicles (“SPRVs”).
Requirement for authorisation
Ireland has long been a first choice jurisdiction for securitisation work. Accordingly, a specialist regulatory authorisation process was introduced by the Regulations to deal with SPRVs. The Regulations include provisions, for which Ireland lobbied at EU level, providing a discretion to the Central Bank to prescribe capitalisation requirements for SPRVs that are lower than those prescribed for regular reinsurance entities.
The Regulations make it an offence for a person to carry on reinsurance business without proper authorisation or to carry on a type of reinsurance business that is beyond the scope of authorisation granted. In order to apply for authorisation, an applicant must have both its head and registered office located in Ireland and be a company limited by shares or guarantee or be a European company. Furthermore, the objects of the applicant must be limited to carrying on reinsurance business.
The Regulations define a SPRV as an undertaking that:
“...assumes risks from insurance and reinsurance undertakings and fully funds its exposures to those risks through the proceeds of a debt issue or some other financing arrangement under which the repayment rights of the providers of the debt or financial arrangement are subordinated to the reinsurance obligations of the undertaking...”
Applications and assessment
Regulation 30 of the Regulations sets out various items which must accompany an application for authorisation of an SPRV which is submitted to the Central Bank. The 2007 Guidelines and the Checklist expand on this and outline more particularly the specific details and documentation which must be included. Such items comprise, but are not limited to:
- a copy of the proposed SPRV contract (ie the reinsurance treaty or retrocessional agreement proposed to be entered into between the SPRV and the ceding insurance undertaking or reinsurance undertaking) or a statement containing a description of that contract;
satisfactory information about the identities and qualifications of:
- the ceding insurance undertaking or reinsurance undertaking under the relevant SPRV contract;
- the persons (if any) who are or will be appointed to act as trustees of the SPRV’s assets;
- the persons who are or will be officers of the SPRV;
- those persons who have qualifying holdings (whether direct or indirect) in the SPRV and the amounts of those holdings; and
- the persons who are providing or will provide management and other professional services (such as accounting) to the SPRV.
Where a description of the SPRV contract is submitted with the application, the Regulations require that such description must include details of the following:
- any triggering event;
- the aggregate limit of the relevant SPRV contract (if any); and
- a statement as to how the SPRV is or will be fully funded,
- an actuarial review of underlying business;
- a prospectus / offering circular or private placement memorandum in relation to the securities to be issued by the SPRV;
- an overview of the SPRV structure and rationale for this structure;
- details of the investment strategy of the SPRV;
- a rating agency pre-sale report on behalf of the SPRV;
- overall risk management plan including details as to how the SPRV will be fully funded;
- financial projections;
- details of the SPRV’s liquidity strategy, including structure of the waterfall (i.e. ranking or priority of payments), types of positions and noteholder withdrawal rules; and
- investment authority guidelines for assets held in trust, along with details of any leverage permitted within these guidelines.
The Central Bank has indicated that an SPRV should be a bankruptcy remote vehicle separate from the cedant. Furthermore, the notes derived from the waterfall structuring of the SPRV should be ‘non-recourse’ in that payments due under the terms of the notes are the obligation of the SPRV only and that in the event of a default the noteholders will not have recourse to the assets of the cedant. The Central Bank has stipulated that the applicant SPRV should be in a position to demonstrate that the cedant and its regulator are aware of the nature of the securitisation transaction and the SPRV.
The Central Bank may refuse an application by an SPRV where it is satisfied that the applicant is not of good repute or will not be able to fulfil the responsibilities imposed on the SPRV by the Regulations. The Central Bank shall not be entitled to refuse an application without giving the applicant the opportunity to make representations to rebut the finding of the Central Bank as to why such application should not be refused. Once authorised, Irish SPRVs are required to establish and maintain sound and adequate administrative and accounting procedures. It is important to note however that the responsibility for management of the SPRV on a day to day basis can be outsourced to a professional management services provider. There are a number of such providers operating in the Irish market.
Generally, the Central Bank will not impose capital requirements on SPRVs in excess of the amount required to ensure they are “fully funded”, as stated under the Regulations.
