How is the reinsurance market currently regulated in the UK?

Under UK legislation reinsurers are treated in the same way as insurers. Reinsurance contracts are regulated investments and all reinsurance companies require FSA regulation. The same rules as regards capital, solvency and other prudential rules apply to reinsurers as to direct insurers, although in some cases a lower solvency margin is required for pure reinsurers than for companies carrying out both direct insurance and reinsurance.

What steps have been taken to implement the Reinsurance Directive?

In June 2006, the FSA issued a Consultation Paper (CP 06/21 Implementing the Reinsurance Directive). It issued feedback on this paper in its policy statement on implementing the Reinsurance Directive in September later that year (CP 06/16 Prudential Changes for Insurers). These changes have been made with effect from 31 December 2006. The FSA decided to:

  • introduce a principles-based (prudent person) approach to asset admissibility for the reinsurance business of pure reinsurers and mixed firms;
  • reduce the reinsurance solvency requirements for life reinsurance “protection” business;
  • authorise and supervise insurance ISPVs and, subject to receipt of a waiver, to allow amounts outstanding or recoverable from them to be counted as regulatory capital or as reinsurance/retrocession; and
  • require that an assessment of the risk transferred by finite reinsurance be made and that the credit for the liabilities reinsured be limited to the risk transferred.

Asset admissibility

The UK applies detailed rules for asset admissibility for direct insurers which used to apply to reinsurers. The Reinsurance Directive sets out a “prudent person” approach which the FSA decided to adopt for pure reinsurers in place of the detailed rules. The prudent person rules consist of a set of principles (set out in Article 34 of the Reinsurance Directive) which firms must apply when selecting capital to cover their liabilities.

The FSA has decided not to adopt the “plus” element of the prudent person principles contained in the Reinsurance Directive. This would have imposed limits on the use of certain types of asset (e.g. unlisted securities) and broad counterparty limits.

What will be the general implications of the Reinsurance Directive in the UK?

Since reinsurance has previously been regulated based on the existing insurance directives, the Reinsurance Directive has allowed the UK to reduce existing requirements for reinsurance where they are in excess of the Reinsurance Directive requirements. In addition, the FSA’s move to a more “principles-based” regulatory approach has seen a more relaxed attitude in certain areas – notably the removal of a number of restrictions on pure reinsurers’ choice of admissible assets.

The FSA has implemented the provisions relating to ISPVs, finite reinsurance, solvency margins, and portfolio transfers in its new prudential sourcebooks INSPRU and GENPRU. Most of the provisions are in INSPRU but the basic solvency requirements are in GENPRU. Both sourcebooks came into force on 31 December 2006.

What are the specific rules on capital and solvency?

The Reinsurance Directive incorporates the life and non-life solvency requirements with the option to use the life solvency requirements for some insurance classes that involve investment risks. The FSA has decided to take up this option and apply the life solvency rules to investments contracts but it has not applied the rules to protection contracts. This should significantly reduce the capital required in respect of life protection business. This reduction will also apply to mixed reinsurers (defined by the FSA as “mixed insurers”) carrying on significant amounts of reinsurance business (e.g. at least 10 per cent and at least €50 million in value).

How is the UK implementing the ISPV rules?

The FSA has implemented the rules permitting ISPVs, with most of the provisions in its INSPRU sourcebook. INSPRU 1.1.92B provides that for regulatory purposes the effect of insurance securitisations can be included for solvency purposes (e.g. as a positive valuation difference) subject to receipt of a FSA waiver. Previously, ISPVs had to apply for authorisation as a reinsurer and were subject to the full regulatory regime for insurers and reinsurers. The FSA have now implemented a “lighter touch” regulatory framework to encourage the growth of the UK as the location for ISPVs. The FSA’s new rules and guidance provide further detail about the proposed operation of ISPVs. 

ISPVs must be fully funded

The FSA believes that fully funded means that the ISPV’s reinsurance liabilities must be capped at the value of the assets available to fund those liabilities. INSPRU 1.6 includes guidance on what the FSA expects ISPVs to do to be fully funded.

The FSA have stated that:

  • ISPVs must have received the proceeds of issuing debt or other method by which it is financed.
  • Terms must be included in ISPVs’ reinsurance contracts which ensure that its exposure under its contracts does not exceed the amount of its assets at any time.
  • Under the terms of any debt or other finance arrangement used to fund its reinsurance liabilities an ISPV must ensure that the rights of providers of that debt or financing are fully subordinated to the claims of creditors under its contracts of reinsurance.
  • ISPVs must only enter into contracts which are necessary for it to give effect to the reinsurance special purpose for which it has been established.
  • Where there is more than one reinsurance contract in place with an ISPV they must demonstrate that each contract is structured in such a manner that it meets the requirement to be fully funded for all its reinsurance obligations.

