OVERVIEW OF CANADIAN REINSURANCE REGULATION

Transcription

1 OVERVIEW OF CANADIAN REINSURANCE REGULATION Laurie LaPalme, Partner, Corporate and Regulatory Insurance Group, Cassels Brock & Blackwell LLP FEBRUARY 27, 2015

2 Reinsurance Regulations in Canada slide 2

3 Reinsurance in Canada Overview: What s Going on Up North? Soft Market and Over Capacity CANADIAN REINSURANCE REFORMS: Legislative Change Guideline B-3: Sound Reinsurance Practices and Procedures Guidance on Reinsurance Security Agreement ORSA (Own Risk Solvency Assessment) Reinsurance Treaties Manuscript Wording Changes Adoption of Reinsurance Security Agreements for Unregistered Reinsurers = COLLATERAL

4 Canadian Reinsurance Market Heavily Regulated OSFI Requirements Relatively Small Market Relatively Few Players (Munich Re, Hannover Re, Scor, Swiss Re are the major players) RESULTS IN: Over -Abundance of Licensed Capacity Perpetual Soft Market Shrinking Market

5 Canadian Reinsurance Regulations Three significant changes: 1. Elimination of 25% unregistered reinsurance limit and 75% fronting limit for P&C insurers effective June 30, New guideline (Guideline B-3 December 2010) encouraging sound reinsurance practices and procedures 3. Adoption of Reinsurance Security Agreements for Unregistered Reinsurance

6 Reinsurance Legislative Change Old rule: P&C insurer cannot cede more than 25% of reinsurance with an unregistered reinsurer, if Cedant wants to take credit Old rule: P&C Insurer cannot cede more than 75% of GWP REPEALED as of June 30, 2011

7 Implications of Repeal of 25%/75% Rule Our observation is that the elimination of the 25% limit has resulted in a continued increase in the use of unregistered reinsurance (especially with internal retrocession arrangements). BUT OSFI will use its discretion to address situations deemed prudentially unsound. The elimination of the 25% limit also provides more flexibility for unregistered reinsurance to be placed with related parties in the same group of companies BUT OSFI REQUIRES collateral in order for a Canadian cedant to be able to take credit for the unregistered reinsurance. Approvals required for related unregistered reinsurers (not the treaty)

8 Implications of Legislative Change With the elimination of the 75% limit on registered reinsurance, insurers can now: More opportunity for fronting arrangements however, it is likely that fronting will continue to be expensive However OSFI has indicated that all insurers must retain some reasonable amount of risk (10% to 25%) and that fronting for all of an insurer s business would not be permitted

9 Reinsurance Reforms: Guideline B-3

10 Reinsurance Guidance : OSFI Guideline B-3 OSFI expectations for risk management regarding reinsurance: 1. Applies to all Canadian insurance companies and foreign insurers 2. Board/Chief Agent must approve a comprehensive Reinsurance Risk Management Plan ("RRMP") 3. A cedant must perform a sufficient level of Due Diligence on its reinsurance counterparties on an on-going basis 4. Written Reinsurance Contracts -- must provide clarity and certainty on coverage that is provided

11 Guideline B-3: Administration of RRMP Annual Attestation Reinsurance Declaration Made by Senior Officer to Board/Chief Agent Declaration confirms that the RRMP meet the standards set out in Guideline B-3 The reinsurance arrangements convey a true transfer of risk, are properly accounted for in appropriate manner

12 OSFI s Reinsurance Mandate Permits greater use of both registered and unregistered reinsurance will be permitted in Canada, provided it is done: With a greater emphasis on the quality and collectability of the reinsurance involved, and With more transparency in structure With more clarity in contract language Again, must be a risk taker in Canada. Cannot cede all liabilities on all lines

13 Guideline B-3 Consequences Consequences for failing to meet Guideline B-3 principles and expectations: OSFI may not grant a capital/asset credit for the reinsurance OSFI may adjust the insurer's capital/asset requirements or target solvency ratios

14 Guideline B-3 BEST RESULT was Increased Clarity in Reinsurance Contracts Prior to the effective date of reinsurance coverage, insurers must have a process in place that ensures there is a contract for each reinsurance arrangement that is: Clear and provide certainty Comprehensive Written Binding OSFI wants contract certainty, in particular with insolvency language

