The revised Swiss Insurance Supervision Act (nISA) has introduced a new category of license: the Insurance Special Purpose Vehicle (SPV) (Versicherungszweckgesellschaft; Entité ad hoc d’assurance; Società veicolo di assicurazione). Instituted almost a decade after the first Swiss Franc-denominated catastrophe bond issuance, the SPV is a welcome update to the Swiss regulatory regime offering a domestic option for capital markets-facing alternative risk transfer. In future, the launch of the SPV might come to be seen as a first step on a journey which sees Switzerland establish an additional hub for insurance-linked securities (ILS). Several other elements would need to fall into place for Switzerland to compete with established markets, but as in life, so in (re-)insurance: never say never.

By Fabian Meier / Matthias Wühler (Reference: CapLaw-2024-35)

1) Introduction

In January 2015, reports about a special capital markets transaction comprising Swiss insurance risks were appearing in industry publications: Gurten, the first ever Swiss Franc-denominated private catastrophe bond issuance, had been completed. The transaction afforded protection to the building insurer of the canton of Berne (Gebäudeversicherung Bern, GVB) alongside its traditional reinsurance program. The launch of the new Swiss SPV rules almost a decade after Gurten is an opportunity to revisit that transaction.

The Gurten private catastrophe bond was issued through Kaith Re, a Bermuda exempted company registered as a class 3 insurer under the Bermuda Insurance Act of 1978 and registered as a segregated account company, acting in respect of its segregated account designated Leine Re, to benefit GVB. The protection provided to GVB via the Gurten private catastrophe bond was positioned alongside GVB’s reinsurance program. It provided one year of annual aggregate protection to GVB on identical coverage terms to its traditional reinsurance program offering GVB an additional (“alternative”) form of risk transfer.

The transaction summary illustrates the centrality of the SPV, a key component of the ILS value chain. Typically, a (re-)insurance company that initiates the transaction transfers underlying insurance risks to the SPV by way of a reinsurance contract. As this risk transfer is often regulated as (re-)insurance activity, the SPV requires a (re-)insurance license that is provided in a “simplified” form in jurisdictions that have an SPV regime. The SPV vehicle is funded by its investors (equity or debt) and most of its funds are used to secure payment obligations arising in relation to the reinsurance contract. Investors are rewarded for the provision of this principal by collateral yield and premium received under the reinsurance contract. The principal is, however, at risk and repayment of principal dependent on the performance of the underlying insurance portfolio. 

With the new Swiss regulations on SPVs, limited purpose risk transformer vehicles can now be created, which addresses the lack of a suitable framework in the Swiss insurance regulation to establish similar structures domestically.

2) The SPV

All ILS jurisdictions of choice invariably provide a dedicated rulebook for the risk transformer vehicle (or several rulebooks for different types of vehicles). In this respect, Switzerland has now taken the first step to achieving parity in terms of the regulatory framework. Both Level 1 regulations, the nISA, and Level 2 regulations, the revised federal Ordinance on the Supervision of Private Insurance Companies, are in force as of 1 January 2024. 

According to the legal definition in the nISA, an SPV is not an insurance company. This emphasizes its special purpose in risk transfers and further excludes a dual license as regular (re-)insurance company and SPV. Furthermore, the SPV must assume risks from (re-)insurance companies setting it up for reinsurance activities rather than primary insurance. Lastly, the risks ceded to the SPV must be fully collateralized by issuing financial instruments subordinated to the risk assumption obligations of the SPV (Art. 30e nISA).

a) Risk Groups (Risikogruppen): Segmentation of Assets and Liabilities

In order to transform insurance risks into securities, the issuer of said securities must be bankruptcy-remote from any unrelated business. In other words, investors are seeking exposure to the defined pool of risks, and nothing else. As it would be highly inefficient to set up a new SPV for each transaction (cost items extend beyond the minimum capital injected into the vehicle, with the SPV entertaining numerous relationships with service providers, custodians etc.), a crucial aspect of a functional SPV regime is the possibility to establish segmented and bankruptcy-remote compartments of assets and liabilities under the same SPV.

In the Gurten example, Leine Re represents this “compartment” and bankruptcy remoteness is achieved by way of recognition as a segregated account under the Segregated Accounts Companies Act of Bermuda. The Act, inter alia, (i) provides certainty that the assets of a segregated account are available only to meet liabilities linked to that certain account, and not to meet liabilities linked to another segregated account or the general account, and (ii) specifically establishes that a Segregated Accounts Company may issue securities and link these securities to a particular segregated account.

