Guideline on Application for Authorisation to carry on Special Purpose Business (GL 33)

The Insurance Authority has recently issued a Guideline on Application for Authorisation to carry on Special Purpose Business.

This largely reflects the content of the amendments made to the Insurance Ordinance by the Insurance (Amendment) Ordinance 2020 and the Insurance (Special Purpose Business) Rules.

In this regard, see our Client Alerts dated 27 May 2020 and 10 March 2021 by referring to the following links.

New development in insurance regime: Insurance Amendment Bill and Insurance Amendment (No. 2) Bill dated 27 May 2020

Insurance (Special Purpose Business) Rules dated 10 March 2021

Additional points arising from the Guideline are:-

(a) 

There is set out as Annex A to the Guideline the expectation of the Insurance Authority of the typical structure for special purpose business for issuing investment linked securities.

(b) 

More detail is provided regarding the factors to be considered by the Insurance Authority to satisfy itself that the financial position and contractual arrangements of a special purpose insurer is such as to render it fully funded. These factors include the aggregate maximum liabilities under the risk transfer agreement, likely expenses, contractual arrangements put in place for its aggregate maximum liabilities, the proposed offering size, arrangements for holding of assets, payment obligations to investors, financial projections and investment strategies of the special purpose insurer as well as other matters which the Insurance Authority considers to be relevant.

(c) 

It is specified that the risk transfer agreement between a special purpose insurer and its cedants must have a clear limited recourse clause which limits the amount recoverable from the special purpose insurer to the lower of the aggregate limit under the risk transfer agreement or the available assets held by the special purpose insurer for the benefit of cedants.

(d) 

It is also provided that a special purpose insurer should be bankruptcy remote and must not be a company within the same group of companies as the cedant and the investors in investment linked securities should have no recourse to the assets of the cedant in the event that the special purpose insurer defaults on its payment obligations under the investment linked securities. This aspect should be covered by written legal advice and the special purpose insurer should disclose this essential feature in offering documents for the issuance of investment linked securities.

(e) 

A special purpose insurer should also advise all investors in investment linked securities that under the terms of any debt issuance or other financing arrangement used to fund its insurance liabilities, the rights of the providers of that funding are fully subordinated to the claims of cedants in the risk transfer agreement.

(f) 

The special purpose insurer should also provide full disclosure of investment guidelines governing the composition of assets to its cedants and investors.

(g) 

If a special purpose insurer is intended to be reused for issuing investment linked securities in the future, the special purpose insurer must obtain confirmation from the Insurance Authority that there is no objection to this before entering into a risk transfer agreement backed by new investment linked securities. In considering such an application, the Insurance Authority will expect the special purpose insurer to provide updated information regarding the proposed investment linked securities. In addition, the contractual documentation must disclose the allocation of assets to different agreements and the aggregated limit of each agreement in order to demonstrate that the special purpose insurer will meet the requirement to be fully funded at all times.

(h) 

The Guideline provides a description of the application procedures and, as with other applications to the Insurance Authority, requires the applicant to have an initial discussion with the Insurance Authority to discuss the proposals before completing the necessary application form.

(i) 

A description is also included of the required information and supporting documents for the application.

The Guideline took effect from 30th June, 2021.