NAIC SPRV Model Provides Added Tool to Manage Risk for Natural Catastrophes

The National Association of Insurance Commissioners’ (NAIC) adoption of the Special Purpose Reinsurance Vehicle (SPRV) Model Act will provide a template for states to create legislation that will enable onshore securitization of insurance risk for natural catastrophes.

The National Association of Independent Insurers (NAII) praised the NAIC’s recent adoption of the SPRV Model Act last week during the Commissioners’ Washington Summit.

The Model Act provides another private market tool for insurers to manage catastrophe and other risks,” said Stephen W. Broadie, NAII assistant vice president, financial legislation and regulation. “This is a big step in the right direction for insurers, reinsurers and consumers alike because it promises to allow insurers to access the capital markets in the United States, rather than incur the additional costs of engaging in offshore securitizations.”

According to NAII, securitization transactions allow capital market investors to purchase bonds issued by SPRVs that are used to fund a reinsurance transaction. Illinois has already enacted an earlier version of the NAIC Model Act.

States will be free to enact legislation that may strictly follow the NAIC’s model or to incorporate changes that they view as necessary in their own states,” Broadie said.

But in order for the SPRV to work catastrophe bonds need to be treated as bonds for tax purposes–which means that the interest would be deductible, according to Broadie.

“Some type of federal tax legislation seems to be the next logical step,” he said.