Office of the Superintendent of Financial Institutions
Reinsurance is an important risk management tool available to
an insurer. It can be used 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 to draw on reinsurers’ expertise. However, reinsurance
exposes an insurer to other risks, including operational, legal,
counterparty, and liquidity risks. The combination of these risks
can make reinsurance complex and challenging to implement effectively.
Inadequate reinsurance risk management practices and procedures
can materially affect an insurer’s financial soundness and reputation,
and can ultimately contribute to its failure.
This Guideline sets out OSFI’s expectations for effective reinsurance
practices and procedures. These practices and procedures should
form an important part of an insurer’s overall reinsurance risk
management policy. It applies to all federally
regulated insurers, including life insurers and property and casualty
insurers, domestic insurance companies and foreign insurance companies
in respect of their insurance business in Canada, registered reinsurersFootnote 1,
and fraternal benefit societies (collectively referred to as FRIs),
that are party to reinsurance cessions, retrocessions, and, where
applicable, to assumption reinsurance transactionsFootnote 2.
FRIs are reminded that OSFI’s Guideline on Corporate Governance extends to the business of reinsurance with respect to ensuring
effective oversight and risk management policies and procedures.
The following reinsurance principles are intended to assist FRIs
in developing prudent approaches to managing their reinsurance risks.
OSFI will assess a FRI’s reinsurance risk management policy against
these principles and, where considered necessary, will require remedial
action consistent with its early intervention mandate.
1. A FRI should have a sound and comprehensive reinsurance risk management policy that is overseen by senior management.
OSFI expects that a FRI’s RRMP will form an integral component
of its overall enterprise-wide risk management plan.
The RRMP should reflect the scale, nature and complexity of a
FRI’s business, and have regard for its risk appetiteFootnote 3 and risk toleranceFootnote 4.
OSFI expects the RRMP to document the significant elements of the
FRI’s approach to managing risks through reinsurance, including
the purpose and objectives for seeking reinsurance, risk diversification
objectives, risk concentration limitsFootnote 5,
ceding limitsFootnote 6,
and the practices and procedures for managing and controlling its
The RRMP should detail:
Additionally, a FRI must assess the adequacy and effectiveness
of the reinsurance arrangements to ensure that exposures to large
and catastrophic losses are adequately addressed. This may require
stress testing of exceptional but plausible scenarios to determine
if the reinsurance arrangements entered into are adequate at mitigating
losses to acceptable levels in accordance with the FRI’s risk appetite
and risk tolerance.
OSFI expects senior managementFootnote 7 to oversee the development and implementation of the RRMP. At a minimum, senior management should review the RRMP annually.
Senior management has the responsibility of ensuring that the RRMP is operationalized through the dedication of adequate resources and is implemented by the risk management and business line officers and managers charged with the day-to-day responsibility for the RRMP.
It is the responsibility of senior management to ensure that appropriate policies, procedures, and internal controls exist to monitor the effectiveness of, and operational compliance with, the RRMP on an on-going basis.
Please refer to OSFI’s Corporate Governance Guideline for OSFI’s expectations of FRI Boards of Directors in regards to operational, business, risk and crisis management policies.
2. A FRI should perform a sufficient level of due diligence
on its reinsurance counterparties on an on-going basis to ensure
that the FRI is aware of its counterparty risk and is able to
assess and manage such risk.
A FRI should evaluate the ability of all current and prospective
reinsurance counterparties to meet their liabilities under exceptional
but plausible adverse events on an on-going basis. The level of
a FRI’s due diligence on any reinsurance counterparty should be
commensurate with its level of exposure to that counterparty. Footnote 8
In the evaluation of its current and prospective reinsurance counterparties,
however, a FRI should generally not rely solely on third parties,
including rating agency assessmentsFootnote 9 or broker analysis and recommendations.Footnote 10 Prudent practice dictates that the FRI should, to an extent proportional
to the importance of such counterparty, conduct its own due diligence
on the financial strength and capabilities of all reinsurance counterparties.
