OSFI Policy Review of Reinsurance Regulation and Supervision

&Amendments to Part XIII of the ICA

Presentation to the CIAHalifax

June 25, 2009

Philipe-A. SarrazinDirectorLegislation and Policy InitiativesLegislation and Approvals DivisionTelephone: 613-998-4190philipe.sarrazin@osfi-bsif.gc.ca

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Agenda

• Context

• OSFI discussion paper

• Part XIII of the Insurance Companies Act (ICA)

• Moving forward

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Context

• The business rationale for reinsurance is well known– To stabilize loss experience– To limit exposure to risk– To protect against catastrophe

• However, two (competing) concepts for regulators– Counterparty risk for ceding company (1)

• History shows that it can contribute to the failure of an insurer

– Policyholders are “sophisticated” (2)

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Context

• Not surprisingly, there is a wide variation in regulatory standards and practice worldwide– Depending on the emphasis: (1) or (2)

• Until recently, for example, reinsurers were not regulated at all in certain jurisdictions

• Yet, reinsurance is intrinsically global

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Context

• Recent international movement to find the right balance between (1) and (2)– E.U. Directive on Reinsurance (2007)– IAIS paper on Mutual Recognition in

Reinsurance Supervision (2007)• OSFI is an active member of the IAIS

– NAIC (U.S.) proposals for revising reinsurance regulatory framework (2008/09)

– APRA (Australia) reforms to reinsurance regime (2008/09)

• OSFI initiates policy review of Canada’s regulatory and supervisory regime for reinsurance

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OSFI Discussion Paper

• Paper released on Dec. 12, 2008

• Objectives of the Paper:– To outline OSFI’s current approach to

reinsurance regulation and supervision;– To identify, and provide an update on, a number

of initiatives already under way; and– To consult on the overall policy direction

• Individual companies consulted on specific reinsurance issues in the past; this initiative is much broader

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OSFI Discussion Paper

• Guiding principles for OSFI approach

– Policyholders must be adequately protected• Both direct (ceding companies) and indirect

policyholders

– Regulation and supervision should be proportionate to risk

– OSFI must have the ability to effectively assess those risks

– A level playing field among financial players should be maintained where appropriate

• P&C vs. life• Domestic vs. foreign

– Effective coordination with other regulators is critical

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OSFI Discussion Paper

• The bulk of the paper addresses issues related to unregistered reinsurance

– Collateral requirements

– 25% limit on unregistered reinsurance

– 15% cap on the use of letters of credit as collateral

– Mutual recognition in reinsurance supervision• Proposal for risk-based collateral

requirements (See U.S., Australia)

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OSFI Discussion Paper

• Other notable issues addressed

– 75% fronting limit

– Capital requirements for the Life sector• Counterparty credit risk charge• Operational risk minimum requirement

– Regulatory approval framework• Assessing changes made in 2006

– Governance• Sound reinsurance business practices

(Guidelines B-3 and B-13)• Insolvency and other contract clauses

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OSFI Discussion Paper

• 27 submissions received – domestic and foreign insurance and reinsurance

companies, including industry associations

• Fairly positive feedback with firm support for OSFI initiative and guiding principles for regulation/supervision

• Specific industry comments are currently being assessed– Prevalent theme is that reinsurance issues are

inter-connected and should not be addressed in isolation

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Part XIII of ICA

• Re-interpretation of Part XIII of the ICA– Shift from “location of risk” to “location of

business” regime (activities-based); consult Advisory 2007-01-R1

– Comes into effect Jan. 1, 2010

• Industry pressure for greater certainty on a few reinsurance issues prior to the implementation of Part XIII– 25% limit on unregistered reinsurance– 15% cap on the use of letters of credit as

collateral

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Part XIII of ICA

• Impact on a Direct Insurer’s Books– Must add risks outside Canada that were insured in

Canada, if any, per Advisory 2007-01-R1

– May remove risks that were insured outside Canada per Advisory 2007-01-R1 (consult Implementation Instructions dated Dec. 19)

– 2009 and 2010 Progress Reports

• Impact on Reinsurance– Same impact as above but no “look through”

– When can an insurer claim a credit for reinsurance?

– Meaning of “registered business” once the amendments are in force.

– How do I know whether I was reinsured in Canada?

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Part XIII of ICA

• What is grandfathered?

– Past business of a direct insurer? No

Consult Qs&As (Dec. 19)

– Past business re reinsurance credit? No

Consult Note to Cedants (Dec. 19)

– Past business re 25% limit? Yes

Consult recent Letter on the 25% Limit (June 19)

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Moving Forward

• Industry response to the discussion paper being assessed with a view to implementing some changes relatively soon (e.g., 15% limit on LOCs)

• More work, including further and more precise consultations, on medium-term issues (e.g., governance)

• Continue to work closely with the IAIS on longer term issues (e.g., mutual recognition)