OSFI to publish revised instruction for approval of reinsurance with a related party

The Office of the Superintendent of Financial Institutions Canada (OSFI) has announced it will publish a revised Transaction Instruction regarding superintendent approval for reinsurance with a related party on its website by the end of the year.

The instruction will set out the general information requirements in support of the application of a federally regulated insurer (FRI) for the superintendent’s approval in respect of an FRI’s intention to cause itself to be reinsured with a Related Reinsurer, notes an OSFI memorandum released late last week.

Approvals under this revised approach will typically be granted for an indefinite term, although approvals will be conditional on the FRI annually providing certain information to OSFI, the specifics of which will be set out in the revised Transaction Instruction.

After Jan. 1, 2014, the memo notes that approvals will generally be granted in respect of each Related Reinsurer as opposed to each reinsurance arrangement with a Related Reinsurer.

“While it could be expected that OSFI may scrutinize financial, risk management and exposure questions more carefully in considering applications under the new regime, once the approval has been obtained, the new process should be much easier for insurers as they will not need to obtain additional approvals for reinsurance with the same Related Reinsurer,” notes a bulletin issued Tuesday by Fasken Martineau.

The OSFI memo states that pursuant to sections 523 and 597 of the Insurance Companies Act, the prior approval of the superintendent is required where an FRI intends to cause itself to be reinsured by a related part that is not also an FRI (Related Reinsurer). “Currently, such approvals under the ICA are granted in respect of a request for this approval are set out in Transaction Instruction DA No. 21,” the memo notes.

OSFI reports that the revised approach “is expected to better align with reinsurance industry practices, which frequently see FRIs entering into multiple reinsurance arrangements with the same Related Reinsuer, often on very short notice.” Beyond allowing FRIs more flexibility in managing their reinsurance programs, “we believe that the revised approach will provide OSFI with additional insight into FRIs’ risk exposure to Related Reinsurers,” OSFI adds.

By allowing an insurer that has obtained approval to enter into multiple reinsurance transactions with the related reinsurer, Fasken Martineau notes “this will definitely assist insurers that are part of insurance groups with global operations. Such groups often utilize inter-group reinsurance and retrocession, and sometimes put these arrangements in place on short notice.”

The Fasken Martineau bulletin points out that under the current regime, the timing of the approval, in relation to when the reinsurance or retrocession arrangements are being put in place, can be a significant challenge.

“The new approval regime will be a marked improvement for insurers that are part of such groups and will allow them to put inter-group reinsurance and retrocession arrangements in place quickly without facing the challenge of needing to obtain Superintendent approval within a short timeframe to comply with the Insurance Companies Act,” the bulletin adds.

The OSFI memo,on its website, also provides transitional guidance in relation to different situations.