January 4, 2019 by David Gambrill, Editor-in-Chief
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:
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.
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.