On November 8, 2013, OSFI released a Memorandum regarding changes to its approach to Superintendent approvals for reinsurance with a related party that is not a federally regulated insurer (a “Related Reinsurer”). Such approvals have been granted for many years based on each reinsurance transaction.
After January 1, 2014, approvals will be granted instead for each Related Reinsurer, not each reinsurance transaction with a Related Reinsurer.
This new approach will allow an insurer that has obtained the approval to enter into multiple reinsurance transactions with the Related Reinsurer. This will definitely assist insurers that are part of insurance groups with global operations. Such groups often utilize inter-group reinsurance and retrocession and sometimes put these arrangements in place on short notice. The new approval regime will be a marked improvement for insurers that are part of such groups and will allow them to put inter-group reinsurance and retrocession arrangements in place quickly without facing the challenge of needing to obtain Superintendent approval within a short time frame to comply with the Insurance Companies Act. Under the current regime, the timing of the approval, in relation to when the reinsurance or retrocession arrangements are being put in place, can be a significant challenge.
OSFI believes this new approach will also help them better understand an insurer’s risk exposure to Related Reinsurers.
Given OSFI Guideline B-3 - Sound Reinsurance Practices and Procedures and the required Reinsurance Risk Management Policy, we expect that the new regime for related party unregistered reinsurance will heighten due diligence requirements for Canadian insurers with respect to Related Reinsurers on an ongoing basis. We also expect that under the new regime, it will become increasingly important for Canadian insurers to review all material terms of each reinsurance arrangement with a Related Reinsurer and, in particular, consider any terms which could, in any way, prejudice the Canadian insurer. Since the new regime will allow for increased flexibility for reinsurance with Related Reinsurers and will cover ongoing and future arrangements, due diligence and a review of contract terms will be increasingly important to ensure that the insurer is appropriately assessing and managing the risks associated with these arrangements.
A revised Transaction Instruction will be published on OSFI’s website prior to December 31, 2013. While it could be expected that OSFI may scrutinize financial, risk management and exposure questions more carefully in considering applications under the new regime, once the approval has been obtained, the new process should be much easier for insurers as they will not need to obtain additional approvals for reinsurance with the same Related Reinsurer.
Approvals will generally be granted for an indefinite term, but will be conditional on the Canadian insurer annually providing certain information to OSFI.
Attached to the OSFI Memorandum is an Appendix setting out the transition arrangements.
This is all separate and apart from whether a Canadian insurer will want credit for the reinsurance and, if so, will put in place a Reinsurance Security Agreement, a funds withheld arrangement with a first priority security interest or a letter of credit.