To continue to provide you with the most up-to-date information, we've included a brief summary of regulatory changes/updates that have occurred recently.
The biggest change relates to the regulatory framework governing the use of reinsurance, which includes implications for the previous limitations on the ceding of premiums, use of unregistered reinsurers and the end of reinsurance trust arrangements as we know them.
Draft Guideline B-3: Sound Reinsurance Practices and Procedures
As you will be aware, OSFI has been in the process of rethinking its regulatory and supervisory approach to reinsurance for quite some time. In August 2010, OSFI released for comments a draft guideline (B-3), and revoked its predecessor of the same reference with effect from January 1, 2010. This extensive review was initiated in order to revamp and update the regulatory framework over reinsurance – to bring it up-to-date and in line with international developments and OSFI's own risk management based approach.
As well as revoking the previous B-3 Guideline, the limits on the level of premiums that can be ceded (25% to unregistered reinsurers and 75% fronting limit) are also on the chopping block, with the proposed repeal of the Reinsurance (Canadian Companies) Regulations and the Reinsurance (Foreign Companies) Regulations.
So, what is in the draft guideline? I hear you cry – well OSFI has outlined four key principles that are intended to assist insurance companies to develop prudent approaches to managing their reinsurance risks. They include:
- The need for a sound and comprehensive reinsurance risk management plan, subject to the oversight of the insurers' board of directors (or chief agent) and implementation by senior management
- A sufficient level of due diligence on the reinsurance counterparties on an on-going basis, for the assessment and management of counterparty risk
- The terms and conditions of the reinsurance contract should provide clarity and certainty on reinsurance coverage (including some deadlines for binding of the contracts)
- A ceding company, its policyholders and its creditors should not be adversely affected by the terms and conditions of a reinsurance contract.
This is quite a lot to digest; and the guideline provides more specific guidance on what these principles mean in practice. Overall, they will require insurers to more formally document and oversee their reinsurance program and risk assessment, and tidy up their approach to the binding of contracts and attention given to contract terms/clauses.
The guideline is due to come into effect in January 1, 2011. The comment period has already closed.
For a copy of the draft guideline, see the following link:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/sound/guidelines/b3_dft_e.pdf
Reinsurance Security Agreements
In addition to the intended changes regarding the levels of reinsurance you can cede and to whom, OSFI has also issued draft guidance on their new approach to reinsurance trust/security agreements with unregistered reinsurers.
Under this new approach, OSFI will no longer develop or be a party to the standard form Reinsurance Trust Agreements (RTAs), which were previously used to qualify insurers for capital test credits for amounts due from those reinsurers. This change was prompted by ongoing discussions in the legal community as to whether or not the RTAs in their current form could be challenged if the worst came to the worst. These discussions also centred around whether other arrangements would be more beneficial to ceding companies while still providing the required, or greater, levels of protection.
Under the new draft guideline, ceding companies will now be required to negotiate and enter into suitable arrangements. They must then take whatever measures are necessary to create and maintain a valid first-ranking security interest in assets of an unregistered reinsurer that are held in Canada. OSFI also expects the ceding company to provide a legal opinion asserting such an interest has been created. You can read more about the guidance on the expected minimum standards for these agreements and legal opinions on OSFI's website.
The effective date for these changes is immediate, and all newly entered agreements are expected to follow the new approach beginning January 1, 2011. All existing agreements need to be adjusted by January 1, 2012. Assuming you are currently in a reinsurance renewal cycle, this should be top of your agenda.
For access to the OSFI letter summarizing their new approach to reinsurance trust agreements, and a copy of the draft guidance, see the following links on the OSFI website:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/notices/osfi/rsa_dft_nlet_e.pdf
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/notices/osfi/rsa_dft_e.pdf
OSFI Memorandum to the Appointed Actuary 2010
Consistent with their annual practice, OSFI has issued its memorandum to the appointed actuary for life insurance companies. The good news is that there are no material changes from the prior year, although you are warned to brace yourselves for IFRS in 2011. The areas highlighted by OSFI requiring clear and full disclosure in the AA's reports are:
- Ongoing low interest rate environment
- Sufficient disclosures on the effects of the future interest rate scenarios
- Improvements needed to explain the reason for choosing best estimate assumptions and margins.
For a copy of the OSFI cover letter, or the detailed memorandum itself, see the following links:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/returns/financial/AA_Memo_2010_Let_e.pdf
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/returns/financial/AA_Memo_2010_e.pdf
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.
