The UK's Financial Services Authority (FSA) is to consult the reinsurance industry on rules to introduce a new fit-for-purpose regime for insurance special purpose vehicles (ISPVs). The proposals form part of a wider consultation on the implementation of the EU reinsurance directive (RID).

ISPVs are special purpose reinsurance vehicles which must be fully funded, typically by issuing debt. If the ISPV has to pay out under its reinsurance obligations, the repayment rights of the debt holders are reduced accordingly.

Currently an ISPV would be regulated on the same basis as a firm conducting traditional reinsurance business and would be subject to the full authorization process for such a firm, the FSA says.

Under the RID the FSA will introduce authorization requirements that are proportionate to the lower risks resulting from the structure of ISPVs. These will remove unnecessary information requirements and place greater focus on self-certification than for a traditional insurer or reinsurer.

The FSA will largely supervise ISPVs through its supervision of the ceding insurer, which will ensure that an adequate level of consumer protection is maintained at all times. The introduction of an ISPV regime will allow insurers to manage their capital more efficiently.

The implementation of the reinsurance directive gives the FSA an opportunity to make the UK an easier place for insurers to do business in. Introducing ISPVs will give insurers and reinsurers access to more diverse sources of capital and enable them to manage their capital more efficiently, says Thomas Huertas, the FSA’s director for wholesale firms.