CEIOPS’’
Advice for Level 2 Implementing Measures on Solvency II: Special
Purpose Vehicles
2. Extract from Level 1
Text
2.1. Article 211 (Special purpose vehicle) of the Level 1 text
reads:
1. Member States shall allow the
establishment within their territory of special
purpose vehicles, subject to prior supervisory approval.
2. In order to ensure a harmonised approach with respect to
special purpose vehicles, the Commission shall adopt implementing
measures laying down the following:
(a) the scope of authorisation;
(b) mandatory conditions to be included in all contracts issued;
(c) fit and proper requirements as referred to in Article 42 of
the persons running the special purpose vehicle;
(d) fit and proper requirements for shareholders or members having
a qualifying holding in the special purpose vehicle;
(e) sound administrative and accounting procedures, adequate
internal control mechanisms and risk-management requirements;
(f) accounting, prudential and statistical information
requirements;
(g) solvency requirements.
Those measures, designed to amend non-essential elements of this
Directive inter alia by supplementing it, shall be adopted in
accordance with the regulatory procedure with scrutiny referred to
in Article 301(3)
3. Special purpose vehicles authorised prior to 31
October 2012 shall be subject to the law of the Member State having authorised the special purpose vehicle.
However, any new activity commenced by such a special purpose
vehicle after that date shall be subject to paragraphs 1 and 2.
2.2. Recital (91) – (94)
(91) Appropriate rules should be provided for special purpose
vehicles which assume risks from insurance and reinsurance
undertakings without being an insurance or reinsurance
undertaking. Recoverable amounts from a special purpose vehicle
should be considered as amounts deductible under reinsurance or
retrocession contracts.
(92) Special purpose vehicles authorised before 31 October 2012
should be subject to the law of the Member State having authorised
the special purpose vehicle. However, in order to avoid regulatory
arbitrage, any new activity commenced by such a special purpose
vehicle after 31 October 2012 should be subject to the provisions
of this Directive.
(93) Given the increasing cross-border nature of insurance
business, divergences between Member States' regimes on special
purpose vehicles, which are subject to the provisions of this
Directive, should be reduced to the greatest extent possible,
taking account of their supervisory structures.
(94) Further work on special purpose vehicles should be conducted
taking into account the work undertaken in other financial
sectors.
3. Advice
3.1. Background
3.1. Article 13(26) of the Level 1 text defines an SPV as
“any undertaking,
whether incorporated or not, other than an existing insurance or
reinsurance undertaking, which assumes risks from insurance or
reinsurance undertakings and which fully funds its exposure to
such risks through the proceeds of a debt issuance or any other
financing mechanism where the repayment rights of the providers of
such debt or financing mechanism are subordinated to the
reinsurance obligations of such an undertaking”
3.2. Traditionally CEIOPS has seen that the structure of an SPV
transaction could take a number of different forms depending on the nature of the risks transferred and
structure of the arrangement itself.
Some life SPVs to date have assumed risks such as
lapse risk or excess mortality and transferred those risks to the
capital markets.
Some non-Life SPVs to date have assumed risks like motor risks,
and natural catastrophe risks such as windstorm risks and
earthquake risks and transferred those risks to the capital
markets.
3.3. The Directive will oblige Member States to
allow SPVs to be established in their jurisdiction subject to
harmonised authorisation requirements as set out by Article 211.
In order
for the undertaking concerned to benefit from the regulatory
capital relief available the SPV would therefore need to be
authorised by the supervisory authority; otherwise the SPV would
fall outside the scope of this advice.
3.4. It is important to note that
if the conditions for authorisation have been
adequately met by the SPV then
the transaction should
be considered for risk mitigation recognition within the solvency
calculations of the undertaking akin to a reinsurance transaction,
including appropriate allowance within recoverables
covering the technical provisions (see Recital 91) and the risk
profile changes within the SCR.
Therefore, it is important that the decision regarding
authorisation of the SPV and its recognition within the solvency
calculations of the undertaking are consistent.
[AN IMPORTANT NATIONAL
DISCRETION]
3.5. It will remain a matter
for Member States whether they allow SPVs not falling under
Article 13(26) and Article 211. Such SPVs (for example,
SPVs that only transfer non-insurance risks) may be considered by
supervisory authorities for regulatory capital relief under risk
mitigation purposes.
3.6. Supervisory authorisation for the regulatory requirements and
the scope of supervisory review of an SPV and its use should
address a number of specific outcomes, among which:
• What is the structure of the SPV arrangement?
• What risks are to be assumed by the SPV and what are the terms
and conditions for payment?
• How has the SPV satisfied the fully funded concept?
• What is the investment policy of the SPV?
• What benefit does an undertaking obtain from transferring risk
to an SPV?
• How does this benefit differ from the treatment of traditional
securitisation?
• How does this benefit reflect retained risk or potential risk by
the undertaking, particularly counterparty and reputation risk?
• What additional complexity does the risk transfer present to the
supervision of the undertaking and its group?
• How does the balance sheet for solvency purposes of the
undertaking differ from its accounting balance sheet after a risk
transfer and why?
3.7. Supervisory authorities should assess that the above
questions are appropriately answered, an appropriate mechanism is
in place to transfer risk and that the appropriate documentation has been received before
approving an SPV (and that the documentation is assessed and
each of the principles mentioned in this paper are fulfilled).
