OSFI Releases Revised Instructions for Reinsurance with a Related Party

On December 31, 2013, the Office of the Superintendent of Financial Institutions (OSFI) released its revised Transaction Instruction DA No. 21 - Reinsurance with a Related Party, which sets out the information that a federally regulated insurer (FRI) would need to provide in an application for approval under Sections 523 and 597 of the Insurance Companies Act (ICA).

As noted in our November 13, 2013 bulletin, Sections 523 and 597 of the ICA require that prior approval of the Superintendent is needed where an FRI intends to cause itself to be reinsured by a related party that is not also an FRI (Related Reinsurer). Such approvals are currently granted in respect of each reinsurance arrangement. However, under the revised approach, approvals will be granted in respect of the applicant’s intention to cause itself to be reinsured (through one or more reinsurance arrangements on an ongoing basis) by a specific Related Reinsurer rather than according to each particular reinsurance arrangement.

The information requirements set out in the revised Transaction Instruction DA No. 21 are divided into three sections: (i) information relating to the applicant’s Reinsurance Risk Management Policy (RRMP); (ii) information relating to the proposed Related Reinsurer; and (iii) information relating to the proposed reinsurance arrangement.

With respect to the RRMP, an applicant will be expected to provide confirmation that its board of directors or chief agent has reviewed and approved the RRMP in accordance with OSFI’s Guideline B-3: Sound Reinsurance Practices and Procedures, in addition to details regarding the due diligence carried out by the applicant in respect of the Related Reinsurer.

An applicant will also be expected to provide, among other things: the name of the Related Reinsurer; an analysis of why the Related Reinsurer is a related party of the applicant (including an organizational chart); a summary of the financial services and other key activities carried on by the Related Reinsurer; a copy of the most recent annual report of the Related Reinsurer and a report on the Related Reinsurer issued by a recognized credit agency; annual regulatory filings and financial statements of the Related Reinsurer for each of the most recent three years; confirmation that the Related Reinsurer meets the minimum capital requirements in its home jurisdiction; and a description of any material direct insurance, reinsurance, retrocession or other business arrangements between the Related Reinsurer and any entities or persons that are affiliated with, or are related parties of, the Related Reinsurer.

Finally, with respect to the proposed reinsurance arrangement, an applicant will now be expected to provide, among other things: a description of the applicant’s objectives in seeking to enter into the proposed reinsurance arrangement with the Related Reinsurer; draft copies of each reinsurance contract in which the applicant and Related Reinsurer intend to enter; a description in table format of the applicant’s entire reinsurance program; a confirmation as to whether the applicant intends to claim capital credit or asset credits in respect of the reinsurance arrangement; and confirmation from a senior officer or chief agent of the applicant that all reinsurance contracts between the applicant and the Related Reinsurer will: (i) conform with Guideline B-3 and the applicant’s RRMP; (ii) be entered into, renewed, modified or, where applicable, commuted (or otherwise terminated), on terms and conditions at least as favourable to the applicant as market terms and conditions; (iii) effect a risk transfer; and (iv) not result in the Related Reinsurer insuring a risk in Canada.

It is important to note that the applicant will be required to provide OSFI with specific information, on an annual basis, about the applicant’s reinsurance arrangement with the Related Reinsurer if the approval is granted. We would encourage potential applicants to review OSFI’s revised Transaction Instruction DA No. 21 in full before submitting an application to the Superintendent. It can be found here.

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