OSFI Proposes Revisions to Guideline on Sound Reinsurance Practices

OSFI, in June 2018, had issued a discussion paper on a reinsurance framework and the paper included proposals to enhance and clarify the OSFI expectations for prudent reinsurance practices. The Annex to the letter proposing the draft guideline summarizes comments received regarding the June 2018 proposals, along with the responses of OSFI. The revisions to the guideline reflect these proposals as well as comments received in response to the discussion paper. Key changes to the guideline encourage insurers to better identify and manage risks arising from the use of reinsurance, particularly counterparty risk. Revisions also clarify the OSFI expectation that reinsurance payments flow directly to a cedant insurer in Canada and reaffirm OSFI's principles-based expectation that an insurer not cede substantially all of its risks. These changes are primarily clarifications, but may highlight the need for some insurers to adjust aspects of their reinsurance programs.

Guideline B-3 applies to all federally regulated insurers that are party to reinsurance cessions, retrocessions and, where applicable, to assumption reinsurance transactions. This guideline is complementary to, and should be read in conjunction with other OSFI guidance, including Guideline A on life insurance capital adequacy test, guideline on corporate governance, and Guideline E-17 on background checks on directors and senior management.

OSFI noted some that federally regulated insurers are making greater use of reinsurance and have larger and more concentrated exposures to reinsurers. In addition, the federally regulated insurers are not consistently interpreting and applying some of the OSFI expectations for prudent reinsurance risk management. Consequently, some federally regulated insurers may have more risk associated with their reinsurance programs than appropriate. Hence, the objective of the OSFI reinsurance review is to ensure that the regulatory framework for reinsurance remains effective and appropriate. 

Related Links

• Letter to Insurers
• Proposed Guideline
• Impact Analysis Statement

Comment Due Date: August 16, 2019

Effective Date: 2020 (expected)

Keywords: Americas, Canada, Insurance, Reinsurance, Guideline B-3, Counterparty Risk, Reinsurance Practices, OSFI