The Office of the Superintendent of Financial Institutions (OSFI) released a discussion paper on Regulatory and Supervisory Approach to Reinsurance. The paper notes that most reinsurance is provided by a small number of foreign companies, regulation of which is not consistent. The paper notes that a number of countries are in the process of examining reinsurance regulation and that coordination with provincial and international counterparts is important. Currently OSFI requires unregistered reinsurers to maintain enough collateral to cover 100% of ceded liabilities and to post collateral in Canada. In addition, a 25 pe r cent concentration limit is applied on property and casualty insurance (P&C) premiums ceded to unregistered reinsurers (no limit is imposed on the life insurance sector). OSFI is considering replacing the limit with a general principle in a guideline further bolstered with guidance on clear wording and the inclusion of specific clauses in reinsurance contracts.

• OSFI seeks industry views on the concentration limit.

Letters of credit ("LOCs") are currently permitted as acceptable collateral, but their use is limited to 15 per cent of the risks ceded to unregistered reinsurers. 

• OSFI seeks industry views on the policy of limiting the use of LOCs.

OSFI’s regulation of reinsurers is generally more extensive than that of most countries. The paper sets out the minimum criteria that OSFI would assess in considering mutual recognition of reinsurer supervision. OSFI advises that moving to a system of mutual recognition would be very complex with significant challenges. In the absence of a mutual recognition system, risk-based or graduated collateral requirements could be considered (eg reinsurers in the home country that meet certain requirements would qualify for reduced collateral, or reinsurers would post collateral on a consolidated basis, rather than on an individual contractual basis).

• OSFI welcomes comments on its current capital/collateral regime for unregistered reinsurance activities.

Insurance companies enter into reinsurance arrangements with an unregistered reinsurer that is a related party.

• OSFI welcomes comments on approval requirements for such arrangements.

Changes for Life insurers for registered reinsurance - OSFI will implement a capital charge on the Life sector in the credit risk component in the Minimum Continuing Capital and Surplus Ratio (MCCSR) to account for counterparty credit risk. It will also implement a minimum capital charge of 25 per cent of MCCSR gross capital requirements to account for operational risk. This approach will be temporary until an explicit capital charge for operational risk is developed.

• OSFI seeks views on the 75% fronting limit with registered reinsurers for P&C companies.
• OSFI seeks views on the approval regime given changes being contemplated

Governance – The paper notes the overall requirement for sound management as set out in the Guideline on Corporate Governance. An updated Guideline on Sound Reinsurance Practices and Procedures (B-3) will soon be released for comment. Guideline on Reinsurance Agreements (B-13) will set out prudential considerations relating to time lags in reinsurance arrangements and address issues relating to wording within a reinsurance agreement. OSFI will also issue guidance on insolvency and other clauses contained in reinsurance contracts.

Input is required by March 6.  The paper can be found at http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/notices/osfi/dscp_reins_let_e.pdf

OSFI Consultation on Outsourcing Guidelines

OSFI's outsourcing guideline has been changed and a consultation is underway.  OSFI has requested comments on the guideline through industry associations.  Key changes are as follows.  The Guideline includes, among other items, the following revisions:

1. Federally regulated entities (FREs) are provided with a transition measure to bring outsourcing arrangements that are obtained as part of an acquisition by the FRE, into compliance with the Guideline.

2. The Guideline clarifies the expectation that, as part of the FRE’s materiality test, a FRE would need to consider the potential influence on the FRE of multiple outsourcing arrangements with a single service provider.

3. Section 8 of the Guideline has been removed to reflect the repeal of the requirement for approval of the Superintendent to maintain and process outside Canada information or data relating to the preparation and maintenance of certain corporate, accounting and customer records.

4. The Guideline includes a standardized template for a centralized list that FREs could use to summarize all material outsourcing arrangements.