When performing its due diligence, a FRI should give consideration
to, among other things, the reinsurance counterparty’s:
Similarly, a FRI that is a reinsurer should, commensurate with
its level of exposure to the cedant, conduct its own due diligence
on the risk management and risk assessment criteria of the cedant.
The evaluation of each of a FRI’s reinsurance counterparties should
be updated throughout the life of the reinsurance contract. In cases
where there may be material exposures to incurred but not reported
losses, management should ensure that the evaluation continues beyond
the expiration date of the contract to ensure that the FRI assesses
potential reinsurance recoverables from expected future claims.
OSFI expects a higher level of due diligence by a FRI in respect
of any current or prospective reinsurance arrangement with an unregistered
reinsurerFootnote 12 or with a
cedant that is not regulated by OSFI. This assessment of counterparty
risk should consider the regulatory and supervisory regime, and
the legal and insolvency frameworks of the unregistered party’s
home jurisdiction.Footnote 13
3. The terms and conditions of the reinsurance contract
should provide clarity and certainty on reinsurance coverage.
A FRI should have processes and procedures in place to ensure
that a comprehensive, written, and bindingFootnote 14 reinsurance contract is executed prior to the effective date of
reinsurance coverage. To achieve clarity and certainty on reinsurance
coverage, a reinsurance contract should be unambiguous, and there
should be complete and final agreement of all material terms and
conditions of the contract, documented in writing, by all parties
prior to the contract’s effective date.
OSFI recognizes that there may be situations where a comprehensive
reinsurance contract is only duly executed by all parties after
the effective date. In such circumstances, historical practice has
been that the reinsurance coverage during this interim period is
usually set out in a less formal document (e.g., slip, cover note,
letter of proposal, binding letter of intent, hereinafter referred
to as the “summary document”). If an event were to occur within
this interim period, lack of certainty relating to the terms and
conditions of the reinsurance coverage in the summary document could
result in actual operational and reputational risks for both the
cedant and the reinsurer. In an effort to mitigate these risks,
OSFI expects FRIs to:
Generally, a reinsurance contract should stand on its own, providing
the necessary clarity and legal certainty on reinsurance coverage.
OSFI acknowledges, however, that there may be situations where it
is necessary and appropriate for a FRI to enter into a supplemental
or subordinated reinsurance contract, a side letter, or other types
of arrangements that are ancillary to, and form part of, the main
reinsurance contract. In addition to ensuring that these arrangements
meet the requirements of this Guideline, the FRI should be transparent
with stakeholders about these arrangements, ensure that such amendments
are appropriately reflected in its financial statements, and ensure
that they do not adversely change the terms or conditions of the
original contract to the detriment of policyholders.
4. A ceding FRI should not be adversely affected by the
terms and conditions of a reinsurance contract.
The terms and conditions of a binding reinsurance agreement should
provide that funds will be available to cover policyholderFootnote 16 claims in the event of either the cedant’s
or reinsurer’s insolvency. To this end, reinsurance contracts should
include an “insolvency clause”, and particular attention should
be paid to the appropriate useFootnote 17 of “off-set” or “cut-through” clauses, the structure of “funds withheld”
arrangementsFootnote 18 , and other
such types of terms or conditions that may frustrate the scheme
of priorities under the Winding-Up and Restructuring Act (WURA).
