Guideline on Application for Authorization to Carry on Special Purpose Business

Guideline on Application for Authorization to Carry on Special Purpose Business

Guideline on Application for Authorization to Carry on Special Purpose Business 1402 790 Charing

The Guideline on Application for Authorization to Carry on Special Purpose Business (GL-33) (the “Guideline”) published by the Insurance Authority (“IA”) came into force on 30 June 2021.

The Guideline is issued in connection with the regime administered by the IA for authorization of special purpose insurers (“SPIs”) to carry on special purpose business (“SPB”) in Hong Kong, which is defined to mean “the insurance business of effecting and carrying out contracts of insurance that are fully funded through insurance securitization”.

In July 2020, amendments were made to the Insurance Ordinance (Cap. 41)(“IO”) to enable the formation of SPIs specifically for issuing insurance-linked securities (“ILS”) in Hong Kong.

The Guideline further elaborates upon the relevant provisions in the IO concerning the regulation of SPIs.

The requirement for an SPI applicant includes the following:-

Requirement Details
Fitness and Properness of Administrator(s) and Directors
  • The SPI applicant must appoint at least one administrator and two or more directors, one of which must be a resident in Hong Kong.
  • Their appointment must be approved by the IA.
  • The administrator and directors must be fit and proper to hold the position. Factors to consider will include qualifications, experience, ability to act competently, honestly and fairly, reliability and integrity, as well as financial status.
  • The IA will also take into the  Guideline on “Fit and Proper” Criteria under the Insurance Ordinance (Cap. 41) (“GL4”)
Financial and solvency requirements

 

  • The SPI applicant must be “fully funded”, which means its full liabilities must be fully backed by assets including funds raised through debt or other financing arrangements.
  • In evaluating the financial position and whether they are “fully funded”, the IA will consider factors such as:-
      • the aggregate maximum liabilities (whether actual or potential) of the SPI under the reinsurance/risk transfer contract;
      • the expenses the SPI expects to incur;
      • the contractual arrangements or structures that the SPI has put in place to provide for its aggregate maximum liabilities, including the type and amount of assets being held for the cedant(s) under the reinsurance/risk transfer contract;
      • the proposed offering size of the ILS and net proceeds to be received;
      • the arrangements for holding the assets backing the liabilities of the SPI and the legal ownership of such assets;
      • the payment obligations to investors under the contractual documentation in respect of the ILS; and
      • the financial position and investment strategies of the SPI.
  • Additionally, an SPI applicant must be “bankruptcy remote” such that the SPI must not be a company within the same group of companies to which the cedant belongs, and the ILS investors must have no recourse to the assets of the cedant.  In this regard, a written legal advice to confirm the bankruptcy remote must be obtained and submitted to the IA for the purpose of the application.
Sophistication of Investor
  • Under the Insurance (Special Purpose Business) Rules (Cap. 41P) (“SPB Rules”), ILS issued by SPI are only to be offered, sold to and purchased by institutional investors permitted under the said rules.

Prospective SPI applicants are encouraged to approach the IA with all relevant documents to discuss their proposal prior to completing the relevant application form.  The application is to be supported by all relevant documents and information, which includes:-

  • Particulars of the applicant including the prospective administrator(s) and directors and identities of professional advisors and service providers;
  • Form A/Form B under the IO;
  • Written and binding undertaking from the SPI and/or written representation from the placement agent(s)/arranger(s) of such proposed ILS transaction, committing to comply with the SPB Rules;
  • Types of perils to be covered and respective triggering events;
  • Investment Strategies and Potential Investments;
  • Financial Projection of the SPI of three years or up to the maturity date of the ILS, whichever is longer;
  • Copies of financial statements of the cedant(s);
  • Draft term sheet, draft offering documents for the ILS, draft indenture;
  • Draft reinsurance/risk transfer contract to be entered into by the SPI and cedant(s)
  • Draft contractual documentation for the ILS and confirmation of fully-funded arrangement and bankruptcy remoteness arrangements; and
  • Detailed written explanation of how the SPI will satisfy the “fully-funded” requirement.

No fees are payable on submission of the application; however, payment of an annual fee is required after authorisation is obtained and on each subsequent anniversary date of authorization.

SPI Applicants should also take note of the requirements applicable to the re-using of the SPIs for other ILS transactions in the future, filing requirements of SPIs and the restrictions on the sale of ILS (including the scope of eligible investors as well as minimum investment requirements).

Contact us today if you would like to find out more about the SPI applications.

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