Legal Analysis On Reinsurance By SPRVs

Traditionally, Reinsurance is a mechanism in order to distract insurance loss risks in the insurance industry. An insurer can reduce or eliminate the threat to its solvency by taking out a contract or treaty of reinsurance with a reinsurer to indemnity itself against liability on its own policies. Such reinsurance mechanism has greatly promoted the development of insurance industry in the world. But growing major catastrophes have created a clear long-term trend toward insurance losses in increasing severity, which can precipitate a shortage of global catastrophe reinsurance capacity. When the total insurance losses, arising from an unexpected major catastrophe or a series of major catastrophes, are out of the whole capacity of the insurer and its reinsurers, the insurance industry will probably suffer insolvency. It is a serious problem which can not be resolved by traditional reinsurance mechanism and sets into motion industry to find alternative sources of reinsuance capacity including Reinsurance by SPRVs(Special Purpose Reinsurance Vehicle . In 2001,Reinsurance by SPRVs was confirmed in the "SPRV Model Act" drew up by the National Association of Insurance Commissioners of America and having been enacted by several states. It is the first Act about such reinsurace and is a good example for other countries to adopt such reinsurance mechanism. SPRV means an entity organized under the "Model Act", which acts for the limited purpose of underwriting the reinsurance contract depending on effectuating SPRV insurance securitization. Reinsurance by SPRVs means an alternative reinsurance way, in which a reinsurance contract is underwritten by SPRVs, the proceeds are obtained by SPRVs through the insurance securitization and held in trust pursuant to the requirements of the Model Act to secure the obligations of SPRVs under reinsurance contract with one or more ceding insurers, wherein the SPRVs' obligations to return the full initial investment to the holders of SPRV securities, pursuant to the transaction terms, are contingent upon the funds not being used to pay the obligations of SPRVs to the ceding insurers under the reinsurance contract.Such threat to solvency as mentioned above also exists in the development of insurance industry of China. Insurance and reinsurance resource has been in very short supply to meet the great demand of transferring catastrophe risks in our society. The insurance industry of China should make some innovations to develop itself deeply. So, basing on the new mechanism of Reinsurance by SPRVs, the innovation practice in the world insurance industry, the author uses the research approach of general analysis and special analysis to explore the rational elements of this innovation. Beginning from the analysis on the system basis of Reinsurance by SPRVs, the author makes a legal analysis on Reinsurance by SPRVs upon the basis of the insurance law theory, therefrom tries to discover how to protect the legal interests of the original insured as well as the holders of SPRV securities in Reinsurance by SPRVs. The author hopes the dissertation make some valuable references to the development of insurance industry of China and the legal system innovation of China. According to the train of thought, the dissertation is divided into four chapters, about 34 000 words :The first chapter puts forward the system basis of Reinsurance by SPRVs. Reinsurance by SPRVs is an alternative reinsurance mechanism based on Debt Securitization, a new financial technique. The indemnity obligations of reinsurer can become the target of Securitization because it means a special debt to reinsurer, i.e. the actual indemnity amounts, up to the limits of the reinsurance contract, paid by reinsurer are uncertain when reinsurer enters into a reinsurance contract, and reinsurer will get profits when the indemnity obligations need not be fulfilled or totally fulfilled if the liability incurred on a policy is out of the limits of the reinsurance contract, which means probable cash flows can be collected fr...