Ceding FRIs should ensure that all reinsurance contracts contain
an insolvency clause clarifying that the reinsurer must continue
to make full payments to an insolvent cedant without any reduction
resulting solely from the cedant’s insolvency. Such a clause provides
greater certainty that reinsurance receivables remain within the
overall general estate of the insolvent ceding company, or as part
of the assets in Canada of a foreign insurance company as defined
under the WURA and the Insurance Companies Act (ICA), rather
than being allocated toward the payment of specific claims of creditors
Reinsurance contracts should not contain other types of terms
or conditions that may limit a troubled or insolvent cedant’s
ability to enforce the contractual obligations of a reinsurer, or
that may adversely affect the treatment of any claims in respect
of the cedant’s policyholders. and cut-through clauses may allow
certain creditors or policyholders to have preferential Off-set
treatment over other claims, contrary to the scheme of distribution
in the WURA. In the case of off-set clauses, for example, where
the ceding company is a foreign insurance company authorized to
insure in Canada risks, the reinsurer should not have any right
of off-set against the obligations of the ceding company other than
those related to the ceding company’s insurance business in Canada.
If a reinsurance contract provides for a funds withheld arrangement,
the contract must clearly provide that, in the event of the cedant’s
or reinsuer’s insolvency, the funds withheld, less any surplus due
back to the reinsurer, must form part of the property of the cedant’s
general estate, or part of the assets in Canada of a foreign insurance
company as defined under the WURA and the ICA.
OSFI expects all contracts related to reinsurance coverage to
stipulate a choice of forum, a choice of law, and the appointment
of agents for service of legal processes that are necessary to ensure
the reinsurance contract and any disputes arising from such contract
are subject to the laws and courts of a Canadian province or another
legal jurisdiction of, in the reasonable opinion of the FRI, equivalent
or greater reliability and certainty which has a natural connection
to the transaction.
Enhanced transparency will allow OSFI to better understand the
economic impacts and risks associated with a FRI’s reinsurance arrangements.
A FRI is required to maintain and provide to OSFI, upon request,
its RRMP and a complete description of all its reinsurance arrangements,
including levels of reinsurance, the due diligence performed on
reinsurance counterparties, and the proportion of registered and
A FRI should promptly inform OSFI if it becomes aware of any reinsurance
issues that could materially impact its financial condition.
Reinsurance may be a major part of a FRI’s overall risk management
program. Non-adherence to the principles in this Guideline could
result in a reinsurance program or reinsurance contract that does
not provide the intended protection to the ceding company. It may
also compromise the availability of balances that may have been
otherwise recoverable. If a FRI fails to meet the principles set
out in this Guideline, on a case-by-case basis, OSFI may not grant
a capital / asset credit for the reinsurance arrangement, or may,
commensurate with risk, use its discretionary authority under the
ICA, to adjust the FRI’s capital / asset requirements or target
solvency ratios to compensate for reinsurance that is not, or may
not, be wholly effective or reliable.
Federally approved provincial / territorial reinsurers may lose
their status if they fail to meet the expectations set out in this
The FRI’s RRMP should be made available to OSFI on request.
There should be regular reporting to senior management to confirm that the FRI’s reinsurance risk management practices and procedures meet, except as otherwise disclosed, the standards set in this Guideline. The reporting should include assurances that the FRI’s reinsurance arrangements effect a risk transfer and that they are accounted for in the appropriate manner.
When a deviation from this Guideline has taken place over such year, the nature and extent of the deviation, and the measures taken or proposed to correct or otherwise mitigate the risk associated with such deviation, should be documented and disclosed to senior management and to OSFI in full.
This Guideline is complementary to, and should be read in conjunction
with, other OSFI guidance that implicitly or explicitly addresses
various elements of reinsurance or governance, including:
A FRI should consider that, before reinsuring with an unregistered
related party, an approval may be required under subsection 523(2)
or 597(1) of the ICA. A ceding FRI must seek the requisite approval
under subsection 254(2), 254(2.01) or 587.1(2) of the ICA prior
to causing itself to be reinsured on an assumption basis.
See, as applicable, Guideline A - Life Insurance Capital Adequacy Test and the P&C-1 Annual Return Instructions for property and casualty insurance companies for complete definitions of “registered reinsurer”. Note that these definitions include federally approved provincial / territorial reinsurers.
Return to footnote 1 referrer
Please refer to the Other OSFI Guidance section of
this Guideline for guidance on the statutory approval requirements
for assumption reinsurance transactions.
