Final Guideline B-2 and Guideline B-3
Information
Table of contents
Today, OSFI is issuing its final Guideline B‑3, Sound Reinsurance Practices and Procedures, and its final Guideline B‑2, Property and Casualty Large Insurance Exposures and Investment Concentration. This brings to a conclusion Phase II of OSFI’s review of reinsurance practices, launched in 2018 through the Reinsurance Framework Discussion Paper.
These revised guidelines come into effect on January 1, 2025. The near three-year transition period permits federally regulated insurers (FRIs) time to effectively adjust their business practices accordingly. FRIs’ existing insurance business should remain compliant with the current in-force Guideline B‑3 and Guideline B‑2 until January 1, 2025.
OSFI will hold industry information sessions in the coming months to provide additional clarity regarding OSFI's expectations and supervisory approach.
Changes to Guideline B‑3
Final Guideline B‑3 reflects comments received by the insurance industry in response to Draft Guideline B‑3, issued in June 2019. Key industry input, as well as OSFI’s responses, are summarized in Annex A.
This revised guideline expects FRIs to better identify and manage risks arising from the use of reinsurance, particularly counterparty risk. It clarifies OSFI’s expectation that reinsurance payments flow directly to a cedant FRI in Canada, and reaffirms OSFI’s expectation that a FRI should not cede substantially all of its risks. These changes are primarily clarifications, but may highlight the need for some FRIs to adjust aspects of their reinsurance programs.
Changes to Guideline B‑2
Final Guideline B‑2 reflects comments received by the property and casualty (P&C) insurance industry in response to Draft Guideline B‑2, issued in November 2020. Key industry input, as well as OSFI’s responses, are summarized in Annex B.
This revised guideline requires a P&C FRI to be able to cover the maximum loss related to a single insurance exposure on any policy it issues, assuming the default of its largest unregistered reinsurer on that exposure. This rule is expressed as a percentage of total capital available (or net assets available for foreign branches). 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. The investment limits contained in Guideline B‑2 remain unchanged.
Annex A – Summary of Key Comments on Draft Guideline B‑3 and OSFI Responses
In developing final Guideline B‑3, OSFI considered the range of feedback received from stakeholders on the draft revised Guideline B‑3, published in June of 2019. Below is a brief summary of the key issues raised and how OSFI responded to each.
Respondent Feedback | OSFI Response |
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Reinsurance with Home Office | |
Many respondents stressed the global nature of reinsurance and the benefits of international diversification in large insurance groups. Some respondents noted that there could be capacity reductions or higher reinsurance premiums as a potential consequence of foreign FRIs not being able to ultimately cede business to the home office through an affiliate. |
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Ceding “Substantially All” and Fronting | |
Some respondents noted that there may be valid business reasons for a FRI to cede large percentages of its business to a reinsurer. Others noted the lack of clarity around OSFI’s interpretation of the term “substantially all”. |
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Reinsurance Counterparties | |
Some respondents expressed the view that reinsurance arrangements with affiliated counterparties present more operational prudence, minimizing the risk of group insolvency. |
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Some respondents argued that the current practice of relying on third parties, such as reinsurance brokers and rating agencies, including ongoing discussions between the parties to the reinsurance contract, is sufficient to assess the reinsurance counterparty risk. Conducting further due diligence on the counterparty would be burdensome for both the cedant and the reinsurer. |
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Flow of Reinsurance Payments | |
Some respondents argued that the requirement for reinsurance payments to flow directly to a cedant in Canada goes against the global nature of reinsurance, whose purpose is to centralize purchases of reinsurance for a group. Other respondents also argued that such a requirement would increase the administrative burden on FRIs, and would be duplicative of other measures designed to protect Canadian policyholders. |
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Annex B - Summary of Key Comments on Draft Guideline B‑2 and OSFI Responses
In developing final Guideline B‑2, OSFI considered the range of feedback received from stakeholders on the draft revised Guideline B‑2, published in November 2020. Below is a brief summary of the key issues raised and how OSFI responded to each.
Respondent Feedback | OSFI Response |
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Definition of a “Single Insurance Exposure” | |
Many respondents requested clarification on the definition of a “Single Insurance Exposure”. Some respondents argued for a shift away from certain prescriptive requirements to allow for greater flexibility for P&C FRIs to make this determination. |
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Large Exposure Limits | |
Many respondents noted that varying limits on the maximum loss on a Single Insurance Exposure, depending on the type of P&C FRI, could result in an uneven playing field. |
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Definition of a “P&C FRI Subsidiary in Canada” | |
Some respondents indicated that the term “P&C FRI Subsidiary in Canada” is not clearly defined, and there could be several interpretations. For example, there are various types of relationships that a P&C FRI can have with a parent company. These can include a parent company that is another Canadian FRI, a foreign insurer, a Canadian holding company, and a foreign holding company. |
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Criteria for Foreign Companies | |
Some respondents raised questions as to how OSFI would evaluate whether a parent company or home office of a P&C FRI is subject to “robust regulation and supervision”, is not subject to “legal, regulatory, statutory and fiscal restrictions” and “is a continuing source of financial strength” (see Annex 2 of the draft Guideline B‑2). |
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Use of Letters of Credit | |
Some respondents argued that the use of letters of credit as a risk mitigation technique should not be restricted. Letters of credit are deemed to be legally enforceable instruments. |
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