3.8. The principles below, under the headings of the paragraphs in
Article 211, go some way towards answering these issues.
Under a principles-based approach, this means they will need to be considered on a
case-by-case basis due to the variety of SPV transactions that
could be undertaken.
As it is not possible to anticipate the specific nature that these
risk transfers may take in future years, in considering an SPV
application, supervisory authorities should consider the economic
effect of the transaction over its legal form.
Establishing high-level principles for a supervisory framework
aims not to inhibit the ongoing development and evolution of SPVs,
while also allowing an appropriate supervisory review process in
relation to these transactions.
3.9. The supervisory approach CEIOPS is aiming for is to
set some fundamental requirements that the SPV needs
to meet at authorisation and for it to continue to meet those
requirements on an on-going basis.
In parallel the undertaking who transferred risk to
the SPV will be subject to on-going supervision.
This approach is aligned with the fact that the undertaking
benefits in terms of capital relief from the transfer of risk to
the SPV.
3.2. The scope of authorisation
3.2.1 Explanatory text
3.10. The definition of an SPV in Article 13(26) of the Level 1
text sets out the scope of an SPV’s authorisation, including its
permitted range of activities as constrained by the preconditions of its
authorisation.
3.11. In CEIOPS’ view, SPVs should only be considered for
authorisation in a Member State
if a) and either b) or c) of the following three scope
issues are fulfilled:
a. the transaction has the structure of an SPV as
defined in Article 13(26) and meets the requirements established
in the rest of the paper below; and either
b. the SPV assumes risk from an undertaking through a reinsurance
contract14; or
c. the SPV assumes insurance risks from an undertaking transferred
through a contract that is ‘reinsurance like’.
3.12. The SPV should be restricted from engaging
in activities other than assuming risks from undertakings, except for activities directly
arising from that business.
3.2.2 Potential re-use and changes in the SPV’s terms
3.13. The SPV authorisation should
only be valid for the purpose for which it was
established, which may include potential future reuse.
CEIOPS’ believes that if in the authorisation process the
undertaking has clearly stated the aim
of reusing the SPV, along with the details of the reuse, then detailed follow up
discussions should not be necessary when the envisaged reuse
occurs if the same circumstances apply as at authorisation of the
SPV and the SPV is acting within its articles of incorporation.
3.14. If the proposed reuse was not planned and discussed with the
supervisor at initial authorisation or if initial authorisation
was granted subject to a proviso that a potential reuse would have
to be approved by the supervisor, the anticipated reuse of an SPV
needs prior approval16 from the supervisory authority where the
SPV has been established.
Re-entering the approval process with the supervisory authority needs to occur for any
regulatory capital relief to be taken by the undertaking for the
SPV under the new arrangement.
Approval should therefore be applied when the circumstances are
changing or the objective of the SPV is different or when the
SPV’s incorporation documents have been amended.
3.15. If during the lifetime of the SPV it assumes any additional risks, has any changes made to the contracts involved or has
further capital raised from investors and placed into it after
authorisation, which was not as agreed at authorisation,
then any material changes need to be subject to prior
supervisory approval.
3.16. The approval process, for both the reuse of the SPV or for
any change of its characteristics (e.g. additional risks assumed
or capital placed into it, or contracts involved) during its
lifetime 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.
The supervisory authority should consider if these
changes constitute a change in the objectives of the SPV, in which
case a more exhaustive authorisation process will be required.
Supervisors would expect to be kept informed of all
material changes to the SPV.
3.17. An SPV may only be reused for another transaction than the
one for which it was established if the contract period has
expired or all the risks assumed have been settled, transferred or
have terminated and all amounts due to the undertaking or
investors have been paid (or, in the case of investors, the
investors have agreed that such amounts are to be reinvested in
the SPV).
In this situation the undertaking may use the same legal structure
which may reduce administrative costs.
3.18. If the reuse of an SPV is not approved, because the SPV does
not continue to meet all of the below mandatory conditions, then
failure to gain approval
would result in the SPV being treated in the same manner as an SPV
that is not authorised, notwithstanding other possible supervisory
measures.
3.19. In accordance with Article 211(3),
SPVs authorised prior to the date referred to in
Article 309(1) shall be subject to the law of the Member State
having authorised the SPV.
SPVs that have been
authorised prior to the adoption of the Solvency II Directive
shall therefore not be subject to the conditions set out below and
will continue to be subject to the law of the Member States in which they were authorised as previously agreed
with their supervisory authority prior to the implementation of
Solvency II.
However, if any new activity
is commenced by such an SPV
after the date the Directive becomes effective this would require supervisory approval subject to the requirements set out here in accordance with
Article 211(3).
CEIOPS may develop further details here under its
Level 3 work.
3.2.3 Supervisory
responsibilities
3.20. Where an SPV is to be located in an
EEA jurisdiction other than where the undertaking is
located, the decision for
authorisation of the SPV should be taken by the supervisory
authority in the jurisdiction where the SPV is to be established.
Prior to granting authorisation of the SPV, the supervisory
authority where the SPV is to be established should consult the
supervisory authority of the undertaking as if the requirements
set out in Article 26 applied.
