Canada: OSFI Releases Letter and Draft Guidance on Reinsurance Security Agreements

On August 9, 2010, the Office of the Superintendent of Financial Institutions (Canada) (OSFI), the Canadian federal prudential insurance regulator, released for comment draft Guidance (the Guidance) on the use of Reinsurance Security Agreements (RSAs). The Guidance was accompanied by a letter (the Letter) that summarized OSFI's rationale for discontinuing the previously utilized mechanic of standard form reinsurance trust agreements (RTAs) and outlined OSFI's new approach to RSAs. The Guidance, which is open for comment until October 1, 2010, applies to all federally-regulated insurers and reinsurers (each, a FRI) in respect of reinsurance cessions and retrocessions with reinsurers not licensed in Canada, and also outlines OSFI's expectations of FRIs in connection with the RSA process. Once adopted, the Guidance will significantly increase the administrative burden on FRIs seeking to reinsure with unlicensed reinsurers and may, as a result, significantly discourage the use of unlicensed reinsurance.

This Insurance Law Update provides an overview of, and a commentary on, the Guidance and Letter. OSFI has also simultaneously released a draft Guideline on sound reinsurance practices and procedures. Information regarding the draft Guideline can be found in Stikeman Elliott's earlier September 2010 Insurance Law Update.

Historical Background

The Letter advised that OSFI would no longer develop or be party to standard form RTAs. Previously, OSFI had developed standard form RTAs to which OSFI was a party and which FRIs were required to use in order to be eligible for regulatory capital/asset credit in respect of risks reinsured with unlicensed reinsurers.

OSFI's desire to change its role is understandable, as OSFI practically does not have the expertise or resources to continuously monitor and assess all applicable provincial legislation. Nor, conceptually, should such drafting or monitoring be OSFI's role or responsibility, and indeed, by comparison, OSFI does not draft or become a party to commercial agreements entered into by deposit-taking institutions it regulates.

In the Guidance, OSFI noted that its decision to discontinue use of RTAs was supported by a number of factors, including the desire to:

  • require FRIs to better manage their own risks related to unlicensed reinsurance;
  • provide FRIs flexibility to create their own forms of security agreements;
  • as noted above, harmonize with the practice for other security and collateral arrangements utilized by deposit-taking institutions;
  • recognize that the use of an appropriate standard form agreement is a fact-specific determination and that the creation of a first-ranking, perfected security interest depends on more than just the form of the agreement;
  • maintain access to Canadian courts; and
  • as noted above, minimize OSFI's costs and responsibility associated with reviewing all applicable Canadian personal property legislation and securities transfer legislation (as would have been required in connection with the development of a standard form RSA).

New Approach

OSFI will now require FRIs to negotiate and enter into suitable arrangements and take all necessary practical and operational measures to create and maintain a valid, first-ranking security interest in assets of an unlicensed reinsurer that are held in Canada. Further, FRIs will be required to provide a legal opinion addressed to the FRI and OSFI, and on which OSFI will be entitled to rely, asserting that such an interest has been created in its favour.

All agreements entered into after January 1, 2011 will be required to comply with the new approach, although FRIs are encouraged to migrate to the new regime as soon as possible. Practically, this represents a very short timeline for compliance. In addition, and importantly, OSFI expects that companies will replace all existing agreements by January 1, 2012. That is also practically a very short timeline for compliance with such a requirement and, as noted below, may present significant commercial consequences for FRIs.

In the Guidance, OSFI indicated that it will permit capital/asset credit for reinsurance agreements in certain circumstances including where the following criteria, among others, are met:

  • the assets of the unlicensed reinsurer are pledged to the FRI pursuant to a security agreement made under provincial law;
  • the pledged assets are held in Canada by a collateral agent, which must be a Canadian financial institution not affiliated with the unlicensed reinsurer;
  • all relevant documentation is binding on the parties and legally enforceable in all relevant jurisdictions;
  • the FRI takes all necessary steps to create and maintain a valid, first-ranking interest in the collateral;
  • if the pledged assets are financial assets to which securities transfer legislation applies, the collateral agent maintains control of the assets on behalf of the FRI;
  • the FRI provides OSFI with a legal opinion, addressed to the FRI and OSFI and on which OSFI is entitled to rely, asserting that a valid and enforceable first-ranking security interest in the pledged assets has been created in its favour; and
  • the credit quality of the reinsurer and the value of the collateral must not have a material positive correlation (for example, securities issued by the reinsurer or any related entity would provide little protection and would therefore be ineligible).

The legal opinion and accompanying RSA will be required to be filed with the OSFI Securities Administration Unit.

OSFI expects FRIs to have a policy, approved by the board or a committee of the board, requiring management to confirm to the board/committee from time to time (but at least once every two years) that a valid and enforceable first-ranking security interest in the pledged assets continues to be created in the FRI's favour, including where changes have been made to applicable provincial/territorial personal property security legislation or securities transfer legislation. It would appear that this reconfirmation obligation will require FRIs to obtain reaffirmation of existing opinions every two years, which will impose an additional significant administrative burden and cost on FRIs. For FRIs that are branches, OSFI expects that the Chief Agent will ensure that the branch has an approved policy.

