On December 24, 2010, OSFI released final versions of Guideline B-3 – Sound Reinsurance Practices and Procedures and the Guidance for Reinsurance Security Agreements.
Guideline B-3 sets out OSFI's expectations with respect to reinsurance risk management practices and procedures. The final version of Guideline B-3 is consistent with the draft Guideline released in August 2010, which we summarized in a previous Bulletin.
Federally regulated insurers are expected to comply with Principle 1 of Guideline B-3, namely, have a sound and comprehensive reinsurance risk management policy that has been approved by the insurer's Board of Directors (or the Chief Agent, in the case of a foreign company), by July 1, 2011. Federally regulated insurers are expected to comply with the balance of Guideline B-3 by July 1, 2012 and to take all commercially reasonable efforts during the transition period to make multi-year contracts that do not come up for renewal during such period compliant with Guideline B-3.
Guidance for Reinsurance Security Agreements
The Guidance sets out OSFI's expectations regarding the use of reinsurance security agreements to obtain a capital/asset credit in connection with unregistered reinsurance. The use of reinsurance security agreements replaces the use of reinsurance trust agreements. The final Guidance is consistent with the draft Guidance released in August 2010, which we summarized in an article in Canadian Underwriter.
The Guidance states that as a matter of best practice ceding companies are encouraged to take steps to enter into reinsurance security agreements that meet the requirements of the Guidance as soon as possible. The Guidance also states that all new agreements are expected to comply with the Guidance beginning July 1, 2011 and that OSFI expects companies to take all commercially reasonable efforts to replace existing multi-year agreements that do not naturally come up for renewal prior to January 1, 2012.
Proposed Repeal of the 25% Limit on Unregistered Reinsurance and the 75% Fronting Limit
One remaining aspect of the reform of the regulatory and supervisory approach to reinsurance is the repeal of the Reinsurance (Canadian Companies) Regulations and the Reinsurance (Foreign Companies) Regulations. This would eliminate the 25% limit on unregistered reinsurance and the 75% fronting limit. The elimination of these limits was proposed by OSFI during the course of its reinsurance policy review. The proposed Regulations Repealing the Reinsurance (Canadian Companies) Regulations and Reinsurance (Foreign Companies) Regulations were published in the Canada Gazette, Part I, on October 30, 2010.