On February 11, 2022, the Office of the Superintendent of Financial Institutions (OSFI) issued final versions of Guideline B-3: Sound Reinsurance Practices and Procedures (Guideline B-3) and Guideline B-2: Property and Casualty Large Insurance Exposures and Investment Concentration (Guideline B-2), concluding OSFI’s most recent review of the Canadian reinsurance framework which commenced in June 2018.
Guideline B-2 and Guideline B-3 (collectively, the Guidelines) will come into effect on January 1, 2025. OSFI has indicated that it intends to hold industry information sessions to provide additional clarity regarding OSFI’s expectations and supervisory approach. OSFI had previously released drafts of each of the Guidelines for public consultation.
Guideline B-3 applies to all federally regulated insurers (FRIs), whether in the P&C or Life space. Guideline B-2 only applies to federally regulated P&C insurers (P&C FRIs).
Updates from prior draft guidelines
Guideline B-3 is largely reflective of the last draft published for consultation in June 2019.
OSFI made it clear that it expects reinsurance receivables to be paid directly to the FRI-cedant or its agent in Canada. Specifically, Guideline B-3 now provides that OSFI expects reinsurance contracts with third-party reinsurers to contain an insolvency clause stipulating that, in the event of the insolvency of the FRI-cedant, all reinsurance receivables are to be paid directly to the FRI-cedant in Canada, or to a person acting for, or on behalf of, the FRI-cedant in Canada. Reinsurance contracts with affiliated (i.e., related party) reinsurers are expected to contain a clause stipulating that all reinsurance receivables are to be paid directly to a FRI-cedant in Canada, or to a person acting for, or on behalf of, the FRI-cedant in Canada.
Guideline B-2 has been substantively revised from the version published in November 2020. In respect of a FRI’s Gross Underwriting Limit Policy (GUWP), the FRI is expected to use relevant, reasonable and supportable information to measure and determine the maximum loss on a “Single Insurance Exposure”. The Single Insurance Exposure is defined by each P&C FRI in their GUWP. FRIs should make the determination without regard to the probability of the loss event occurring and by using approaches that are risk-based and forward-looking (i.e., not solely based on past losses).
Revisions were made to the factors for determining Single Insurance Exposure for the classes of property insurance and title insurance:
- Property insurance: The aggregated insurance exposures on in-force policies at a single location, including any exposures subject to the location. OSFI removed prior guidance which provided that this should be, at a minimum, the sum of the location building exposure, location contents exposure and business interruption exposure, among other things.
- Title insurance: The aggregated insurance exposures on in-force policies related to the legal title for a single location. OSFI removed prior guidance which provided that the FRIshould consider (among other things) the expectations of the policyholder regarding the maximum size of a loss that could be claimed.
In addition, insurance exposure limits have been amended as follows:
- For insurance companies: 100% of Total Capital Available (as defined in Guideline B-2) where any entity in the P&C FRI control chain is a widely held company and/or a regulated financial institution, and 25% of Total Capital Available otherwise.
- For foreign branches: 100% of Net Assets Available (as defined in Guideline B-2).
Annex 2, which set out certain criteria for P&C FRI subsidiaries and for foreign branches in Canada, has been deleted from the final version of Guideline B-2. These changes arguably make the exposure limits more equitable as among insurance companies and branches operating in Canada.
Each of the Guidelines refer to OSFI’s Corporate Governance Guideline, which sets out OSFI’s expectations in respect of operational, business, risk and crisis management policies. The Corporate Governance Guideline is applicable to all federally regulated financial institutions other than branch operations of foreign banks and foreign insurance companies. However, the Corporate Governance Guideline should be applied in spirit and principle to foreign branches, where applicable.
Takeaways
With an effective date of January 1, 2025, OSFI has provided all FRIs sufficient time to review and consider the Guidelines to determine what actions, if any, need to be taken to ensure compliance with the Guidelines as of the effective date. Specifically, all reinsurance contracts should be considered to ensure the insolvency provisions are compliance with the revised guidance, and that appropriate language is included to ensure reinsurance receivables are paid directly to FRI-cedants or their agents in Canada.
Moreover, P&C FRIs should determine the impact of Guideline B-2 on their capital requirements. Each P&C FRI must consider its GUWP, particularly in respect of Single Insurance Exposures and limits by class of insurance to ensure appropriate capital levels in Canada. Given the length of time required to conclude a reinsurance arrangement, and particularly global reinsurance treaties, it would be prudent for FRIs to review their anticipated business plans and reinsurance arrangements as soon as possible. FRIs should also plan to participate in OSFI’s industry information sessions, once scheduled, in order to seek further guidance from OSFI.
Please do not hesitate to contact any member of the Insurance group should you have any questions.