OSFI expects that the RSA will, at a minimum:

  • include a reference to the applicable statute pursuant to which the RSA is made;
  • provide that the pledged assets shall be held in the province pursuant to which the RSA has been made;
  • provide that the collateral agent will, in respect of the pledge, act solely as agent for the FRI and not as agent for the reinsurer (which, we note, does not reflect the current securities transfer legislation in respect of securities in the possession of a securities intermediary);
  • provide that the pledged assets will be held by the collateral agent in one or more accounts identified in its records as separate and distinct from other accounts of the collateral agent; and
  • provide that the reinsurer agrees to deliver to, and maintain with, the collateral agent as collateral under the RSA, assets having a market value at all times at least equal to a specific amount or to an amount determined by formula.

OSFI expects the legal opinion to include:

  • an assertion that the security interest in the pledged assets is valid and enforceable against all other creditors of the unlicensed reinsurer, including in the event of insolvency;
  • a reference to the applicable provincial statute pursuant to which the arrangement is made;
  • a statement as to the validity and enforceability of the security interest in the context of the applicable rules governing conflicts of laws; and
  • an assertion that a first-ranking priority is created by such security interest.

OSFI will continue to require ceding companies to obtain OSFI approval (i) for the removal of pledged assets; (ii) to obtain credit for assets that are not listed on Schedule A to the Guidance; (iii) or for any transaction involving foreign currency assets. The ceding company may, without OSFI's prior written approval, accept a pledge of assets listed in Schedule A, and allow the reinsurer to withdraw any asset if the asset withdrawn is replaced either prior to or simultaneously with an asset listed in Schedule A, the market value of which on the date of the replacement is, and is certified by the ceding company to OSFI to be, at least equal to the market value of the asset withdrawn. If an asset is to be replaced with an asset not on Schedule A, it will require OSFI approval. Schedule A assets are limited to bonds, debentures and other evidences of indebtedness of Canadian governmental entities and Canadian companies holding a minimum rating, potentially A-, from a nationally recognized rating agency, as well as common and preferred shares traded on a recognized stock exchange in Canada.


As noted above, the new approach is commendable in the sense that it gets OSFI out of the business of drafting or being a party to commercial contracts, and to that extent is consistent with the approach taken to the deposit-taking sector.

However, the abandoning of the use of a standard form agreement will impose substantial new burdens on FRIs seeking to utilize unlicensed reinsurers, as FRIs will now be required to negotiate the forms of (i) RSAs having regard to both the applicable provincial law and the laws of the jurisdiction of the unlicensed reinsurer, (ii) related opinions under applicable provincial law and (iii) appropriately (although not expressly required by the Guidance), related opinions under the laws of the jurisdiction of the unlicensed reinsurer. Further, FRIs will face the uncertainty of whether OSFI, upon a review of an FRI's RSA and related opinions, would challenge the form/acceptability of the RSA and related opinions and deny capital/asset credit on that basis. Consequently, the new regime may significantly discourage the use of unlicensed reinsurers, as the increased internal and external costs may make many such arrangements uneconomical. Practically, FRIs may wish to attempt, including through their industry associations, to settle a number of standard form RSAs and related opinions for use in connection with the small number of domiciles of the leading unlicensed reinsurers.

Although the Letter and Guidance take a principles-based approach and are intended to provide FRIs with increased flexibility, certain requirements under the Guidance are actually quite prescriptive and, further, are inconsistent with the approach taken for banks in respect of collateral for derivatives. It is not clear why it is necessary that RSAs be made under provincial law, that the pledged assets be held in Canada or that the collateral agent be a Canadian financial institution, as none of those requirements apply to banks in the context of derivatives. With respect to the requirement for legal opinions from a number of jurisdictions, over time hopefully it will be possible for FRIs, including through their industry associations, to collectively develop and rely on general advice and opinions such as those published by the International Swap Dealers Association in respect of swaps in relation to various jurisdictions.

While OSFI obviously has an interest in the quality of the collateral pledged, it could address this issue directly rather than by imposing constraints relating to the form and jurisdiction of the pledge. In general, security arrangements are more flexible and allow for the taking of the security in other jurisdictions. As in the case of deposit-taking institutions, the onus should reasonably be on the FRI to satisfy itself that it has taken all appropriate steps and obtained all necessary documentation under applicable foreign law. As a result of recent developments under Canadian and foreign law, it has become much easier to obtain valid and perfected security in certain foreign jurisdictions.

The lack of any grandfathering of existing RTAs will require FRIs to obtain the cooperation of their unlicensed reinsurers in order to replace existing RTAs with new RSAs. This will impose a significant commercial risk on FRIs, as they will be forced to reopen negotiations and face the prospect of being forced to agree to less favourable terms than at present.

Further, certain of the quite prescriptive requirements with respect to the required legal opinions are not consistent with market practice, may likely make compliance difficult. In particular, opinions are typically subject to standard assumptions and exceptions with respect to priority, and to a qualification with respect to enforceability under insolvency laws, all of which OSFI will ideally appreciate and accept, consistent with current market practice.

Lastly, it is not yet clear whether OSFI's RSA mechanic and form will be acceptable to any provincial insurance regulators asserting co-jurisdiction over capital/asset levels supporting risks located in their provinces and written by federally-licensed insurers also licensed and carrying on business in the applicable province (or, conversely, whether any required provincial mechanism/agreements will be satisfactory to OSFI), although we understand that discussions are to occur in that connection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.