This consultation should be accompanied by an
exchange of relevant documentation provided with the authorisation request.
3.21. If the views of the supervisory authorities cannot be
reconciled regarding the decision for authorisation, the matter
should be referred to CEIOPS.
The supervisory authority where the SPV is to be established shall
keep the supervisory authority of the undertaking informed of the
result of the authorisation process.
Authorisation of the SPV shall mean that the
undertaking is granted appropriate capital relief depending to the
level of risk transfer associated with the SPV.
3.22. The same process as described in the previous paragraphs
also applies regarding the approval of reuse of SPV or changes to
the SPV’s terms when an approval is necessary.
3.2.4 SPVs used by more than one undertaking
3.23. CEIOPS believes that SPVs could be used by
more than one
undertaking within the same group, to transfer risk to outside this group.
However an SPV should only be used by one
group and not by a number of undertakings from different groups.
This is because SPVs can involve complex transactions and in
CEIOPS’ view should be kept transparent.
CEIOPS holds the view that
the benefits which include the clarity of only having
an SPV used by one group outweigh any additional costs of a number
of groups setting up their own individual SPVs.
3.24. Where separate undertakings within a group use an SPV,
that SPV should be
established in such a way that the SPV is protected from the
impact of a related undertaking within a group being wound up (“such as a bankruptcy remote vehicle”).
If one undertaking utilises an SPV then, without this condition,
the assets of the SPV could be pooled and used to contribute to
the debts of a related undertaking instead of the obligations
under the contract.
The fact the insurer is being wound up will usually have no
impact on the obligations of the SPV “under the contract”.
3.2.5 Pre-authorisation process
3.25. CEIOPS recognises that establishing SPVs
can be a costly and time consuming process and undertakings would therefore appreciate early
engagement with the supervisor.
CEIOPS does not propose to mandate such a requirement but
considers these matters fall within the scope of ongoing contact
between supervisors and undertakings.
The supervisory authority may be able to discuss requirements at
an initial stage of the establishment of the SPV, but the
undertaking should recognise that only when final documentation
has been received can the decision process commence.
3.26. On receipt of the final complete documentation, the
supervisor should make their decision regarding authorisation of
the SPV no later than 6 months after the complete documentation
has been received.
Any refusal for authorisation should be notified to
the undertaking and accompanied by precise grounds for doing so.
CEIOPS’ advice
Scope of authorisation
3.27. SPVs shall only be considered for authorisation in a Member
State if a) and either b) or c) of the following three scope
issues are fulfilled:
a. the transaction has the structure of an SPV as
defined in Article 13(26) and meets the requirements established
for SPVs; and either
b. the SPV assumes risk from an undertaking through a reinsurance
contract23; or
c. the SPV assumes insurance risks from an undertaking transferred
through a contract that is ‘reinsurance like’.
3.28. If in the authorisation process the undertaking has clearly
stated the aim of reusing the SPV, along with the details of the
reuse, then detailed follow up discussions shall not be necessary
when the envisaged reuse occurs if the same circumstances apply as
at authorisation of the SPV and the SPV is acting within its
articles of incorporation.
If the proposed reuse was not planned and discussed
with the supervisor at initial authorisation or if initial
authorisation was granted subject to a proviso that a potential
reuse would have to be approved by the supervisor, the anticipated
reuse of an SPV needs prior approval from the supervisory
authority where the SPV has been established.
3.29. Where an SPV is to be located in an EEA jurisdiction other
than where the undertaking is located, the decision for
authorisation of the SPV shall be taken by the supervisory
authority in the jurisdiction where the SPV is to be established.
Prior to granting authorisation of the SPV, the supervisory
authority where the SPV is to be established should consult the
supervisory authority of the undertaking.
This consultation should be accompanied by an exchange of relevant
documentation provided with the
authorisation request.
If the views of the supervisory authorities cannot be reconciled
regarding the decision for authorisation, the matter should be
referred to CEIOPS.
3.30. Where separate undertakings within a group use an SPV, that
SPV shall be established in such a way that the SPV is protected
from the impact of a related undertaking within a group being
wound
up.
3.3. Mandatory conditions to be included in all contracts issued
Explanatory text
3.31. Authorisation of the SPV should be contingent on
certain mandatory conditions being present within the contractual
arrangements between the undertaking, investors and the SPV.
3.32. After authorisation the SPV should be
monitored by the supervisory authority that authorised
the SPV as part of the regular Supervisory Review Process (SRP).
The SPV shall, in a timely manner,
notify the supervisory authority of any subsequent material
developments which give rise to possible breaches of the
conditions underlying the decision on authorisation (i.e. of any
circumstances that may give supervisors reason to reassess the
compliance with the approval requirements).
3.33. If any mandatory conditions are breached the undertaking
and/or persons responsible for running the SPV need to inform the
relevant supervisory authorities immediately on discovery of a
breach and discussions between the undertaking, those persons
running the SPV and the supervisory authority should follow.
3.34. The supervisory authority of the undertaking should be
consulted regarding any supervisory actions, prior to those
actions being taken, except where the conditions of Article 250(2)
apply.
Such actions should, in the first instance, include discussion
between the SPV and its supervisor to determine which requirements
have been breached and how this situation arose.
The undertaking should expect that supervisory actions are subject
to a due process (which may be developed by CEIOPS at Level 3) and
are undertaken as part of on-going supervision.
