Could Sweden become a cat bond domicile?
An interesting initiative was recently taken in Riksdagen, the Swedish Parliament. In a motion to the Parliament, Per Åsling (Centre Party), raises the possibility of making Sweden an attractive domicile for structuring cat bonds and other insurance linked securities (ILS). In the motion, he raises this as an opportunity for Swedish enterprises to find alternative insurance capital for issues such as forest fires, harvest damages, dam failures or damages to infrastructure from flooding.
Mr. Åsling notices the interesting development in the UK, where the conservative government is set to adapt regulations to make the country an attractive domicile for ILS. Among other things, the government will “work together with the industry and regulators to develop a new competitive corporate and tax structure for allowing Insurance Linked Securities to be domiciled in the UK.” The government also notes that this is a key growth opportunity for the reinsurance sector. Strengthening Sweden’s position as a financial centre is also an important motive for Mr. Åsling.
With the adoption of the Solvency II Directive (as proposed in a Government bill in September), the European legislation regarding Special Purpose Vehicles (SPVs) will become fully harmonized. As SPVs are at the core of ILS deals, this entails a uniform and predictable regulation for companies interested in setting up ILS deals in Europe. As ILS are treated quite favorably on both the asset and liability sides of the balance sheet for companies facing capital requirements, the harmonization effort could be an important driver for increased interest in cat bonds with a European domicile.
In the motion, Mr. Åsling identifies three issues that need to be addressed in Swedish policy: Taxation, supervision and corporate structure.
In the consultation preceding the final memorandum on the implementation of Solvency II in Sweden, the Swedish Tax Agency, noted that SPVs would not be included in the chapter on reinsurance and insurance taxation in the Swedish tax code. Not doing so would induce uncertainty about how SPVs would be regarded from a taxation perspective, and Mr. Åsling proposes that this should be rectified when the bill is adopted by the parliament.
Furthermore, he identifies the risk of “goldplating” (over-implementing) the framework and thus introducing excessive supervision of companies that typically would need little supervision during normal operation.
Perhaps the most important proposal is that Sweden should consider a change to the corporate legislation, allowing Protected Cell Companies (PCCs) for setting up ILS. This corresponds to an international trend, where PCCs are increasingly used for this purpose, as it simplifies deals and introduces additional protection for investors as the collateral accounts are completely segregated from the SPV company itself.
A final decision on the implementation of the Solvency II Directive in Sweden is expected during the autumn and the motion by Mr. Åsling certainly adds another element of interest to it. The act is expected to enter into force on January 1, 2016.
Mr. Åsling’s motion to Riksdagen (in Swedish): http://data.riksdagen.se/dokument/H3022981
The government’s bill on Solvency II (in Swedish): http://www.regeringen.se/rattsdokument/proposition/2015/09/prop.-2015169/
Artemis news story on the UK initiative: http://www.artemis.bm/blog/2015/03/18/uk-gov-budget-targets-ils-cat-bonds-aims-to-become-ils-domicile/
The Swedish Tax Agency’s answer to the consultation on Solvency II implementation (in Swedish): https://www.skatteverket.se/rattsinformation/remissvar/remissvar2014/13152613114112.5.3f4496fd14864cc5ac9da11.html