OSFI introduces new guidelines for use of Letters of Credit by Federally Regulated Insurers

On November 8, 2023, the Office of the Superintendent of Financial Institutions Canada (OSFI) issued revised general guidelines for the use of Letters of Credit (LOC) for Federally Regulated Insurance Companies (FRIs) (the Guidelines). The Guidelines provide FRIs with guidance on OSFI’s requirements relating to LOC approvals. The Guidelines are effective as of November 8, 2023.

As a general rule, OSFI will only recognize an approved LOC as security for the purposes of:

1. Reducing the reserve and required coverage for unregistered reinsurance, and
2. Admitting Self Insured Retention (SIR) recoverable for the capital test.

In order to improve the efficiencies in the issuance of LOC approvals, OSFI has amended its process to reduce the amount of time LOCs spend in transit. The amended process is as follows:

1. The applicant requests an LOC from the issuing bank.
2. If the issuing bank is a foreign bank, the LOC requires confirmation of a Canadian bank.
3. Issuer (bank) sends original (or amendment) to the FRI (Canadian or Foreign Company) for review. The FRI will ensure details are correct and that the LOC meets OSFI Guidelines.
4. FRI forwards a soft copy of LOC or amendment to OSFI via email for review.
5. Once approved, OSFI will notify the FRI and trustee (if applicable) via email.
6. A foreign FRI will forward the original documentation to the trustee for safekeeping. The FRI will retain the LOC for safekeeping.

In addition to complying with the above-noted process, FRIs will also need to continue to comply with the following guidelines:

1. LOCs must adhere strictly to OSFI’s standard wording, to which there have been no substantive updates.
2. There are two different LOCs that may be used – one for Unregistered Reinsurance and one for SIR. Applicants should instruct the issuing bank as to which type of LOC is required. Templates are posted on OSFI’s website.
3. For the FRI to obtain a capital credit for an LOC, the LOC must be approved by the Superintendent.
4. Any change in the amount of this LOC must be approved by the Superintendent.
5. LOCs from foreign banks must have a separate confirming letter from a Canadian bank. If the LOC is issued by a foreign bank, the bank address shown in the body of the LOC can be either that of issuing bank or of the Canadian confirming bank (in practice the Canadian bank’s address is usually used).
6. The LOC must be subject to International Standby Practices (ISP98).
7. LOCs must be for a fixed term of at least one year.
8. LOCs must be for a stipulated dollar amount.
9. LOCs must be evergreen, unconditional and be in the currency of the business reinsured, issued or confirmed by a Canadian financial institution.
10. LOCs must be irrevocable except with at least three months’ notice to OSFI. This condition can be satisfied either by a provision in the LOC or by confirmation from the issuing bank.

The above amendments are another step in OSFI’s work to streamline, simplify and reorganize its processes and procedures. The hope is that these amendments will allow FRIs to obtain approved LOCs in a more efficient and expedient manner.

Please do not hesitate to contact Dentons Canada LLP’s Corporate and Regulatory Insurance group should you wish to discuss in further detail how these Guidelines impact your firm’s use of LOCs.