Return to footnote 2 referrer
In this Guideline “risk appetite,” often a qualitative assessment,
refers to the total level and type of risk exposure that a FRI
is willing to undertake to achieve its objectives.
Return to footnote 3 referrer
In this Guideline, “risk tolerance” refers to specific parameters
and / or limits on the level and amount of risk a FRI is willing
to accept / retain, such as maximum net retentions.
Return to footnote 4 referrer
Appropriate concentration limits should be based on premiums,
expected claims, amount of risk, and possible future exposures
(at time of inception or renewal of policy), on a consolidated
basis, to individual counterparties, groups of individual counterparties
or related entities and counterparties in a specific geography.
Return to footnote 5 referrer
A FRI generally should not, in the normal course of its business,
cede 100 per cent, or substantially all, of its risks in the
main areas in which it conducts business. Absent extenuating
circumstances (e.g., a troubled FRI), such an arrangement could
weaken the underwriting standards and discipline at the ceding
FRI. A FRI may, however, occasionally cede a portion, or even
100 per cent, of a specific line of business or a particular
type of risk that is ancillary to its core business to, for
example, underwrite the business for purely marketing or relationship
purposes. Cessions of existing lines of business at 100 per
cent may, depending on the circumstances, also be acceptable
Return to footnote 6 referrer
For foreign company branch operations in Canada, OSFI looks to the Chief Agent to oversee the management of the branch.
Return to footnote 7 referrer
The level of due diligence should not be any less thorough
if the counterparty is a related party of the FRI.
Return to footnote 8 referrer
By analogy, see the Financial Stability Board’s report on Principles
for Reducing Reliance on CRA Ratings: http://www.financialstabilityboard.org/publications/r_101027.pdf.
Return to footnote 9 referrer
Any significant outsourcing of this due diligence function
to a third party must be in accordance with OSFI’s Guideline B-10: Outsourcing of Business Activities, Functions
Return to footnote 10 referrer
If a cedant FRI is aware that a reinsurance counterparty relies
significantly on retrocessions, the cedant should seek greater
visibility of the identities and financial standing of the retrocessionaires.
Return to footnote 11 referrer
Generally, an “unregistered reinsurer” is a reinsurer that is not reinsuring in Canada risks in accordance with OSFI Advisory 2007-01-R1: Insurance in Canada of Risks, and, as such, is not regulated and supervised by OSFI. For complete definitions of “unregistered reinsurer”, see Guideline A - Life Insurance Capital Adequacy Test and the P&C-1 Annual Return Instructions for property and casualty insurance companies.
Return to footnote 12 referrer
For example, the review should include an assessment of the
quality of the regulatory and supervisory regime, compliance
with international standards and best practices, and the adequacy
of the insolvency laws governing proceedings in the reinsurer’s
Return to footnote 13 referrer
“Binding” means that the parties are bound to the terms and
conditions of the contract.
Return to footnote 14 referrer
OSFI would generally not consider an agreement bearing the
signature of the reinsurance intermediary as acceptable unless
the intermediary can support a finding that it has the authority
to act for, or on behalf of, the cedant or reinsurer, as the
case may be.
Return to footnote 15 referrer
No policyholder in the (re)insurance chain should be adversely
affected, including the cedant and its policyholders.
Return to footnote 16 referrer
OSFI recognizes that there may be situations where the interests
of a cedant FRI and its policyholders may be better served by
the use of off-set and cut-through clauses. OSFI does not intend
to restrict the use of such terms or conditions where they do
not give preferential treatment over other claims under the
scheme of distribution in the Winding-Up and Restructuring
Return to footnote 17 referrer
Under funds withheld arrangements, assets (generally the premium)
that would normally be paid over to a reinsurer as consideration
under the reinsurance agreement are withheld and retained by
the ceding company as a form of security enabling a capital
credit for unregistered reinsurance.
Return to footnote 18 referrer