Part XIII changes may affect capital/asset credit eligibility in 2008-09 reinsurance contracts

Federally regulated insurance companies that are about to sign long-term agreements with foreign-based reinsurers — i.e. agreements that extend beyond 2010 — should be aware of the potential impact that changes to Part XIII might have on capital/asset credit eligibility, Canada’s federal solvency regulator says.
The Office of the Superintendent of Financial Institutions (OSFI) has indicated that sometime on or before Dec. 19 it will be finalizing two documents (Note to Cedants as well as Implementation Instructions—Amendments to Part XIII of the Federal Insurance Companies Act). The two documents are intended to provide more detailed guidance on what it means to be “reinsured in Canada.”
New rules for claiming a capital/asset credit will come into force in conjunction with the coming into force of Part XIII of the Insurance Companies Act, on Jan. 1, 2010.
The key change, according to OSFI, is that “a cedant will only be eligible for a capital/asset credit in respect of risks reinsured by a foreign company where:
•    that foreign company has reinsured in Canada the risks of that cedant; or
•    the foreign company provides collateral which is available in Canada, as specified in the capital/asset adequacy guidelines.
Currently, a cedant reinsured by the Canadian branch of a foreign company will generally be eligible for a capital/asset credit without regard to where the negotiations take place as long as the risk being reinsured is in Canada, OSFI notes.
But to the extent that a long-term reinsurance agreement (that will find application for 2010 or beyond) is about to be entered into by a cedant, OSFI advises a cedant “to pay particular attention to Advisory No. 2007-01 entitled Insurance in Canada of Risks, dated September 2007, which provides guidance on indicia to consider in determining whether a foreign entity is insuring (or reinsuring) in Canada a risk.”