- Type of Publication: Guideline Impact Analysis Statement
- Date: June 2019
Reinsurance is an important risk management tool that can be used by an insurer to reduce insurance risks and the volatility of financial results, stabilize solvency, make more efficient use of capital, better withstand catastrophic events, increase underwriting capacity, and draw on reinsurers’ expertise. However, the use of reinsurance can expose an insurer to operational, legal, counterparty, and liquidity risks, among other risks. The combination of these risks can make reinsurance complex and challenging to implement effectively. Insurers that do not implement appropriate reinsurance risk management practices and procedures may face material risks to their financial soundness and reputation, which can ultimately contribute to failure.
In 2010, OSFI issued Guideline B-3: Sound Reinsurance Practices and Procedures (Guideline B-3). The guideline established minimum expectations regarding sound reinsurance risk management practices and procedures to assist federally regulated insurers (FRIs) in appropriately managing their reinsurance risks. The insurance environment and reinsurance practices have changed considerably in recent years. As a result, OSFI conducted a reinsurance practices review and issued a Discussion Paper on OSFI's Reinsurance Framework (Discussion Paper) in June 2018. The Discussion Paper included proposals to clarify and enhance OSFI’s expectations set out in Guideline B-3.
II. Problem Identification
OSFI notes that some FRIs are making greater use of reinsurance. OSFI has also observed some FRIs having larger and more concentrated exposures to reinsurers, particular in the P&C sector. Such exposures can increase risks to a FRI and its policyholders in the event that a large loss occurs if its reinsurer becomes distressed and fails to pay a claim in a timely manner. In addition, FRIs are not consistently interpreting and applying some of OSFI’s expectations for prudent reinsurance risk management. As a result, some FRIs may have more risk associated with their reinsurance programs than appropriate.
The objective of OSFI’s reinsurance review is to ensure that the regulatory framework for reinsurance remains effective and appropriate. Some adjustments to the reinsurance framework have already been made (e.g., changes included in the 2019 Minimum Capital Test Guideline). As part of the broader review of sound reinsurance practices, OSFI is also considering other changes to the reinsurance framework, including the introduction of a rule related to the issuance of high-limit policies for P&C insurers. At this time, the proposed revisions to Guideline B-3 aim to:
- encourage better identification and management of risks arising from the use of reinsurance, particularly counterparty risks;
- clarify OSFI’s expectation that reinsurance payments flow directly to a FRI-cedant in Canada, or to a person in Canada acting for, or on behalf of, a FRI-cedant;
- reaffirm OSFI’s principles-based expectation that a FRI not cede “substantially all” of its risks, and clarify that this determination will be made in a manner consistent with that used by OSFI for assumption reinsurance and asset sale transaction approvals; and
- clarify other aspects of OSFI’s expectations related to the prudent management of reinsurance risks.
OSFI’s Discussion Paper described proposals to enhance and clarify Guideline B-3 expectations related to the prudent management of reinsurance risks, especially in regards to counterparty risk. OSFI received 34 responses to its Discussion Paper. The cover letter accompanying draft Guideline B-3 contains a summary of stakeholder comments and OSFI’s responses.
OSFI is now seeking comment on the proposed revisions to Guideline B-3. When the final version of the guideline is issued, OSFI will post a non-attributed summary of comments received, along with OSFI’s responses. Interested parties should provide comments no later than August 16, 2019.
OSFI is proposing revisions to Guideline B-3 in order to assist FRIs in identifying and managing risks arising from their use of reinsurance.
VI. Implementation & Evaluation
The changes to Guideline B-3 are primarily clarifications; therefore, the final guideline will be effective on the date of its issuance in 2020. The changes may, however, highlight the need for some insurers to adjust aspects of their reinsurance programs. OSFI intends to offer information sessions when it releases the final guideline.