OSFI defends as “fair and reasonable” its guideline requiring due diligence on reinsurance contracts

Canada’s solvency regulator acknowledges its Guideline B-3-Sound Reinsurance Practices and Procedures has “created a lot of stir” within Canada’s reinsurance community because of its insistence that federally regulated insurers perform a sufficient level of due diligence on reinsurance counterparties.
But the Office of the Superintendent of Financial Institutions (OSFI) insists its “due diligence” guidelines are not overly prescriptive and are still very much in keeping with a flexible principles-based approach.
“I am told we went overboard,” OSFI director of legislation and policy initiatives Philipe Sarrazin said at the Insurance Bureau of Canada (IBC)’s 10th Annual Regulatory Affairs Symposium in Toronto on Nov. 4. But “we don’t think it’s unreasonable, honestly, to perform due diligence on multi-million-dollar contracts,” he said.
“There is a lot of due diligence that goes on in much smaller transactions…”
Sarrazin denied OSFI was expecting an unrealistic amount of effort to comply with the guideline. “Read the words,” he said. “We want due diligence performed commensurate with an institution’s exposure. So, tailor it to your needs. Tailor it to how much reinsurance is being used…
“If a counterparty is selling you [financial] strength, shouldn’t you be allowed to verify it’s true that the strength is going to be there, and the payments are really going to be on time when you really want to call on your reinsurer counterparty?
“To us, it’s obvious. For some, it’s asking way too much. But we think it’s fair and reasonable to perform due diligence on contracts.”
Sarrazin said OSFI’s guidance should not be interpreted to mean brokers or ratings agencies could not be consulted as outside sources when performing due diligence on counterparties. But they should not be the only sources, Sarrazin said.
“What we are saying is, proper due diligence requires that you ask the right questions and you form your own opinion. We’re not restricting the use of outside sources, but we’re saying you need to ask questions.”
Consulting OSFI itself was no substitute for due diligence, he added.