Legal considerations on insurance linked securitisation under Maltese law

Abstract

Insurance securitisation is an innovative technique developed on the basis of traditional securitisation which transfers insurance risks to the capital markets. An insurance securitisation structure relies on a Special Purpose Vehicle which performs a central role in assuming insurance risk from an originator which it then transforms into securities which are sold to investors. The complex mechanics of the structure give rise to unique legal and regulatory issues. An analysis of current thought and practice on an international and European level shows amendments to Maltese securitisation law are needed in order to address the specific issues of insurance securitisation and facilitate its growth. Furthermore, new Solvency II rules will require Member States to legislate for Special Purpose Vehicles involved in insurance securitisation transactions. Key to the design of an adequate and effective securitisation regime is an understanding that the predominant purpose of the structure is the effective transfer of risk to a Special Purpose Vehicle which is then passed on to investors. Though the securitisation entity‟s activities are analogous to the business of insurance, the classification of a Special Purpose Vehicle as an insurer would impose excessively burdensome requirements, especially given the collateralisation of all the entity's obligations. The design of a fit for purpose legal and regulatory regime is therefore advocated. Such a legal and regulatory regime should also address other legal and regulatory issues connected with insurance securitisation, in line with Solvency II requirements and the practice of other jurisdictions, as in the United Kingdom, Bermuda and Cayman Islands among others.