As a last resort, supervisory actions could include withdrawing the
authorisation of the SPV.
3.35. The supervisory authority where the SPV is established
should take into account concerns raised by the supervisory
authority of the undertaking concerning a possible breach of
mandatory conditions by the SPV.
If the views of the supervisory authorities cannot be
reconciled, the supervisory authority of the SPV as well as the
supervisory authority of the undertaking concerned may consult
CEIOPS who should resolve the dispute.
3.36. The mandatory conditions below are those that need to be
satisfied in order for the supervisory authority to be able to
authorise the SPV in accordance with Article 13(26) and Article
211, which would then result in a reduction in the undertaking’s
capital requirements and the ability to recognise the recoverables
as covering part of the technical provisions as appropriate.
If these conditions are not satisfied then the
supervisory authority should not authorise the SPV.
3.37. Below are a number of
principles that should be included in the mandatory conditions of
the contracts issued in relation to the establishment of the SPV
for authorisation:
3.3.1. Principle 1 –
Fully Funded
3.38. The definition of an SPV in Article 13(26) of the
Directive requires the SPV to be fully funded.
This fully funded principle requires the SPV
at all times to have assets
that are equal to or greater than the aggregate limit of its
obligations at any time including any fees and expenses.
The contract transferring risk between the undertaking and
the SPV must have a clear aggregate limit.
Contracts without
aggregate limits (potential unlimited liability) could not satisfy
the condition to be fully funded.
The SPV must be fully funded up to the clearly defined
aggregate limit in the contract (together with fees and expenses
as noted above).
3.39. To assess the fully funded concept,
assets and liabilities
should be measured on a Solvency II valuation basis, and the level of assets should be continuously
monitored to ensure compliance with the fully funded concept.
3.40. Contractually due future premium or investment income may be
considered to satisfy the fully funded criteria for future fees
and expenses only (not its obligations to the undertaking except
as set out in the next paragraph).
If the SPV is relying on
investment income to fund future fees and expenses then at
authorisation the undertaking should run a number of stress and
scenario tests which should demonstrate that these future fees
and expenses can be met out of future investment income.
The design and results of these stress tests on investment income
should be discussed with the supervisory authority during the
authorisation process.
3.41. In a Life SPV situation, claims reserves may run down from a
starting peak.
However, for long-terms blocks which are closed to new business,
it is possible that renewals mean that the reserves have not yet
peaked.
In those situations it is envisaged that the increase in reserves
could be fully funded by contractually due future receipts.
An SPV has to ensure compliance with the fully funded principle.
3.42. It is this fully funded
condition that differentiates an SPV from a traditional (re)insurance
undertaking. Only when the proceeds of debt issuance or other
financing are received by the SPV would the SPV be considered
fully funded.
Financing the SPV on a
contingent basis through for example a standby facility or letter
of credit should not be allowed.
At no period in time would its assets be insufficient
to meet its liabilities as they fall due.
If the value of the assets falls below the value of the potential
reinsurance recoveries or aggregate liabilities this should be
reported immediately to the undertaking and the supervisory
authority where the SPV is established and the supervisory
authority of the undertaking, if they are not the same.
3.3.2. Principle 2 – Investors have
a subordinated claim on SPV assets
3.43. The assets of the SPV must be
available to first meet its obligations to the
undertaking.
The definition of the SPV requires that
the rights of the
finance providers be fully subordinated to the obligations of the
SPV.
The undertaking is therefore free to draw down on the assets of
the SPV in order to meet the pre-defined liabilities.
Unless agreed at authorisation, only at the expiration of the
SPV’s cover and when there are no further liabilities under the
contracts, can any surplus outstanding after the SPV’s obligations
have been satisfied be returned to capital providers.
Any allowance for repayments prior to this should be explained to
the supervisory authority and agreed at authorisation, along with
an estimation of the expected repayments to be made over the
lifetime of the SPV.
3.44. The contractual conditions and location of the assets should
guarantee that there are not any constraints that impede timely
access to the assets in order to settle the obligations of the
SPV.
3.3.3. Principle 3 –
“Prudent person”
3.45. The SPV should adhere to the “prudent person” investment
principles.
In CEIOPS’ view the following is the appropriate application of
this principle to the investment strategy of SPVs:
a) Assets should reflect the duration of underlying
liabilities.
3.46. The SPV is expected to pay due regard to the time horizon of
its underlying liabilities when deciding upon its investment
strategy, meaning that assets and liabilities are cash flow matched
and the liquidity risk of the assets is managed appropriately.
b) Assets should be of a high quality and counterparty
exposures should be sufficiently diversified.
3.47. The SPV would be expected to invest in high quality assets.
These assets should be adequately diversified.
Counterparty exposures should also be adequately diversified to
ensure that the SPV is not exposed to undue default or
concentration risk.
It is expected that this should be discussed and agreed by the
supervisory authority where the SPV is to be located before
authorisation.
Exposures to derivative contracts should also be
included in this assessment.
3.48. The SPV may need to invest in certain assets to fulfil its
purpose or to minimise the risk to a ceding undertaking, for
example, the SPV may need to invest in certain investment assets
to cover linked insurance liabilities, or assets may be withheld
by the ceding undertaking.
