Jersey: Risk Transformation - Structure And Regulation Of Jersey SPV Issuing Catastrophe Bonds

Last Updated: 4 December 2012
Article by Adrian Odell

Background to catastrophe bonds

Bonds may be issued by a company ("SPV") to investors with the purpose of raising capital for the specific purpose of hedging the SPV exposure to a risk of a third party which has been assumed by the SPV.

Historically, bonds which were issued by an SPV to hedge against exposure to the risk of a third party in relation to a natural disaster, became known as catastrophe bonds. This term now refers to a bond issued to hedge against almost any risk assumed in relation to a third party, including credit default risk.

The assumption of risk by the SPV to the third party may be in the form of an insurance, reinsurance or other contract entered into with the third party. The SPV usually pays a high rate of return to catastrophe bondholders, mainly funded by the premium received on the contract with the third party. However, in the event of the catastrophe occurring, the bondholders typically lose their money and the capital of the bonds is used to pay the third party.

Given its ability to establish a bridge between the capital markets and insurance/ reinsurance markets, an SPV is also sometimes referred to as a transformer.

Legal structure

A Jersey SPV which will issue catastrophe bonds is usually established as a limited company pursuant to the Companies (Jersey) Law 1991 ("Companies Law"), and requires consent pursuant to the Control of Borrowing (Jersey) Order 1958 ("COBO").

The Companies Law permits both protected cell companies and incorporated cell companies. Further, Jersey has a wide range of legal structures which may be used as an SPV, including partnerships with and without legal personality, should structuring needs of an SPV require this.

Regulation

A Jersey SPV will require a permit pursuant to the Insurance Business (Jersey) Law 1996 ("Law") if it carries on insurance business in or from within Jersey. The Law is supplemented by various Orders, as well as Codes of Practice for Insurance Business ("Codes") issued by the Jersey Financial Services Commission ("JFSC").

Article 5(2) of the Law provides that "subject to the provisions of this Law, no person shall carry on in or from within Jersey insurance business to which this Article applies unless that person is authorized by a permit granted under Article 7 (to be known as a "Category A permit" in the case of a permit holder which is granted a permit by virtue of its authorization by or under the law of a jurisdiction outside Jersey and a "Category B permit" in the case of any other permit holder) to carry on business of the description in question."

The consequences of regulation under the Law has a substantial impact on the manner in which the SPV operates, in particular given that a permit the Law and Codes. Further, the insurance contracts which it issues will be subject to the principles of insurance, including the requirement of utmost good faith.

The Guidance Note for Applications Under the Insurance Business (Jersey) Law 1996 ("Guide"), states that "Category A permits will be granted to persons that are already authorised to carry on insurance business by a jurisdiction outside of Jersey; (and) all other persons intending to carry on insurance business will be granted a Category B permit".

The Guide states in paragraph 1.2 that: "In addition to the incorporation of traditional forms of insurance company, the Category B permit facility also allows for the formation of captives, and caters for the establishment of Special Purpose Vehicles such as transformer vehicles and companies for the securitisation of insurance risk. A captive insurance company incorporated under the Companies (Jersey) Law 1991, needs to hold a Category B permit even if it does not undertake its insurance business in or from within the Island."

The Law does not define "insurance" and instead only states in Article 1 that "insurance includes reinsurance". Article 5(1) of the Law further provides that Article 5 applies to long-term business and general business. The writing of insurance contracts against risks related to credit, suretyship and miscellaneous financial loss are included in Classes 14 to 16 of the list of "general business" in the First Schedule to the Law. Notably, these are the sort of risks typically associated an SPV.

The absence of a definition of insurance in the Law and Orders, and further absence of any policy guidance from the JFSC, means that the concept of "insurance" remains a matter of common law in Jersey. In this regard, the Royal Court of Jersey apply a mix of the principles of Jersey(in particular in determining the underlying requirements of a contract) and English common law (in particular in relation to insurance as a specific contract) in determining this issue.

The requirements of an insurance contract are detailed, however, one of the most important principles of insurance which is of relevance in the context of an SPV is the concept of an "insurable interest". An "insurable interest" refers to the requirement for an assured to have a pecuniary interest in the subject matter of the insurance arising from a relationship with it recognised in law.

In the case of an SPV which does not issue a contract to a person with an insurable interest in relation to the risk being insured, it will not be carrying on insurance business. There may be other factors which are relevant too, for instance the nature of the return which the contract provides, indemnification for actual loss as opposed to a fixed or formulaic return usually encountered in the case of noninsurance contracts.