Swiss law now provides a functional equivalent to the Segregated Accounts Companies Act of Bermuda in Art. 30f nISA. The SPV consist of company assets (Gesellschaftsvermögen) and risk assets (Risikovermögen) which can be allocated to one or several “risk groups” (Risikogruppe; Groupe de risques; Gruppo di rischio), the Swiss equivalent of the Bermudian segregated account. Each risk group is a separate accounting, economic, and “legal unit” within the SPV (Art. 30f nISA). The liabilities of a risk group are limited to the assets of this risk group ensuring the segregation and mutual bankruptcy remoteness amongst different risk groups of the SPV. This segregation of assets and liabilities of assets is not an entirely new idea under Swiss law. Similar concepts already exist under the rules for collective investment schemes (umbrella funds) or the so-called asset groups in Swiss investment foundations. The nISA addresses the concept of a risk groups at a high level of abstraction, whereas the Level 2 ordinance specifies the working-level details (Art. 111m through 111u).

b) Other

The rules on corporate governance of an SPV are relaxed over those applying to insurance companies. Whereas a risk management and internal control function including compliance are mandatory (Art. 30e(3)(b) nISA), SPVs need not appoint a designated actuary (Arts. 111d Level 2 ordinance, Art. 23 nISA) and are exempt from comprehensive solvency regulation as well as business plan requirements for (re-)insurance companies. The delegation and outsourcing of the management as well as risk and control functions is permissible, with the exception of the overall management, supervision and control by the ultimate management body (e.g. the board of directors). The delegation rules also reflect the limited-purpose character of the SPV and enable the establishment of lean risk transfer vehicles administrated by external service providers. 

FINMA maintains ultimate authority over the conduct of business of the SPV, not only in that the SPV requires a license, but in that the individuals holding decision-making authority on behalf of the SPV are subject to fit and proper requirements (Art. 30e(3)(d) nISA). Whether the fit and proper assessment in the context of an SPV would be the same as for a fully regulated insurance carrier is an interesting question that could arise at the occasion of an actual SPV registration. The first provision in Chapter 5a of the nISA, the chapter dealing with SPVs, specifically notes that SPVs are not insurance companies (Art. 30e(1)(a) nISA), and Art. 30e(2) nISA stipulates that the provisions applicable to insurance companies apply to SPVs analogously (as does Art. 111d(2) of the Level 2 ordinance for the provisions therein). For now, there is no specific lower-level guidance as to the fit and proper assessment of an SPV key function holder. In practice, the assessment will depend on the scope of activities of the SPV as well as its operational complexity.

3) Comprehensive Infrastructure of established ILS Hubs

The Gurten transaction was structured in Bermuda, a well-established market for ILS transactions. Bermuda has several advantages that make it an attractive location, some of which could provide valuable insights for Switzerland’s future development in this area. 

Bermuda has a well-developed legal and regulatory framework that supports the ILS market, providing a reliable environment for transactions. The Bermuda Monetary Authority is skilled at overseeing complex insurance and reinsurance activities, including ILS, and fast-tracks ILS transactions. 

The preferential tax regime is likely the key factor. Jurisdictions that are preferred for ILS issuances have competitive taxation on the risk transformer vehicle (i.e., low corporate tax) and a full withholding tax exemption for investors. The withholding tax regime is a frequent subject of intense political debate in Switzerland. Without changes to the tax rules, Swiss SPVs will not be used as issuers in ILS transactions with international investors. 

Other advantages in Bermuda include the well-established service provider market, capable of administrating and managing SPVs and ensuring operational efficiency as well as regulatory compliance.

4) Outlook

Almost ten years after Gurten, the launch of the SPV regime and especially the introduction of the concept of risk groups showcases a remarkable development of the Swiss regulatory regime. Switzerland has natural potential to grow as an ILS investment hub because (i) large (re-)insurance companies that are already active in the global alternative risk transfer market need it (ii) Switzerland is well-known for its ILS asset managers and structures and (iii) Swiss institutional investors, such as pension funds, often include ILS as part of their allocation to alternative assets. The success factors will include the establishment of a preferential tax regime, the time to market for Swiss SPVs as well as license conditions and costs in practice.

Fabian Meier (fabian_meier@swissre.com)
Matthias Wühler (matthias_wuehler@swissre.com)