15 Guideline B-3 Reinsurance Contracts Reinsurance Contract must also provide: Canadian risks must be governed by Canadian law Any disputes resolved to the non-exclusive jurisdiction of a Canadian Court, Service of Notice in Canada OR In the reasonable opinion of the cedant, a jurisdiction of equivalent or greater reliability and one that has a natural connection to the reinsurance transaction

16 Guideline B-3 Reinsurance Contracts Reinsurance Treaty must now contemplate Reinsurance Security Agreement if intend to enter into such an arrangement Events of Default as to when Enforcement under the Reinsurance Security Agreement should be expressly delineated Indemnification under improper actions or breach of Reinsurance Security Agreement

17 Reinsurance Contract: Insolvency Clause

18 Guideline B-3 Reinsurance Contracts Insolvency Clause Insolvency clauses which provide that the reinsurer is required to continue to make full payments to an insolvent cedant without any reduction Payments must be made to the receiver/ the branch in Canada in the event of an insolvency so that the Canadian cedants see the insurance recoverables

19 Guideline B-3: Reinsurance Contract Cut Through Clauses and Set Off Provisions Proper Use of Set Off and Cut Through Clauses Cut Through Clauses are generally not enforceable in Canada as they contravene the scheme for distribution of assets of an insolvent insurer pursuant to the Winding Up and Restructuring Act (Canada) Set off Provisions are acceptable. Better that the set off is provided between the same companies (parties to the contract) and do not involve other companies that are related parties. Moreover, set off should only be in respect of the Reinsurance Treaty (not other agreements between the parties)

20 Guideline B3: Introduction of Reinsurance Security Agreements Credit for Unregistered Reinsurance -- 3 Alternatives 1. Reinsurance Security Agreement Complying with Guidance on Reinsurance Security Agreements 2. Funds Withheld Arrangements 3. Letters of Credit (up to 30%)

21 Reinsurance Security Agreements OSFI requires Reinsurance Security Agreements Must create a valid and enforceable security interest in the assets of the unregistered reinsurer that has priority over any other security interest in such collateral The collateral must be held in Canada with a custodial agent Assets owned by Reinsurer until Default/Enforcement

22 Reinsurance Security Agreements No OSFI Standard Form of Reinsurance Security Agreement ~ however both CIBC Mellon and RBC Investor Services have a widely used standard form RSA for their clients. OSFI is NOT a party, but a Reinsurance Security Agreement must be filed with OSFI within 15 days of the ceding company obtaining the required legal opinion that a valid security interest has been created in the collateral

23 Reinsurance Security Agreements Collateral Agent Report filed with OSFI monthly (15th day from a Canadian financial institution that is NOT affiliated to the unregistered reinsurer (providing market value of individual assets) Requirement of Legal Opinion from cedant from legal counsel (which generally requires an opinion for foreign reinsurers local counsel as well)

24 Implications to Canadian Insurers and Unregistered Reinsurers Added time and cost of obtaining legal opinions and foreign legal opinions New legal opinions required if Collateral changes or reinsurance agreements change (most companies viewing this as an annual exercise) Issues with jurisdiction of the foreign head office re enforcement of a charge or security interest against the assets of a reinsurer that it regulates Confirm Collateral is not subject to other encumbrances in each and every jurisdiction it does business (other than Canada) *** FIRST Priority Interest

25 Regulatory Crystal Ball Gazing OSFI Is Really Not the Wicked Witch of the West

26 International community long way from harmonizing Until Then Canada is Status Quo 1. OSFI loves Capital High capital requirements are not going anywhere ~ 2008 proved to the international community that OSFI's high capital requirements worked 2. Continued increase in competition with new markets entering Canada, despite limited growth opportunities. Consolidation of the market place through mergers and acquisitions will also likely continue

27 Canada has one of the most robust insurance regimes OSFI not willing to give up its protections 3. Canada not seeking Equivalency under Solvency II taking more of a wait and see approach 4. More involvement at the IAIS very active in the international community and setting policy 5. ORSA introduced for 2014 All federally regulated insurers and reinsurers had to submit ORSA Report and Key Metrics Report December 31, Mutual Recognition premature for Canada may move towards a risk based collateral system - eventually 7. Solvency II and Basel 3 may have long term implications for Canadian banks ~ may result in new rules that OSFI will then apply to insurers

28 Any questions, please contact: Laurie LaPalme, Partner Cassels Brock