Licencing requirements for Category B

All Category B applications, which would ordinarily be made by an SPV carrying on insurance business, must be made using the required Application Form, and supported by (1) a five year business plan; (2) projected solvency calculations; (3) details of any reinsurance arrangements; (4) completed personal questionnaire or additional appointments form for all directors, shareholders and key persons. An annual fee is also payable to the JFSC on application as further detailed below.

Government and Licensing Fees

Apart from standard Registry fees payable by an SPV (£200 for a limited company or cell of a cell company), licensing fees will be payable if the SPV requires a permit under the Law. In the case of a Category B permit, where the permit holder will carry on general business and is not a cell company or a cell, the annual fee will be £4,725; and in the case of a category B permit where the applicant is a cell company, the annual fee will be £4,725, or £1,350 if the permit applied for or to be renewed is to be granted to a cell of a cell company.

Requirements under the Codes

The Codes issued by the JFSC are arranged under seven fundamental principles. Among other things, these require an insurer to (1) conduct its business with integrity; (2) have due regard for the interests of its policyholders; (3) organise and control its affairs effectively for the proper performance of its business and be able to demonstrate the existence of adequate risk management systems; (4) be transparent in its business arrangements; (5) maintain and be able to demonstrate the existence of adequate capital resources; (6) deal with the JFSC in an open and co operative manner; and (7) not make statements which are misleading, false or deceptive.

Among other things, key structural requirements of an insurer are that it must be under the control of at least three appropriately qualified and experienced people, have at least two Jersey directors, have a Compliance Officer, Money Laundering Officer and Money Laundering Compliance Officer, provide an annual declaration by the Directors to the JFSC, provide CPD of not less than 35 hours per annum to all employees engaged in insurance-related activity, maintain its records in Jersey for at least ten years, maintain capital (minimum £100k) sufficient to meet its insurance liabilities and further meet solvency requirements prescribed by the Law and Orders, appoint and maintain auditors and prepare annual audited accounts.

An SPV may enter into a contract for the services of a management company pursuant to an outsourcing contract. Although the SPV would remain ultimately responsible under the Law, Orders and Codes for its obligations, an existing licensed insurer in Jersey may be used to assist in meeting certain of its obligations on a day to day basis, including the appointment of relevant personnel and officers. This is expressly recognised by the JFSC, and would usually be the case with an SPV which does not have substance in Jersey.

Catastrophe bonds as insurance Business

A catastrophe bond would not be regarded as insurance as it is not issued to person in respect of an insurable interest in a risk, but instead in respect of a capital investment which provides a return to investors irrespective of whether or not they have an insurable interest in the subject matter of the risk to which the bond relates. Further, a catastrophe bond does not pay out to the bondholder, but instead hedges the SPV for its exposure to a third party, in the event that the risk to which the bond relates matures. In other words, the catastrophe bond is intended to raise finance to cover a risk that the SPV has covered for a third party.

Other contract – and instruments as insurance business

An SPV issues catastrophe bonds to hedge its risk to a third party, which may be assumed by way of an insurance contract, reinsurance contract or other form of contract or instrument. Although in the case of entering into an insurance contract or reinsurance contract, a Jersey SPV would be carrying on insurance business under the Law, any other contract (for instance a credit default swap) entered into by the SPV would need to be evaluated to assess whether it constituted insurance business under the Law. The concept of an insurable interest would be key in determining this issue. Notably, an SPV which wishes to enter into reinsurance contracts as an insured party will need to hold a permit under the Law.

Summary

A Jersey SPV is usually established as a limited liability company pursuant to the Companies Law, and requires consent pursuant to COBO. A Jersey SPV which does not carry on insurance business will not require a permit under the Law. Further, the contracts such an SPV issues will not be subject to the principles of insurance. For instance, the requirement of utmost good faith will not necessarily apply as it would in the case of an insurance contract.

In the event that a Jersey SPV is carrying on insurance business under the Law, it will require a permit under the Law and also need to comply with the Codes of Practice for Insurance Business. Further, the principles of insurance will apply to any insurance or reinsurance contract entered into by it.

A key determinant in establishing whether a Jersey SPV is carrying on insurance business is the concept of an insurable interest in the risk being insured.

Catastrophe bonds issued by a Jersey SPV do not require an insurable interest on the part of the bondholder and would not constitute the carrying on of insurance business in Jersey.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions