Reinsurance Protectionism

Canada’s solvency regulator appears to be concerned about capital flight from Canada by way of reinsurance contract arrangements.

In its June 2018 Reinsurance Framework Discussion Paper, the Office of the Superintendent of Financial Institutions (OSFI) raises concerns about developments it has tracked over the past decade. Among them:

• Insufficient collateral requirement for unregistered reinsurance
• Concentration risk, in which a single reinsurer, or a limited number of reinsurers, is on a program
• Worldwide treaties that create the potential for claims in other jurisdictions to drain the capital available for Canadian claims events
• Overreliance on quota share treaties (in some cases, OSFI says, an insurer may cede a majority of their earned premiums to reinsurance)
• Fronting arrangements in which an insurance company insures the risk and then reinsures 100% of that risk with an unregistered unrelated foreign insurer (although there is nothing inherently wrong with such arrangements, OSFI wants to uphold the integrity of the arrangement)
• Foreign reinsurers ceding risks back to the home office, potentially causing a delay in moving the funds back to Canada in the event of a disaster.

OSFI has a number of specific proposals to counter each of the risks outlined above. For the sake of economy, I characterize them into two broad categories: Requiring capital (or more capital) to be parked in Canada, and making it more expensive for reinsurers to move the capital outside of Canada.

David Gambrill, Editor-in-Chief

Either way, the approach appears to take the “global” out of global reinsurance. Indeed, the whole point of global reinsurance is for capital to flow freely over boundaries, depending upon where the disasters occur.

By requiring reinsurers to park funds in individual countries, or to make it harder for them to move funds out of individual countries, that reduces the global capital pool available for reinsurers to apply to disasters happening worldwide. This in turn makes it harder for reinsurers to diversify their risks. Some suggest OSFI’s recommendations would create an “island” of capital in Canada.

So far, this is all in discussion mode. There is still time to express opinions to OSFI. Now is the time to speak up.