OSFI Releases Draft Revised Guideline B-3 on Reinsurance Practices and Procedures

June 26, 2019

On June 12, 2019, Canada’s federal prudential regulator of insurance companies, the Office of the Superintendent of Financial Institutions (“OSFI”), released a draft revised version of its principal guidance on managing reinsurance risk, Guideline B-3: Sound Reinsurance Practices and Procedures (the “Guideline”). The proposed revisions to the Guideline reflect the positions outlined in OSFI’s June 2018 Discussion Paper (see our commentary) as well as comments received from industry stakeholders (summarized, with OSFI’s responses, here).

At a high level, the revisions to the Guideline:

  • Encourage insurers to better identify and manage risks arising from the use of reinsurance, particularly counterparty risk;
  • Clarify OSFI’s expectation that reinsurance payments flow directly to a ceding insurer in Canada (or a person acting for or on behalf of the ceding insurer in Canada);
  • Reaffirm OSFI’s principles-based expectation that an insurer not cede substantially all of its risks; and
  • Clarify other aspects of OSFI’s expectations related to the prudent management of reinsurance risks.

The revision also incorporates some minor stylistic improvements, including a more consistent use of the “active voice”.

Background

In the Guideline Impact Analysis Statement released with the draft Guideline, OSFI noted that, in its view, reinsurance practices and the insurance environment as a whole have changed considerably since the original Guideline was introduced in 2010. In addition, OSFI was concerned that federally-regulated insurers/reinsurers (“FRIs”) were not consistently interpreting and applying certain of OSFI’s expectations for prudent reinsurance risk management, with the result that some reinsurance programs had an inappropriate amount of associated risk.

Specific Changes

The changes in the Guideline that will be of particular interest to the industry include the following:

  • Under the heading “Key Principles”, the previous statement that the principles are intended to assist FRIs in developing approaches to manage their reinsurance risks has been more forcefully rephrased to stipulate that FRIs should adhere to the principles when developing risk management frameworks for reinsurance risk.
  • In respect of managing risks through reinsurance, the revised Guidelines more forcefully states that an FRI must regularly assess the adequacy and effectiveness of its reinsurance arrangements.
  • OSFI reemphasizes that its expectations for managing reinsurance risk are consistent in respect of all counterparties, affiliated and non-affiliated – and particularly instructs that the level of due diligence should not be any less thorough for an affiliated counterparty.
  • OSFI notes that, in connection with limitations on ceding all or substantially all risks, it generally applies the concept of “substantially all” in a manner consistent with that used in connection with assumption reinsurance, and asset sale, transaction approvals.

Major Concern for P&C Insurers

Overall, the Guideline continues to take a principles-based approach and the changes to the Guideline are unlikely to be contentious. However, the elephant in the room is the very contentious proposal in the Discussion Paper that OSFI Guideline B-2 on counterparty risk concentration exposures be amended to impose a rule limiting the issuance of high-limit policies by property and casualty (“P&C”) insurers. The P&C industry has strongly objected to the proposed rule and is actively lobbying against it. The proposed rule would require a massive increase in capital for certain Canadian P&C insurers and is understood to be markedly out of step with international regulatory norms.

Next Steps

  • Those who would like to comment on the new draft should ensure that OSFI receives their submission by August 16, 2019.
  • The finalized Guideline is expected to be released in 2020.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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