On February 3, 2011, His Excellency The Governor General in Council, on the recommendation of the Minister of Finance, made the Regulations Repealing the Reinsurance (Canadian Companies) Regulations and the Reinsurance (Foreign Companies) Regulations (the “Regulations”), which Regulations come into force on June 30, 2011.

Effective June 30, 2011, property and casualty insurance companies will no longer be prohibited from ceding more than 75% of their gross premiums in the aggregate, and will no longer be limited to ceding only 25% of their gross premiums to unregistered reinsurers. The purpose of these 75% and 25% ceding limits was to limit counterparty risk in the event reinsurance companies would not be able to meet claim obligations. However, these 75% and 25% ceding limits did not reflect industry innovations (multi-layered arrangements and sophisticated financial instruments, such as securitization), lacked efficiency and flexibility, and no longer fulfilled their prudential purpose.

The Regulations are expected to:

  • Allow the Office of the Superintendent of Financial Institutions (“OSFI”) to better address insurers’ risks through the issuance of principles-based guidance and a risk based supervisory framework, in particular Guideline B-3 Sound Reinsurance Practices and Procedures, December 2010;
  • Provide clarity to the industry on OSFI expectations pertaining to reinsurance arrangements, which will produce more effective and efficient supervisory efforts;
  • Provide the industry with greater flexibility to structure operations to be more aligned with global business practices and will facilitate federally regulated companies to be more competitive globally;
  • Alleviate the administrative burden for insurance companies; and
  • Permit simplified reinsurance transactions and clearer contractual agreements for the industry, which will translate into greater transparency in reinsurance transactions.

OSFI has indicated that after the repeal of the Regulations, reinsurance strategies, programs, processes and contracts will be subject to significantly greater scrutiny by OSFI’s supervision arm, which may take enforcement actions if an insurance company does not act in the best interest of policyholders.

We will be pleased to assist you in adapting to these changes and ensuring your compliance with the new OSFI reinsurance guidance.