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As has been the case with other E.U. directives such as Solvency II, E.U. member states are at various stages of their implementation of AIFMD and many have chosen to “gold plate” the provisions of AIFMD to add local requirements. Some also do not have co-operation agreements in place with particular non-E.U. countries, making it difficult for those AIFMs to market non-E.U. ILS structures.
In some member states such as the U.K., the Netherlands and Luxembourg, short-form AIFM notification has proved useful for non-E.U. managers wishing to market ILS structures in those member states immediately. In certain jurisdictions, such as the U.K., there are accommodations in place for AIFMs who manage an AIF with assets below certain thresholds, whereby the sub-threshold AIFM is not subject to the full operational requirements imposed by AIFMD. In addition, in reliance on existing national private placement regimes, some AIFMs are able to accept particular investments under a limited reverse-inquiry investor approach, although this is dependent on specific facts and is not available in many E.U. countries.
Given the lack of passporting rights, in the 2015 convergence fund-raising many managers of ILS structures balanced the regulatory burdens against the potential benefits of marketing their funds in the E.U. and declined to market to investors in particular E.U. countries. This limitation on third-country AIFMs contacting and marketing to E.U. investors in ILS structures will change when a non-E.U. AIFM marketing passport is introduced.
Towards the end of July 2015, the European Securities and Markets Authority (“ESMA”) produced its first opinion and advice on the extension of an AIFMD marketing passport to managers from non-E.U. countries. ESMA has taken a “country-by-country” approach and, using certain AIFMD-mandated criteria (e.g., level of investor protection and oversight over systemic risk provided for by the non-E.U. jurisdiction’s legal/regulatory framework), first considered the following six non-E.U. jurisdictions: United States; Guernsey; Jersey; Hong Kong; Singapore; and Switzerland. ESMA gave “positive” recommendations in respect of the extension of the passport to Guernsey
and Jersey, as well as Switzerland after the enactment of pending legislation, but delayed its decision in respect of the other three jurisdictions assessed. E.U. lawmakers are required to take steps necessary to extend the passport to non-E.U. managers within three months of receiving a “positive” opinion from ESMA.
In October 2015, ESMA confirmed that, alongside its continued assessment of Hong Kong, Singapore and the U.S., it would begin to assess a second group of non- E.U. jurisdictions: Australia; Canada; Japan; the Cayman Islands; the Isle of Man; and Bermuda. The selection of all of these jurisdictions was made after taking into account a number of factors, including the amount of activity already being carried out by entities from these countries under existing national private placement regimes and further efforts made by stakeholders in these countries to engage with the process. It is expected that ESMA will be given a deadline of approximately March 2016 for its next opinion and advice, which is expected to include its recommendation with respect to this second group of non- E.U. jurisdictions.
I. ILS Participation at Lloyd’s
As the U.K. government has announced plans to become a more attractive domicile for ILS business, it is worth examining how alternative capital currently participates at Lloyd’s. At present, an ILS sponsor has a number of options for accessing the Lloyd’s market, each of which presents its own set of challenges.
A sponsor can set up its own syndicate and corporate member and underwrite business in line with its own business plan. This requires a managing agent to manage the underwriting and business of the syndicate on its behalf. The current practice is for new entrants to partner with a “turnkey” managing agent that agrees to warehouse the new entrant, with the intention that the sponsor will have its own managing agent within three to five years. The syndicate pays the managing agent a standard fee for its services and a profit commission based on the syndicate’s overall profitability. Nephila took
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
III. Insurance-Linked Securities