Special Purpose Vehicle (SPV)

Function

The SPV acquires assets or assumes insurance risks and finances this by issuing securities to investors. The proceeds are typically invested in safe, liquid money-market instruments and remain available to fund losses or defaults; any remaining balance reverts to investors once the transaction matures.

Use in risk transfer

In an insurance context, the SPV is mainly used to securitise natural catastrophe risk through catastrophe bonds and, in credit business, receivables through asset-backed securities. It complements traditional reinsurance with a capital-market-based, typically fully collateralised form of risk transfer.

Practical relevance

For primary insurers and large corporates, the SPV widens available capacity for peak risks, particularly when traditional reinsurance markets reach their underwriting limits. Investor default risk is low thanks to collateralisation, but the structuring and issuance process is more elaborate than traditional reinsurance.