New transaction instructions for approvals of reinsurance
arrangements between federally regulated insurers (FRIs) and
certain related parties are now in effect. The Office of the
Superintendent of Financial Institutions (OSFI) states that the new
instructions are in response to the calls for greater supervision
of "captives" coming from regulators across North
America. FRIs considering contracting for reinsurance with a
related party that is not an FRI (a Related Reinsurer), as well as
those that have already received an approval from OSFI, will be
subject to the new procedures and the new annual filing
Pursuant to sections 523 and 597 of the Insurance Companies
Act (ICA), an FRI is required to obtain the prior approval of
the OSFI before "caus[ing] itself to be reinsured in respect
of risks undertaken under its policies by a related party."
Previously, OSFI would consider the information provided by an FRI
and approve or disapprove each proposed reinsurance arrangement
individually. An FRI seeking approval for multiple reinsurance
arrangements with the same Related Reinsurer required a separate
approval from OSFI in respect of each reinsurance arrangement.
On November 8, 2013, OSFI published a letter (Letter) advising
FRIs that revisions to Transaction Instruction DA No. 21 - Reinsurance
with a Related Party (Transaction Instruction) were forthcoming
in 2013. The revised Transaction Instruction (Revised Instruction)
was published on New Year's Eve and provided that, effective
January 1, 2014, instead of approving reinsurance arrangements,
OSFI will approve the Related Reinsurer by which the FRI proposes
to cause itself to be reinsured. Transitional rules are set out in
the Letter for the benefit of FRIs holding approval letters issued
under the previous Transaction Instruction.
Under the Revised Instruction, once a Related Reinsurer is
approved, the FRI can enter into multiple reinsurance arrangements
with the same Related Reinsurer during the term specified in the
approval letter. However, an FRI should not proactively seek
approval for a Related Reinsurer if there is only a "mere
possibility or vague intention" of entering into a reinsurance
arrangement with the Related Reinsurer. When applying for approval,
the FRI must demonstrate "a real intention" to cause
itself to be reinsured by the Related Reinsurer. If the FRI has not
been a party to a reinsurance contract with the Related Reinsurer
for more than one year, OSFI states that the approval "will
generally be revoked."
The "approvals will typically be granted for an indefinite
term" on the condition that the FRI files an annual
information about the Related Reinsurer. The information required
will be set out in the approval letter from OSFI and will typically
include: an analysis that the Related Reinsurer continues to be a
related party; an organization chart; confirmations from a senior
officer (or chief agent if applicable) that the reinsurance
contracts meet certain criteria; a copy of the annual reinsurance
declaration; and details of certain changes to the affairs of the
Related Reinsurer in the past year, among other things. By
requiring regular information updates regarding the Related
Reinsurer, OSFI appears to be taking the same position as
regulators in the United States – specifically, captives have
only been subject to minimal disclosure requirements in the past
and more information about the entities that hold billions in
potential obligations to policyholders is required.
OSFI also states in the Revised Instruction that FRIs cannot use
reinsurance arrangements as a means of providing financial support
to, or bailing out, a related party facing financial difficulty.
This echoes the concern expressed by the New York Superintendent of
Financial Services that insurance companies can mask their
financial well-being by shifting business to related entities that
are not subject to the same degree of regulatory oversight.
Whether OSFI's new approach can strike an appropriate
balance between protecting policyholders from the risks posed by
insurers under financial stress and enabling FRIs to keep premiums
at an affordable level remains to be seen. No doubt, the outcome
will be of particular interest to regulators in the United States
and may serve as a blueprint for their own efforts.
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