In these circumstances, the SPV has to demonstrate how the
“prudent person” principle is satisfied in relation to the quality
of assets and diversification of counterparties.
3.49. Given the application of the “prudent person” investment
requirements above, there should be minimal investment risk in the
SPV.
c) Derivatives should be used only for risk reduction
and efficient portfolio management.
3.50. Derivatives may be used
by SPVs (e.g. interest rate swaps where the fixed income coupons
are swapped into variable rate coupons with the counterparty
through a total return swap).
However, the use of derivatives is only permitted for
risk reduction and efficient portfolio management.
Derivatives should not be permitted in those instances
in which the sole use of the instrument is to allow further
leverage.
3.51. Derivatives associated directly with assets and liabilities
should not be permitted unless they mitigate the risk of an asset
or liability owned by the SPV and for total return swaps, the
change in the value of the derivative matches exactly the change
in the value of the underlying asset.
Details on the derivative strategy should be
established at authorisation which should therefore be assessed
during the authorisation process of the SPV.
3.3.4. Principle 4 –
Effective risk transfer
3.52. The SPV transaction should
effectively transfer risk from the undertaking to the
SPV and thereby to the investors.
The amount of risk transfer will determine the amount of credit
that the undertaking can take for the SPV in terms of any
reduction in the undertaking’s capital requirements or the ability
to recognise the recoverables as covering part of the technical
provisions.
This should be linked to the aggregate limit of the contract.
If no risk transfer occurs then the SPV will not
satisfy this mandatory condition.
3.53. The onus is on the undertaking to ensure that effective risk
transfer has taken place and to demonstrate this to the
supervisory authority where the SPV is established who should
assess that effective risk transfer has taken place and that this
has been fully documented by the undertaking.
The contractual
arrangements and supporting documentation should, for example,
clearly define the risks transferred, the nature, scale and scope
of the SPV’s obligation to the undertaking, the life of the SPV
over which the SPV remains fully funded, the principal repayment
schedule and rights to residual returns.
This should be approved by the administrative or management body of
the undertaking.
3.54. Generally supervisory authorities should assess whether
there is effective risk transfer, having regard to the economic
effect of the transaction.
The risks transferred into the SPV need to be
clearly defined so that they may not be used to back
any similar transactions, i.e. the undertaking can not double
count any regulatory capital relief provided for similar risks.
3.55. CEIOPS considers, as an example, that most indemnity-based
arrangements effectively transfer risk where there is no material
basis risk, however, parametric or index/model triggered coverages
that may use ‘reinsurance like’ contracts that could result in a
material level of basis risk should be assessed on a case-by-case
basis.
For undertakings using
the standard formula to calculate their SCR, the undertaking needs
to prove that the risks that remain after the transaction are
adequately captured by the standard formula.
If this is not the case, as for example there is a material level
of basis risk not adequately captured by the standard formula
(i.e. through a non-indemnity trigger) then an SPV is only likely
to be authorised for undertakings that have adequately modelled
these risks using a full or partial internal model.
This approach is in line with CEIOPS’ Level 2 Advice on SCR
Standard Formula – Reinsurance Mitigation)35.
3.56. An SPV arrangement is unlikely to be authorised36 if it has
a significant amount of basis risk associated with it.
This is consistent with the principles laid out in the Level 2
advice on “Allowance of Reinsurance Mitigation Techniques
(Articles 111 e) and f))” that covers SPVs.
CEIOPS may develop more in this area in its work at
Level 3.
3.3.5. Principle 5 – Non-recourse
3.57. Payments due to investors under the terms of the SPV
contract are the obligation of the SPV
only and in the event of default investors will not
have recourse to the assets of the undertaking.
CEIOPS’ advice
Mandatory conditions to be included in all contracts issued 3.58.
The contracts shall include the following conditions:
a. That the SPV shall be fully funded on a Solvency II valuation basis at all
times which requires the SPV to have assets that are equal
to or greater than the aggregate limit of the SPV’s obligations at
any time (including any future fees and expenses).
Only when the proceeds of debt issuance or other financing are
received by the SPV, could those assets be used to meet the fully
funded criteria.
Contractually due future premium or investment income may be
considered to satisfy the fully funded criteria for future fees
and expenses only (not its obligations to the undertaking except
for some Life SPV where claims reserves may run down from a
starting peak.
b. That the assets of the SPV must first be available to meet its obligations to the undertaking, as investors have a subordinated
claim on the SPV’s assets (unless prior repayments to investors
have been explained to the supervisory authority and agreed at
authorisation).
c. That the SPV shall adhere to the
“prudent person” investment principles of the Directive, and also include the following three
points:
Assets shall reflect the duration of underlying
liabilities;
Assets shall be of a high quality and counterparty exposures
should be sufficiently diversified; and
Derivatives shall be used only for risk reduction /efficient
portfolio management.
d. That the SPV transaction shall effectively transfer risk from
the undertaking to the investors and that the risks assumed into
the SPV need to be clearly defined so that they may not be used to
back any similar transactions.
e. That payments due to investors under the terms of the contract
with the SPV are the obligation of the SPV only and, in the event
of default, investors will not have recourse to the assets of the
undertaking.