Confirmation from legal advisors

The FSA has said that they expect ISPVs to obtain an independent legal opinion that a contractual agreement between any ISPV and ceding insurer is legally effective and meets the requirements in INSPRU 1.6.9R to 1.6.12R. The FSA will also expect legal advisers to confirm that the repayment rights of providers of finance are fully subordinated to the claims of its reinsurance creditors.


Less information is required by the FSA for establishment as an ISPV than for traditional insurers or reinsurers. There is a greater emphasis upon self-certification. The onus will be placed on ceding firms to provide information on the impact of the ISPV on its individual capital assessment (ICA). It must do this and receive the appropriate FSA waiver before the amounts recoverable from an ISPV can count towards its technical provisions or its capital requirements. Authorisation requires the provision of:

  • Details of legal advisers and auditors, and details of legal status (FSMA requires insurers to be a body corporate, registered friendly society or a member of Lloyd’s); details where relevant of the group structure; details of the ISPV’s governing body; and details of its business profile (restricting it to the activities of an ISPV).
  • A business plan which provides a description of the purpose of the ISPV, the risks it will cover and its structure.
  • Independent legal confirmation that the agreements are legally effective and in particular that the repayment rights of debt holders are subordinated to any reinsurance obligations.
  • Controller forms must be provided.
  • Evidence must be provided that the ISPV has adequate internal systems and controls.
  • Details of the extent of any future commitments to future new business must be set out.
  • An approved persons application must be completed which outlines the functions under the FSA’s approved person regime.

Solvency requirement

The solvency rule for ISPVs is that assets must be greater or equal to liabilities. By their nature ISPVs’ liabilities are limited to their total assets with any residual risk retained by the ceding firm as stated in its ICA. ISPVs will have to notify the FSA under the existing supervision sourcebook (SUP) if the solvency rule is breached.


The FSA will monitor the ISPV through minimal reporting requirements and via the ceding insurer. All residual risks will be reflected in the ceding insurer’s ICA. ISPVs set up in the UK by entities supervised outside the UK will be treated in a similar way as ISPVs accepting risks from UK-supervised cedents. Where a UK regulated firm establishes an ISPV in another Member State and wishes to take credit for the ISPV on its balance sheet it will be required to meet the same conditions applied to UK-based ISPVs.

Rules for ceding insurers wishing to take credit for ISPVs

Ceding insurers will need to apply for a waiver in order to take credit for the ISPV on their regulatory balance sheet. The application for a waiver should set out the impact that the arrangement will have on the ceding firm’s ICA. If there is any residual risk (e.g. inherent in the liabilities) or any additional risk, the ceding company will be expected to hold appropriate capital to mitigate it. It remains to be seen how the FSA will treat non-EEA reinsurance special purpose vehicles which are authorised reinsurers.

A key test that all ISPVs will need to meet before credit can be taken on the regulatory balance sheet will be compliance with the proposed risk-transfer principle set out by the FSA. Before granting a waiver the FSA must be satisfied that the ISPV effectively transfers risk for the ceding insurer. If the waiver is granted the cedent will be allowed:

  • to include the ISPV as a reinsurance asset in the case of a non-life insurer or reinsurer; or
  • to deduct any liabilities covered by the ISPV from its gross liabilities in the case of a life insurer or reinsurer.

How is the UK positioning itself to be an ideal home state?

The FSA has implemented the Reinsurance Directive in good time. This should facilitate the use of ISPVs and other structured products to provide additional reinsurance capacity. This also enables reinsurers with their head office in the UK to undertake portfolio transfers within the EU. The FSA has also taken advantage of the option to allow ISPVs not to hold a solvency margin. HM Revenue and Customs have proposed the implementation of a new tax regime for securitisation vehicles and are considering whether insurance special purpose vehicles should also be brought within the scope of the regime. How does the capacity for portfolio transfer in the Reinsurance Directive impact the UK market?

How is the financial regulator implementing these transfer provisions and is this likely to lead to further consolidations of the market in the UK?

The provisions of the Reinsurance Directive lend themselves to a rationalisation of reinsurance business at EU level to one or to a number of strategic centres. The procedure is similar to that for direct insurers. The availability in the UK of schemes of arrangement to provide alternative exit strategies for long tail business may mean that business from other EU jurisdictions will be transferred to the UK. This publication is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to a particular matter.