Federal government changes rules on approving reinsurance arrangements with related parties

Insurance carriers seeking approval from the federal government to be reinsured by related parties can now, in some cases, get approvals for each reinsurer on an ongoing basis, rather than separate approvals for each reinsurance arrangement.

“After January 1, 2014, approvals will generally be granted in respect of each Related Reinsurer as opposed to each reinsurance arrangement with a Related Reinsurer,” the Office of the Superintendent of Financial Institutions (OSFI) stated late last year. “Approvals will generally be granted in respect of each Related Reinsurer as opposed to each reinsurance arrangement with a Related Reinsurer.”

In its Revised Transaction Instruction for Superintendent approvals for reinsurance with a related party, which was posted Dec. 31, OSFI notes that when OSFI grants approval to carriers asking to be reinsured by related parties, that approval now “relates to the applicant’s intention to cause itself to be reinsured by a specific Reinsurer through one or more reinsurance contracts on an ongoing basis, rather than in respect of a particular reinsurance contract.” 

In its administrative guidance, OSFI noted: “Where an applicant intends to cause itself to be reinsured by multiple Reinsurers, applications must be submitted in respect of each Reinsurer.  Additionally, the applicant must demonstrate that it has a real intention to cause itself to be reinsured by the Reinsurer, as opposed to a mere possibility or vague intention of causing itself to be reinsured by the Reinsurer at some point in the future.”

Sections 523 and 597 of the federal Insurance Companies Act (ICA) stipulate conditions under which carriers can buy reinsurance from related parties that are not also federally regulated insurers.

OSFI noted Dec. 31 that when it grants approval to reinsure with related parties, insurers must give OSFI information annually on those reinsurance arrangements. Typically that information would have to include, among other things:

•confirmation that each reinsurance contract “was entered into, renewed, modified or, where applicable, commuted (or otherwise terminated), on terms and conditions at least as favourable to the applicant as market terms and conditions, including the basis on which this assessment was made;”

•details on “the due diligence performed by the applicant in respect of the continuing suitability” of the reinsurer; and

•details on “the type and duration of the reinsurance contracts entered into, renewed, and/or modified” with the reinsurer.

OSFI also stated Dec. 31 that its revised transaction instruction does “not limit, modify or supplant any of OSFI’s expectations regarding sound reinsurance practices and procedures as set out” in its Guideline B-3, titled Sound Reinsurance Practices and Procedures, published in December, 2010.

That guideline applies to all federally regulated insurance companies “that are party to reinsurance cessions, retrocessions, and, where applicable, to assumption reinsurance transactions.”

Among other things, Guideline B-3 states that ceding insurance carriers “should ensure that all reinsurance contracts contain an insolvency clause clarifying that the reinsurer must continue to make full payments to an insolvent cedant without any reduction resulting solely from the cedant’s insolvency.”

In its administrative guidance posted Dec. 31, OSFI noted it “expects that the applicant’s reinsurance arrangement with the proposed Reinsurer must not be carried out to provide financial support to the Reinsurer, or to ‘bail out’ a Reinsurer, in financial difficulty.”

OSFI noted the ICA “generally requires” that related-party transactions have terms and conditions” at least as favourable to the applicant” as “market” terms and conditions.

“OSFI may, if it has reason to doubt the accuracy of the assessment of this requirement, commission, at the applicant’s expense, an independent evaluation.”