3.59. After authorisation, the SPV shall, in a timely manner,
notify its supervisory authority of any subsequent material
development that may give rise to possible breaches of the
conditions underlying the decision on authorisation.
If any mandatory conditions are breached the undertaking and/or
persons responsible for running the SPV need to inform the
relevant supervisory authorities immediately on discovery of a
breach and discussions between the undertaking, those persons
running the SPV and the supervisory authority should follow.
3.60. The supervisory authority of the undertaking shall be
consulted regarding any supervisory actions, prior to those
actions being taken, except where the conditions of Article 250(2)
apply.
Such actions shall, in the first instance, include
discussion between the SPV and its supervisor to determine which
requirements have been breached and how this situation arose.
The undertaking shall expect that supervisory actions are subject
to a due process and are undertaken as part of on-going
supervision.
As a last resort, supervisory actions could include withdrawing
the authorisation of the SPV.
3.3.6. Documentation
requirements
3.61. The authorisation of the SPV by the supervisory authority
where the SPV is planned to be established
should be based on appropriate documentation being
submitted to this supervisory authority.
This documentation is important for authorisation (or approval if
the SPV is being re-used or there are changes to its terms) as it
should allow the supervisory authority to understand the details
of the proposed SPV transaction and to determine whether the
conditions of authorisation have been adequately met.
3.62. An external legal opinion, commissioned by the undertaking,
may accompany the documentation where it is deemed that a legal
opinion is relevant to ensure that it complies with the
requirements
for approval. CEIOPS may develop this further at Level 3.
Documentation requirements that may be needed are set out in the
following section.
3.63. The following documents should be submitted, if applicable,
in writing, in relation to any possible SPV authorisation. CEIOPS
views some documentation as mandatory for all SPV authorisations,
but other documentation may only be necessary if proportionate to
the nature, scale and complexity of the SPV transaction.
Some of the documentation below may be requested as appropriate
for approval related to re-use or changes in the SPV’s terms.
3.64. The mandatory
documentation includes:
a) A copy of the proposed contract between the SPV and
the undertaking and a statement containing a description of that
contract, accompanied by or including satisfactory information
about the identities and qualifications of:
o the ceding undertaking under the relevant SPV contract;
o the persons (if any) who are or will be appointed to act as
trustees of the SPV’s assets;
o the persons who are or will be officers of the SPV;
o those persons who have qualifying holdings (whether direct or
indirect) in the SPV and the amounts of those holdings; and
o the persons who are providing or will provide management and
other professional services (such as accounting) to the SPV.
b) A copy of the SPV’s memorandum and articles, or
proposed memorandum and articles of association;
c) A description of:
o any terms and conditions for payments under the contract between
the SPV and the (re)insurance undertaking;
o the aggregate limit of the relevant contract between the SPV and
the (re)insurance undertaking;
o compliance with the fully funded principle; and
o stress tests results (where applicable).
d) Actuarial review of underlying business
(independent from the undertaking);
e) Prospectus/Offering Circular or Private Placement Memorandum
(if any);
f) Overall risk management plan including details as to how the
SPV will continue to be fully funded during the term of the
contract;
g) Risk implications of the SPV’s investment strategy;
h) Details of any intended hedging instruments, such as interest
rate swaps or currency contracts;
i) Capital including size, growth, potential investor
concentration, and management share of the capital base;
j) A contingency plan explaining what will occur if:
o the fully funded principle is breached (e.g. plans to refund the
SPV);
o a disagreement arises over whether a payment is due to the
undertaking;
o a counterparty to a material transaction is unable to fulfil the
terms of the transaction; and
o any other matters that would materially affect the operation of
the SPV occur.
k) Details of Directors/Management fitness and
probity;
l) Details on how the SPV meets its system of governance
requirements (especially risk management and internal control) as
set out in this paper
m) Investment authority and guidelines for assets held in Trust,
along with details of any leverage permitted within these
guidelines;
3.65. Other documentation that
may be required if
appropriate:
a) Rating agency’s pre-sale report on behalf of the SPV;
b) Details relating to the potential use of financial guarantors
on any of the ‘tranches’ of notes to be issued;
c) Trustee Agreement;
d) Financial projections over the expected life of the SPV;
e) Details of the SPV’s liquidity strategy, including structure of
waterfall, types of positions, and note holder withdrawal rules;
f) Outsourcing and service contracts;
g) If the SPV is used by several undertakings within the same
group, any specific legal arrangement between such undertakings
related to the SPV;
h) Any other document deemed necessary by a supervisory authority.
Explanatory text
3.69. The differences between an SPV and conventional reinsurance
undertakings do not appear to justify holding those personnel
responsible for discharging key functions within the SPV to a
different standard, with regard to fit and proper requirements,
than those of a reinsurance undertaking.
Those persons running the SPV should therefore have an
adequate level of knowledge to be able to understand
the risks transferred to the SPV and the nature of the SPV
transaction that has taken place.
3.70. SPVs shall have in place documented policies and procedures
to ensure that all persons subject to fit and proper requirements
comply with those requirements.
SPVs shall notify the
supervisory authority where the SPV is established, of the persons
who effectively run the SPV.
CEIOPS’ advice
3.71. The persons running the SPV shall be held to the same fit
and proper standard as those running a reinsurance undertaking, as
established in Article 42.
