The concept of longevity risk transfer (LRT) is not new but has recently been attracting more attention both internationally and here in Canada as life expectancies continue to increase. On August 29, 2013, the Office of the Superintendent of Financial Institutions Canada (OSFI) released both a draft policy advisory (Draft Policy) and a memorandum (Memorandum) on the topic of LRTs.
In brief, the Draft Policy provides information and guidance to administrators of federally regulated pension plans who are considering entering into insurance or swap contracts to hedge longevity risk. It outlines (1) the different types of LRT contracts, (2) the risks associated with LRT contracts, (3) considerations for plan administrators who are seeking to enter into an LRT contract, and (4) OSFI's expectations for plan administrators entering into LRT contracts.Notably, the Draft Policy states that OSFI has no objections to a pension plan administrator entering into an LRT contract and there is no requirement that plan administrators obtain OSFI approval prior to entering into such a contract, provided the investment is permissible under the terms of the pension plan and the plan's Statement of Investment Policies and Procedures, that it complies with the Pension Benefits Standards Act (including s. 8) and its Regulations (including Schedule III), and that the plan administrator exercises proper due diligence.
The Memorandum is addressed in part to all federally regulated life insurers and reinsurers in Canada and outlines OSFI's support of a draft consultation paper on longevity risk transfer markets published by the Joint Forum. The Joint Forum is an international group that works under the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors to deal with issues common to the banking, securities and insurance sectors, including the regulation of financial conglomerates. The Joint Forum is comprised of an equal number of senior bank, insurance and securities supervisors. OSFI notes that it expects that insurers and reinsurers that are interested in assuming longevity risk should have the appropriate risk management expertise and governance to assume this particular risk and refers to the Draft Policy.
We note that OSFI is soliciting comments on the Draft Policy until December 6, 2013 and is looking to receive comments on the Joint Forum paper specifically and on LRT more generally. Comments may also be made on the Joint Forum paper directly to the Joint Forum by October 18, 2013.
From these communications, it is clear that while OSFI is watching LRT market developments, LRT contracts are permitted in Canada. We expect that Canadian reinsurers and life insurers will be taking a closer look at the new opportunities offered by such products.