Office of the Superintendent of Financial Institutions
This Guidance sets out OSFI's minimum standards with respect to collateral secured through the establishment of a Reinsurance Security Agreement (RSA). It also outlines OSFI's expectations regarding the operation by companies of the RSA process.
A federally regulated insurance company is generally eligible for a capital/asset credit in respect of unregistered reinsurance if it benefits from collateral held in Canada. In that regard, a capital/asset credit is allowed where ceding companies obtain and maintain a valid and enforceable security interest that has priority over any other security interest in assets of an unregistered reinsurer that are held in Canada. Generally, such a security interest will be obtained by means of a RSA. OSFI will allow a capital/asset credit for RSAs in certain circumstances, including where the following criteria are met:
Although other conditions may apply to reinsurance with related parties (e.g., Superintendent approvalFootnote 2), no additional specific conditions would apply in respect of security agreements.
OSFI will require ceding companies to negotiate and enter into suitable arrangements and to take all necessary practical and operational measures to obtain and maintain a valid and enforceable security interest in the pledged assets that have priority over any other security interest in these assets. Ceding companies will also have to obtain a legal opinion asserting such an interest has been or will be created in their favour. Further, ceding companies are expected to approve assets offered as pledge or withdrawn. Below are minimum standards for a RSA and legal opinion. Once the legal opinion is obtained by the ceding company, the agreement should be filed on a timely basisFootnote 3 with OSFI's Securities Administration Unit at:
OSFI expects ceding companies to have a Board, or committee of the Board, approved policy requiring management to confirmFootnote 4 to the Board, or committee thereof, from time to time but at a minimum once every two years, that a valid and enforceable security interest that has priority over any other security interest in the pledged assets continues to be created in their favour, including where changes have been made to personal property security legislation or securities transfer legislation in the province or territory where the assets are held.
In addition, OSFI expects ceding companies to include in their policy the types of prudentially acceptable pledged assets and the limits (e.g. credit ratings as outlined in the capital/asset guidelines; counterparty concentrations; foreign denominated securities) as well as the practices and procedures for managing and controlling risks related to pledged assets. In respect of foreign insurance companies with branch operations in Canada, OSFI expects that the Chief Agent will ensure the branch has an approved policy.
OSFI expects that the RSA, at a minimum, will:
For each particular RSA, OSFI expects the following to be included in the accompanying legal opinion addressed to the ceding company:
The opinion, on which OSFI and the ceding company will be entitled to rely, may be subject to customary qualifications. It must be provided by a lawyer who either has expertise in the area of personal property security legislation in the province where the assets are held or who is reasonably relying on the legal opinions of those who have such expertise. In relation to a particular RSA, where the ceding company approves a new type of asset not already covered by the accompanying legal opinion, OSFI expects that the company will obtain an additional legal opinion asserting that a valid and enforceable security interest has been or will be created in its favour in respect of this new type of asset. Where the foreign company's Chief Agent is the legal counsel of the company, the foreign company should seek a legal opinion from outside legal counsel. Where a ceding company's legal opinion is provided by in-house counsel, OSFI expects that the opinion will state that it is provided by counsel in his or her professional capacity as a lawyer and not in any other capacity.
In addition to its expectations regarding content of RSAs, OSFI requires monthly reporting with respect to the market value of assets subject to each RSA. As such, OSFI expects that the ceding company shall, on or before the fifteenth day of each monthFootnote 6, or at such other times as requested by notice in writing to the ceding company, cause its 'Collateral Agent' to file with OSFI's Securities Administration Unit (see address above), the declaration in Appendix A (attached) and an electronic (text format) file and paper copy containing the following information:
While the filing of such declaration and related information, through the 'Collateral Agent', is required for ease of process, such filing shall remain the responsibility of the ceding company.
As a matter of best practice, ceding companies are encouraged to take steps to enter into RSAs that meet the requirements of this Guidance as soon as possible. All new agreements should comply with this Guidance beginning July 1, 2011. OSFI expects companies to take all commercially reasonable efforts to replace existing multi-year agreements that do not naturally come up for renewal prior to January 1, 2012. The designated OSFI Relationship Manager will follow each ceding company's efforts and progress.
Foreign depositories are not accepted as assets held by foreign custodians are not considered pledged in Canada.
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Pursuant to section 523 or 597 of the Insurance Companies Act.
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Within 15 days of the ceding company obtaining a legal opinion asserting that a valid and enforceable security interest has been created in its favour.
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The confirmation should either state that the opinion may still be relied upon or that subsequent changes to legislation do not affect the validity of the opinion or, alternatively, a new opinion can be provided.
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Canadian counsel may elect to request a legal opinion from a lawyer who has expertise in this area in the jurisdiction of the unregistered reinsurer to ensure the security interest is recognized in the foreign jurisdiction.
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If the fifteenth day is not a business day of the 'Collateral Agent', on or before the first business day of the 'Collateral Agent' following the fifteenth day.
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