3.72. SPVs shall have in place documented policies and procedures
to ensure that all persons subject to fit and proper requirements
comply with those requirements.
3.73. SPVs shall notify the supervisory authority where the SPV is
established of the persons who effectively run the SPV.
‘Fit and proper
requirements for shareholders or members having a qualifying
holding in the SPV’
Explanatory text
3.74. ”Qualifying holding” is defined as meaning a holding of 10% or more of the
capital or voting rights in an undertaking, or having the ability
to exercise a significant influence over the management of the
undertaking.
Similar conditions should apply to SPVs as those that
apply to shareholders in a reinsurance undertaking as set out in
the Directive.
For example, Article 59 of the Directive refers to the sound and
prudent management of the (re)insurance undertaking in which an
acquisition is proposed, and having regard to the likely influence
of the proposed acquirer on the (re)insurance undertaking, the
suitability of the proposed acquirer and the financial soundness
of the proposed acquisition all of which should be appraised
against a number of criteria.
These criteria include an assessment of the reputation and
experience of any person who will direct the business of the (re)insurance
undertaking as a result of the proposed acquisition and of the
risk of money laundering or terrorism financing.
3.75. CEIOPS believes that the fitness and propriety of the
shareholders or members having a qualifying holding in the SPV
should be assessed against the following criteria:
(a) their reputation and integrity;
(b) their financial soundness, in particular in relation to the
type of business pursued and envisaged in the SPV.
CEIOPS’ advice
Fit and proper requirements for shareholders or members having a
qualifying holding in the SPV
3.76. Similar conditions should apply to SPVs as those that apply
to shareholders in a reinsurance undertaking as set out in Article
59.
The fitness and propriety of the shareholders or members having a
qualifying holding in the SPV shall be assessed against the
following criteria:
(a) their reputation and integrity;
(b) their financial soundness, in particular in relation to the
type of business pursued and envisaged in the SPV.
c) ‘Sound administrative and accounting procedures, adequate
internal control mechanisms and risk management requirements’
Explanatory text
3.77. The SPV should have
sound administrative and accounting procedures and
adequate internal controls and risk management that are
proportionate to the nature, scale and complexity of the SPV
transaction.
If the scale, nature and complexity of the SPV
requires then the other areas and functions of the systems of
governance as set out in the Directive could directly apply to the
SPV.
3.78. Alternatively, the SPV could, if permitted by the
supervisory authority, instead of having these functions itself,
make use of relevant functions and expertise within the ceding
undertaking, as appropriate, to ensure it has a sound system of
governance overall.
The system of governance requirements on each SPV should prior to
authorisation be agreed between the supervisory authority where
the SPV is established and the SPV.
Any arrangements between the SPV and the ceding undertaking must
be formally agreed in an outsourcing contract.
3.79. CEIOPS may develop, under its Level 3 work on the
Supervisory Review Process, harmonised criteria to be used when
deciding on the need for the SPV to develop its own governance
functions regarding the nature of its business.
3.80. Records should be maintained and accounting procedures
established so as to accurately record the activities and
transactions of the SPV.
Financial statements of the SPV should be recorded under both the
same general purposes financial statements (under the national
laws where the SPV is established) along with a Solvency II
valuation which may differ.
3.81. Any application for an SPV must
adequately disclose any material, or potentially
material, conflicts of interest that may arise in respect of the interactions among
the various parties to the transactions into which the SPV will
enter (including any such conflict concerning the
applicant/cession undertaking). Any such conflict of interest must
be disclosed to stakeholders, including the investors.
CEIOPS’ advice
Sound administrative and accounting procedures, adequate internal
control mechanisms and risk management requirements
3.82. The SPV shall have sound administrative and accounting
procedures and adequate internal controls and risk management that
are proportionate to the nature, scale and complexity of the SPV
transaction.
If the scale, nature and complexity of the SPV requires then the
other areas and functions of the systems of governance as set out
in the Directive could directly apply to the SPV.
3.83. Records shall be maintained and accounting procedures
established so as to accurately record the activities and
transactions of the SPV.
Financial statements of the SPV shall be recorded under both the
same general purposes financial statements (under the national
laws where the SPV is established) along with a Solvency II
valuation which may differ.
3.84. An SPV shall adequately disclose any material, or
potentially material, conflicts of interest that may arise in
respect of the interactions among the various parties to the
transactions into which the SPV will enter.
Any such conflict of interest shall be disclosed to
stakeholders, including the investors.
3.5. Supervisory reporting
(accounting, prudential and statistical information requirements)
Explanatory text
3.85. Primarily, a situation should be avoided in which the
on-going supervisory reporting requirements of SPVs are unduly
burdensome.
Supervisory reporting should be proportionate to the nature, scale
and complexity of the risks while at the same time providing
supervisors with the information they need to continue to monitor
the SPV.
The SPV should not, for example, be required to submit its own
regular supervisory reporting such as the Solvency and Financial
Condition Report (SFCR).
It should however be required to file annual accounts in
accordance with the national law of the jurisdiction where the SPV
has been established and, if different, on a Solvency II valuation
basis.
The annual accounts should be sent to the supervisory authority
where the SPV is established as they are responsible for the SPV’s
on-going compliance, and also to the supervisory authority of the
undertaking.
