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Type of Publication: Letter
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Date: November 26, 2020
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To: Federally Regulated Property and Casualty Insurers (P&C FRIs)
OSFI is issuing draft revised Guideline B-2, newly titled ‘Property and Casualty Large Insurance Exposures and Investment Concentration’, for public comment.
The revisions to this guideline primarily address single large insurance exposures of P&C FRIs. The current requirements for investment concentration remain unchanged. This draft guideline reflects written input, meetings and dialogue with industry participants.
Background
In June 2018, OSFI issued a
Discussion Paper on its reinsurance framework, which highlighted concerns with certain industry practices. In particular, P&C FRIs have increasingly adopted business models associated with writing large policies in Canada, and subsequently ceding a significant portion of these risks outside of Canada with little capital or vested assets maintained in Canada to support the increased counterparty risk exposure (referred to as the “leveraged business model”).
In response to this concern, OSFI’s Discussion Paper proposed a rule on the issuance of high-limit policies (policy limit rule). Under the proposed policy limit rule, the maximum policy limit that a P&C FRI could issue depended upon its level of capital and excess collateral, as well as the diversity of its reinsurance counterparties. The policy limit rule assessed the ability of a P&C FRI to handle losses equivalent to its largest three policy limits, and assumed the default of its largest reinsurer on those policies.
Industry expressed significant concerns with the policy limit rule, noting that it captured a scenario that is excessively severe and extremely improbable. Further, it argued that the impact to capital (or collateral) requirements for the P&C industry would be significant. Based on this feedback, OSFI conducted a Quantitative Impact Study (QIS) in early 2019. The QIS data confirmed that certain P&C FRIs would be substantially impacted by the proposed policy limit rule.
Amended proposed rule
Following a pause in its policy work due to the COVID-19 pandemic, OSFI is now proposing an amended rule, which is incorporated in draft revised Guideline B-2. It requires a P&C FRI to be able to cover the maximum loss related to a single insurance exposure (as opposed to three of its largest policy limit losses) on any policy it issues, assuming the default of its largest unregistered reinsurer on that exposure. For simplicity, the amended rule is expressed as a percentage of total capital available (or net assets available for foreign branches).
OSFI has developed the amended rule in this draft guideline with the aim of meeting OSFI’s mandate of protecting policyholders. It is prudent and reasonable to expect a P&C FRI to be in a position to fully cover its potential losses with funds available in Canada or from a diversified panel of reinsurers. OSFI is, however, seeking further feedback through this consultation process to refine solutions that support this goal.
Please provide your input on this draft revised Guideline B-2 to
B.2@osfi-bsif.gc.ca by March 18, 2021. The consultation period will run for an extended period of 16 weeks in order to encourage thoughtful discussion and assessment of the issues while P&C FRIs manage the operational constraints posed by the COVID-19 pandemic.
OSFI is particularly interested in stakeholder views on:
- How a P&C FRI should determine and measure its maximum loss on a ‘Single Insurance Exposure’;
- The potential counterparty risk mitigation techniques a P&C FRI could use; and
- Any other suggestions that contribute to an effective balance between protecting policyholders and allowing P&C FRIs to compete and take reasonable risks.
A non-attributed summary of comments and OSFI’s responses will accompany the issuance of the final guideline.
Yours truly,
Ben Gully
Assistant Superintendent, Regulation Sector