The Office of the Superintendent of Financial Institutions (“OSFI”) has released a memorandum (the “Memorandum”) advising of upcoming changes to the process for obtaining approval of unregistered related party reinsurance between a federally regulated insurer (an “FRI”) and a related party that is not an FRI.
Under the Insurance Companies Act, such reinsurance arrangements are only permitted with the approval of the Superintendent of Financial Institutions (the “Superintendent”). There is also a requirement that such an arrangement be on terms at least as favourable to the FRI as market terms and conditions. This latter requirement will not change.
OSFI’s current practice is to require that FRIs obtain the Superintendent’s approval for each reinsurance arrangement, even if the Superintendent has previously approved a reinsurance arrangement with that related unregistered reinsurer. After January 1, 2014, the Superintendent’s approval generally will be granted in respect of a specific related unregistered reinsurer. Separate approvals will no longer be required for each reinsurance arrangement with that reinsurer once the initial approval of that reinsurer has been provided.
The changes should give FRIs greater flexibility in managing their affairs. FRIs will be able to modify the terms of existing arrangements or enter into new arrangements with an approved related reinsurer on short notice and without a further application for regulatory approval.
OSFI expects to publish a Transaction Instruction prior to December 31, 2013 setting out the requirements that will apply in order for an FRI to obtain the Superintendent’s approval of an application to be reinsured by a related unregistered reinsurer. FRIs can expect that, among other elements, an initial application for approval will require financial information about the reinsurer and any reinsurance treaties then in force or contemplated. The approval will be granted for an indefinite term, but the FRI will be required to provide certain information to OSFI on an annual basis, the details of which will be described in the Transaction Instruction.
The Memorandum outlines certain transitional rules that will apply to existing reinsurance arrangements with a related unregistered reinsurer:
- if an FRI has already received the Superintendent’s approval of a reinsurance arrangement with a related unregistered reinsurer for a defined period, that approval expiry date will be extended until June 30, 2015. The FRI will then be expected to apply under the new approval process prior to January 1, 2015;
- if an FRI has already received the Superintendent’s approval of a reinsurance arrangement with a related unregistered reinsurer with no expiry date, the FRI should apply under the new approval process prior to January 1, 2015; and
- if a new reinsurance arrangement with a related unregistered reinsurer or a material change to an existing approved arrangement with a related unregistered reinsurer are to be executed prior to January 1, 2014, the FRI should apply under the current process for approval. If such an arrangement is to be executed after January 1, 2014, the FRI should apply under the new approval process.