These annual accounts provide access to regular information (on a
Solvency II basis) for the supervisory authority where the SPV is
established.
3.86. The (re)insurance undertaking which utilises the SPV is
required to report all material risks through its supervisory
reporting (which includes details on its risk profile and its Own
Risk and Solvency Assessment (ORSA)).
This includes those risks arising out of any off-balance sheet
financing activities.
The supervisory reporting completed by the undertaking should
provide details on the SPV including a reconciliation of the
accounting valuation basis to the Solvency II valuation basis for
the SPV along with details of how the fully funded concept is
being met.
3.87. These annual accounts of the SPV, together with the
undertaking’s supervisory reporting (which should include details
of the SPV’s investments, the effect of the SPV on the
undertaking’s risk profile and ORSA), would be considered the
minimum information required for regulatory purposes for the
supervisory authority where the SPV is established (to monitor
on-going compliance of the SPV after authorisation) and for the
supervisory authority of the undertaking (to monitor the
undertaking).
The SPV should also be taken into account in the on-going
supervision of the undertaking, for instance
through supervisory assessment of the undertaking’s risk profile
or ORSA.
3.88. If the supervisory authority where the SPV is established
has any concerns with the SPV the supervisory authority where the
SPV is established should inform the supervisory authority of the
undertaking immediately except where the conditions of Article
250(2) apply.
3.89. The SPV may however be required to submit further ad hoc
statistical and financial information above the minimum required
as determined by the supervisory authority of the SPV.
Such information could be required following a pre-defined event
such as a breach of any mandatory conditions or if the SPV has
further risks transferred to it, which would require approval or
in case of deteriorating market conditions.
These requirements should be assessed on a case-by-case basis.
3.90. Any separate ad hoc regulatory reporting requirements, for
example further ad hoc statistical and financial information, on
the SPV in excess of the annual accounts will be determined on a
case
by case basis.
CEIOPS’ advice
Accounting, prudential and
statistical information requirements
3.91. The SPV should be
subject to the same prudential
valuation rules as used for (re)insurance undertakings under
Solvency II.
3.92. On an on-going basis, an SPV should be required to file
annual accounts in accordance with the national law of the
jurisdiction where the SPV has been established and, if different,
on a Solvency II valuation basis.
The annual accounts should be sent to the supervisory authority
where the SPV is established, and also to the supervisory
authority of the undertaking.
These annual accounts of
the SPV, together with the undertaking’s supervisory reporting
(which includes details on its risk profile and its ORSA), would
be considered the minimum information required for regulatory purposes for the supervisory authority
where the SPV is established (to monitor on-going compliance of
the SPV after authorisation) and for the supervisory authority of
the undertaking (to monitor the undertaking).
3.93. The SPV may however be
required to submit further ad hoc statistical and
financial information above the minimum required as determined by the
supervisory authority of the SPV.
3.94. If the supervisory authority where the SPV is established
has any concerns with the SPV they should inform the supervisory
authority of the undertaking immediately except where the
conditions of
Article 250(2) apply.
3.6. Solvency
requirements
Explanatory text
3.95. Given the Directive requires the SPV to be fully funded it
appears that it would not be appropriate for the SPV to be subject
to the MCR or SCR capital requirements.
However, its credit within the undertaking should be equal or
less than the value of the assets recoverable from the SPV.
As referred to by Recital 91, the recoverable amounts
from an SPV should be considered by the undertaking as amounts
recoverable under reinsurance or retrocession contracts.
CEIOPS’ advice
Solvency requirements
3.96. An SPV should be fully funded at all times and is not
therefore required to calculate an individual MCR or an SCR.
3.7 Intra-group SPVs
3.97. CEIOPS has been considering the possibility of having SPVs
that do not raise capital externally and instead the transaction
is entirely internal to the group as set out in Article 212 1(c)
(intra-group) which is therefore used for the undertaking’s own
internal risk management purposes.
3.98. An important mandatory condition for authorising an
intra-group SPV is that the undertaking cannot
use an internal SPV (i.e. one where no element of finance is
raised externally) to achieve a regulatory capital reduction at
group level in the absence of any financing external to the group.
3.99. Regulatory capital
requirements of a group are only permitted to be reduced through
SPV arrangements therefore if, and to the extent to which, funding
is provided externally, to back the obligations provided by an SPV
to undertakings within the group.
In the absence of external financing, only the solo undertaking
who has the contract with the SPV may take regulatory capital
relief for the SPV.
3.100.CEIOPS expects the relevant supervisory authorities to
discuss these intra-group SPVs with the undertaking concerned on a
case-by-case basis especially around the rationale for the SPV and how it
complies with the requirements for authorisation as set out in
this advice at a solo level.
3.101.CEIOPS considers that, as separate undertakings within a
group using an SPV should ensure the SPV is
structured in such a way that the SPV is protected
from the impact of a related undertaking within a group being
wound up, the same principle should apply to intra-group SPVs.
3.102.The requirements should be assessed in relation to the solo
undertaking. CEIOPS may develop this further at Level 3.
CEIOPS’ advice
Intra-group SPVs
3.103.Undertakings shall not use
intra-group SPV (i.e. one where no element of finance is raised
externally) to achieve a regulatory capital reduction at group
level in the absence of any financing external to the group.
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