Heightened regulatory requirements could spark Canadian ILS market

The Office of the Superintendent of Financial Institutions (OSFI)’s new governance and risk management expectations regarding reinsurance arrangements may lead some (re)insurers to consider insurance linked securities solutions (ILS).
In the MSA/Baron Outlook Report Q2-2010, Robert McDowell and Koker Christensen examine the potential emergence of an ILS market in Canada.
According to McDowell and Christensen, some recent developments may foster the growth of such a market. These include:
• OSFI’s new risk management and governance expectations as articulated in its Response Paper: Reforming OSFI’s Regulatory and Supervisory Regime for Reinsurance and its Draft Guideline B-3l;
• increased capital requirements under Basel III; and
• the formation of indices, such as Property Claim Services, specifically for the Canadian market.
Whether and when a Canadian market for ILS emerges will depend on a variety of factors, they say. These include:
• The development or persistence of a hard reinsurance market. This might stimulate demand for ILS.
• Consolidation in the insurance industry. Consolidation would concentrate the insurance risk relating to catastrophic events, possibly forming a catalyst bond for cat bonds.
• The degree to which Canadian (re)insurers are affected by severe events.
“If an ILS department develops, OSFI may feel the need to develop and articulate its expectations regarding ILS,” McDowell and Christensen write. “In the meantime, the laws, regulations and regulatory expectations described in this article will continue to govern this area.”