On July 10, 2009, Quebec's financial services regulator, the Autorité des marchés financiers (AMF), released a draft guideline respecting reinsurance risk management by insurers carrying on business in Quebec. Reinsurance, while obviously an important risk management tool for insurers, exposes them to a number of risks, including residual insurance, legal, counterparty and liquidity risks. Citing the AMF's principles-based approach to regulation, the guideline sets out four broadly-drafted principles for the management of reinsurance risks by insurers:
- A reinsurance risk management framework should be supported by effective governance. The AMF considers the board of directors and senior management to be ultimately responsible for reinsurance decisions and expects that they should, among other things, develop and implement a reinsurance strategy and risk management policy tailored to the insurer's risk profile, adequately monitor reinsurance transactions and review the reinsurance strategy and policy on a regular basis.
- Reinsurance risk management should be an essential part of an insurer's integrated risk management framework and should take into account its overall risk appetite and tolerance levels, be integrated into its strategic and financial planning process and be considered in the development or renewal of products.
- A policy for managing reinsurance risk should be adopted and include procedures for selecting risk transfer methods and reinsurers as well as procedures for implementing, reviewing, amending and documenting reinsurance agreements. The policy should also, among other things, define the conditions for using alternative risk transfer mechanisms, address the possibility of using intermediaries, determine the reinsurer selection process, address reliance on unregistered reinsurers and outline the process for monitoring the application of the policy.
- Insurers should adopt a process to implement the reinsurance risk management policy and establish a process for ceding insurance and implementing alternative risk transfer mechanisms.
The AMF intends to assess compliance with the stated principles in light of the risk profile of each insurer. The proposed guideline is open for comment until October 30, 2009.