The purpose of this document is to provide Federally Regulated Insurance
Institutions with guidance on OSFI’s requirements relating to Letters of credit
OSFI will recognize an approved LOC as security for the purposes of:
- reducing the reserve and required coverage for unregistered
- admitting Self Insured Retention (SIR) recoverable for the capital
- Letters of Credit must adhere strictly to OSFI’s standard wording.
- There are two different LOC’s that may be used – one for Unregistered Reinsurance and one for Self-Insured Retention (“SIR”). Applicants should instruct the issuing bank which type of LOC is
required. Templates are posted on OSFI’s website.
- In order for the Insurance Company to obtain a capital credit for an
LOC, the LOC must be approved by the Superintendent.
- Any change in the amount of this LOC must be approved by the
- LOC’s from foreign banks MUST have a separate confirming letter
from a Canadian bank. If the LOC is issued by a foreign bank, the bank
address shown in the body of the LOC can be either that of issuing bank
or of the Canadian confirming bank (in practice the Canadian bank’s
address is usually used).
- The letter of credit must be irrevocable and be subject to International
Standby Practices (ISP98).
- LOC’s must be for a fixed term of at least one year.
- LOC’s must be for a stipulated dollar amount.
- LOC’s must be evergreen, unconditional and be in the currency of the
business reinsured, issued or confirmed by a Canadian financial
- LOC’s must be must be irrevocable except with at least three months
notice to the Office of the Superintendent of Financial Institutions.
This condition can be satisfied either by a provision in the letter of
credit or by confirmation from the issuing bank.
- The applicant requests an LOC from the issuing bank (if from a
foreign bank, the LOC requires confirmation of a Canadian bank)
- Issuer (bank) sends originals (or amendments) to the beneficiary
(either the Canadian insurance company or if the beneficiary is a
foreign insurance company, to the trustee, C/O OSFI) for approval.
- Canadian insurance company forwards documents to OSFI for
approval (if LOC is a foreign insurance company, the LOC already
bears OSFI’s address).
- Once approved, original documentation is forwarded to the trustee (if
a foreign insurance company) or returned to the Canadian insurance
company for safekeeping.
- OSFI will provide notification to the beneficiary that the new LOC or
amendment has been approved.
- If not approved, original documentation is returned to the issuer or to
the Canadian insurance company.
- Of note, OSFI cannot demand that the issuer comply with our request
Further instruction has to come from the applicant and/or the
beneficiary, who should also follow up to ensure OSFI requests are
complied with. If required changes are not submitted, the LOC and/or
amendment remain outstanding and unapproved.
Overview of the Process