A dedicated company that issues insurance-linked securities and holds the proceeds as collateral for a reinsurance contract.
A special purpose insurer is a company set up for a single transaction, which enters a reinsurance contract with a cedant and funds its obligation entirely by issuing securities to investors. The issue proceeds are placed in a collateral account and invested in very low risk assets; they serve to pay the cedant if a triggering event occurs, and to repay investors at maturity if it does not. The problem it solves is counterparty risk: a traditional reinsurer promises to pay out of capital it has exposed elsewhere, whereas the vehicle holds in advance everything it can owe. The cedant therefore carries no credit exposure to the carrier, which is why these structures developed first on extreme perils, where simultaneous market failure is the feared scenario. The vehicle is deliberately empty of any other asset, with no staff and no business of its own, and its legal isolation from the sponsor is the condition of its effectiveness.
A European cedant sets up a vehicle in 2026 issuing 180 million euros of three-year notes backed by a windstorm layer. Proceeds are invested in government money market funds yielding 2.9 percent, passed to investors on top of the 5.4 percent risk spread. No triggering event occurs over the period: the 180 million is repaid at maturity and the vehicle is wound up.
Special purpose insurer, SPI, Special purpose vehicle assurance, SPRV, Véhicule dédié