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The regulatory framework for reinsurance will be reviewed 10 years after its last revision

by

Hubert Roy

20 August, 2018 07:00

The last revision of the regulatory framework for reinsurance in Canada dates back to 2008. The Office of the superintendent of financial institutions (OSFI) has decided to attack its revision in June.

In publishing his Paper on the reinsurance framework, the regulator is revising its regulation for reinsurers and property and casualty (insurance) and the life reinsurers. The proposed amendments affect, however, the higher the reinsurance property and casualty. OSFI aims to ensure that its revised framework comes into force on 1 June 2020.

This exercise is conducted in parallel to the consultations that have already ongoing as to the capital that is expected to maintain the insurers. The revised versions of the Test of minimum capital, insurance, and Test of capital adequacy, life insurance, enter into force by 1 January 2019. The guidelines attached will then be revised, for an entry into force in 2022.

That wants to revise OSFI in its framework in reinsurance ? Ten years ago, the regulator has introduced a comprehensive change meant that its framework applied from principles and not rules. The superintendent wants to ensure that its framework remains adequate and efficient.

Reinsurance leverage

A first concern of the OSFI refers to a practice introduced by the insurers in 2015, called the operating model to leverage. In this model, the insurer issues policies for higher limits in Canada and reinsured by a very large share of these risks, usually from a reinsurer said non-certified. Everything relates to the reinsurance of risks by insurance companies.

OSFI said to recognize the validity of this practice. However, since insurers are increasing the limits and sizes of their fonts without increasing proportionately the net retention of risks (see chart), the superintendent expressed concern that this model creates a counterparty credit risk important.

Also, the OSFI sees a risk that insurers will become insolvent following a disaster. This risk increases if the insurer focuses its reinsurance coverage from a reinsurer. It also highlights, in the event of a disaster, if this consideration is not quickly paid to the insurer.

To mitigate this risk, the OSFI is considering a rule. It will establish a link between financial resources and the size of the policies underwritten by the insurers.

Foreign reinsurers

OSFI also attacks another problem from different angles, that is, the requirements that must be met by the reinsurers not having a license in Canada compared to those who have a. Reinsurers licensed canadian have higher demands to meet.

OSFI considers that this difference in treatment is not justified. Margins will be changed to blankets that can take the reinsurers, and this, both in the property and casualty insurance than in life insurance.

Concentration risk

OSFI said to have observed another phenomenon in recent years. Insurers focus their programs of reinsurance from a single reinsurer or several reinsurers. According to the superintendent, this increases the risk of financial deterioration of an insurer if ever a reinsurer with which it deals comes to know of the financial difficulties.

To fix it all, OSFI intends to introduce a requirement, or a limit, of concentration on the reinsurance assets. Everything will be done in the context of a future revision of the guidelines on risk capital. The superintendent says he does not have completed its review of this issue and invites the industry to share its comments on this topic.

The consultation on the working Document on the reinsurance framework will run until 15 September.

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