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Model proposed for regulating insurance securitizations in Canada


September 21, 2011   by Canadian Underwriter


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Assuming insurance-linked securities (ILS) ever take off in Canada, the country will need to develop a regulatory regime to accommodate them, according to an article in the Q2-2011 MSA/Baron Outlook Report.
The article, written by Robert McDowell and Koker Christensen of Fasken Martineau DuMoulin, outlines eight basic principles that might underpin such a regime.
“[T]here is currently no regulatory regime in Canada that specifically addresses securitizations,” the authors note. “The primary reason for this is that while insurance securitizations and other forms of insurance linked securities (ILS) have become common in other jurisdictions, there has not yet been sufficient demand for alternative risk solutions by Canadian (re)insurers.”
Insurance securitizations provide a way for ceding re/insurers to transfer risk or obtain financing from capital markets.
A typical arrangement involves a special purpose vehicle (SPV) entering into a reinsurance contract with a sponsor (a ceding re/insurer). The sponsor pays premiums to the SPV to cover an exposure.
The SPV issues securities (such as bonds, for example) to investors. At the same time, the SPV retains funds equal to its exposure under the reinsurance contract with the sponsor, in case claims do need to be paid.
The authors propose that any new regulatory regime for insurance securitizations include the following principles:
•The SPV must be fully funded; that is, it must at all times have assets equal to or in excess of the insurance exposure assumed.
•SPV assets must be held in trust; financial institutions involved cannot be under the control of the SPV or the insurer.
•The SPV must be ‘bankruptcy remote,’ meaning creditors of the sponsor would not have a claim against the SPV if the sponsor becomes bankrupt.
•Investors should have no recourse to the ceding re/insurer for repayment.
•Investors’ claims must be subordinate to the claim of the ceding (re)insurer.
•The SPV shall be subject to prudent investment principles.
•There must be a real transfer of risk in order for credit to be granted.
•Transparency is required, in the sense that the regulator must be able to understand the details of the transaction.


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