FSA Looks at Rules on Sidecars

June 28, 2006

The U.K.’s Financial Services Authority (FSA) announced that it is consulting on rules to be introduced in the country to cover, “a new fit-for-purpose regime for Insurance Special Purpose Vehicles (ISPVs). The proposals form part of a wider consultation on the implementation of the EU Reinsurance Directive (RID).”

The FSA described ISPVs – also known in the U.S. as sidecars – as “special purpose reinsurance vehicles which must be fully funded, typically by issuing debt. If the ISPV has to pay out under its reinsurance obligations, the repayment rights of the debt holders are reduced accordingly. Currently an ISPV would be regulated on the same basis as a firm conducting traditional reinsurance business and would be subject to the full authorization process for such a firm.”

The FSA is considering loosening its authorization requirements in accordance with the EU’s RID to those that are “proportionate to the lower risks resulting from the structure of ISPVs. These will remove unnecessary information requirements and place greater focus on self-certification than for a traditional insurer or reinsurer.”

The FSA said it “will largely supervise ISPVs through its supervision of the ceding insurer, which will ensure that an adequate level of consumer protection is maintained at all times. The introduction of an ISPV regime will allow insurers to manage their capital more efficiently.”

Thomas Huertas, FSA Wholesale Firms Director, commented: “The implementation of the Reinsurance Directive gives the FSA an opportunity to make the UK an easier place for insurers to do business in. Introducing ISPVs will give insurers and reinsurers access to more diverse sources of capital and enable them to manage their capital more efficiently.

“We can now also give greater investment flexibility to pure reinsurers, whilst life reinsurers will benefit from reduced capital requirements. These changes will provide an important contribution to our provision of the ‘Regulatory Platform of Choice’.”

The full bulletin and additional information may be obtained on the FSA’s Website at: http://www.fsa.gov.uk.

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