“Fully funded” in the context of the Regulations means that the market value of the assets held in trust or as otherwise held under the terms of a contract by or on behalf of the SPRV for the benefit of the counterparty to the contract, or the value of the letter of credit established by or on behalf of the SPRV for the benefit of the counterparty, equals or exceeds that aggregate limit of its obligations at any time including any fees and expenses.
Reuse of or alterations to SPRVs
The 2009 Guidelines contain directions on the potential reuse of an SPRV. If, during the initial authorisation process, the undertaking seeking authorisation clearly states the aim of reusing the SPRV, along with details of the reuse, then detailed follow up discussions with the relevant regulatory authority should not be necessary if such reuse occurs in the same circumstances as at authorisation and the SPRV is acting within its articles of incorporation.
The 2009 Guidelines contain further directions where reuse was not planned at the time of the initial authorisation. Here the prior approval of the relevant regulatory authority would be required before such reuse would occur and it is envisaged that this process would be more straightforward that an initial authorisation. However it is preferable that this intention be outlined during the initial application for authorisation.
Importantly, the 2009 Guidelines state that the approval process for the reuse of an SPRV or any change of its characteristics should be:
“proportionate to the nature, scale and complexity of the transaction that is taking place and may not require a full authorisation process as would be needed at the original establishment of the SPV”.
This reduces the burden on undertakings wishing to reuse an SPRV for a transaction similar or identical to the one approved during the initial authorisation.
Taxation of SPRVs
Ireland’s tax regime for SPRVs enables an SPRV to be structured so that it earns only a very minimal taxable profit (eg, EUR 1,000 per year) which is subject to Irish tax at the rate of 25%.
To ensure an Irish SPRV falls within the Irish tax legislation, the SPRV must observe the following:
- the SPRV must be a company which is tax resident in Ireland.
- the SPRV must carry on in Ireland a business of holding or managing (or both holding and managing) ‘qualifying assets’. There are three categories of ‘qualifying assets’, namely: financial assets (including shares, bonds, securities, derivatives, receivables, leases, carbon offsets, and contracts for insurance); qualifying commodities; and plant and machinery.
- apart from activities ancillary to this business, an SPRV may not carry on any other activity.
- the SPRV’s initial transaction must involve ‘qualifying assets’ with a minimum market value of EUR 10 million.
- the SPRV must notify the Irish tax authorities that it intends to fall within the special Irish tax regime for SPRVs. However, no special tax rulings or authorisations are required.
An SPRV’s taxable profits are computed in accordance with generally accepted accounting principles on the same basis as a trading company. An SPRV is entitled to claim a tax deduction for its business expenses, including its interest expenses. Importantly, an SPRV may claim a tax deduction for profit-linked interest payments (subject to satisfying a number of conditions).
Generally, the activities of an SPRV are exempt activities for VAT purposes. The SPRV is typically not in a position to obtain a repayment of any VAT incurred by it in respect of services received. An SPRV may be required to account for Irish VAT on services received from abroad which have an Irish place of supply. However, no charge to Irish VAT arises in respect of investment management or corporate administration services supplied to an SPRV. Furthermore, stamp duty is not payable on the issue or transfer of securities issued by an Irish SPRV provided that the funds raised from the securities are used by the SPRV in the ordinary course of its business.
Ireland was at the forefront of implementing the Reinsurance Directive and the legislative regime has resulted in a balanced regulatory environment for the Irish reinsurance industry. With a principle focus on SPRVs, Ireland has several appealing factors as a jurisdiction for special purpose vehicles issuing reinsurance linked debt securities.
Ireland as a jurisdiction for SPRVs enjoys particular advantages over other traditional reinsurance jurisdictions in respect of SPRVs. Not only is Ireland a common law country, but it is both a Member State of the EU and a member of the Organisation for Economic Co-operation and Development (“OECD”) and most fundamentally, it is an onshore jurisdiction. Furthermore, as a consequence of its historical experience with both SPRVs and special purpose insurance vehicles, Ireland has a wealth of knowledgeable and cost-effective professionals and service providers in addition to competitive start-up costing.
From a commercial perspective, SPRVs established in Ireland will typically be tax neutral and there is no minimum capital requirement beyond that to certify the SPRV as “fully funded”, as explained above.