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III. Insurance-Linked Securities
In November 2015, the U.K. government commenced the legislative process relating to the legal framework for facilitating ILS and collateralised reinsurance business, beginning with amendments to its Bank of England and Financial Services Bill, which would provide it with the power to both regulate and facilitate ILS business, including collateralizedreinsurance. Theamendmentswouldamend the Financial Services and Markets Act 2000 and give the government and Her Majesty’s Treasury (“HM Treasury”) the ability to enact legislation to create a legal framework for transformer companies. The proposed transformer company would feature a protected-cell-type structure, with different parts of the transformer vehicle allowed to be legally segregated and to be separate from the overall vehicle. Thismoveisavitalfirstelementindevelopingthe legal and tax frameworks needed for London to increase its presence as a hub of ILS activity, particularly as a destination for domiciling legal entities.
H. MarketingILStoE.U.Investors—AIFMD
The Alternative Investment Fund Managers Directive (“AIFMD”) represents the most significant European regulation of investment funds in recent times and directly impacts investor marketing and fund-raising for ILS structures, including for ILS funds, many sidecars and other collateralized reinsurance structures where an exemption is not available. AIFMD is broad in scope and covers the management, administration and marketing of a wide range of asset managers, whether they are based in the E.U. or outside of it. AIFMD affects:
(i) alternative investment fund managers (“AIFMs”) in the EEA who manage alternative investment funds (“AIFs”), whether or not those AIFs are marketed in the EEA and whether or not the particular securities in question are marketed directly by the AIFM or through a placement agent; and
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
(ii) non-EEA AIFMs who manage AIFs within the EEA, or who market AIFs within or into member states.
All sponsors of third-party capital management vehicles in the alternative reinsurance and convergence markets that are collective investment schemes must now consider if they are AIFMs managing AIFs before commencing marketing activities to investors based in any E.U. country.
AIFMD regulations currently vary depending on whether either the manager or the funds are established in the E.U. There is currently no “passport” regime where authorized non-E.U. AIFMs can market to investors throughout the E.U., although E.U.-based AIFMs can benefit from a harmonized framework. The lack of harmonization for non- E.U. managers and funds has impacted the convergence market because a large number of fund managers, ILS funds and collateralized structures are located in offshore jurisdictions such as Bermuda and the Cayman Islands.
Without passporting rights, non-E.U. AIFMs must currently 21 contact investors and market under the private placement regime on a country-by-country basis and typically
by considering exclusions from AIFMD and related regulations. For most Cat Bonds and some sidecars, the exclusion from AIFMD that is most useful is a provision for closed-end structures issuing non-convertible debt, similar
to typical capital markets securitizations. This exclusion is not generally available for ILS funds or sidecars, or other ILS structures that issue preferred shares or other forms of equity.
AIFMD also includes requirements for the authorization or registration of AIFMs in order to perform the functions of portfolio management and risk management and for the marketing of AIFs to professional investors within the EEA.