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                       June 29-30  les 29 et 30 juin
Session/Séance :            Session 18 • OSFI Reinsurance Guidelines—What's New

 Philipe-A. Sarrazin        Managing Director, Legislation and Policy Initiatives, OSFI
 John Dark, F.C.I.A         Actuary, Business Opportunities, Co-operators Life

Moderator :
 Lynn Grenier-Lew, F.C.I.A. Vice President, Development, RGA Life Reinsurance
Session/Séance : Session 18
OSFI’s Reinsurance Guideline

Philipe-A. Sarrazin
Managing Director, Legislation and Policy
Reinsurance Policy Review

• Guideline B-3: Sound Reinsurance
  Practices and Procedures
  –   Overview
  –   A move from Rules to Principles
  –   Regulatory and Supervisory Objectives
  –   Core Principles
  –   Guideline Administration
  –   Implementation

• Reinsurance Security Agreements
  – Overview

Guideline B-3 – Overview

• December 2008 – Consultation paper
• March 2010 – Response paper published
• August 2010 – Draft Guideline B-3: Sound
  Reinsurance Practices and Procedures
  published for public consultation
• December 2010 – Final Guideline B-3:
  Sound Reinsurance Practices and
  Procedures published

Guideline B-3 –
A move from rules principles

            BEFORE                             AFTER

•   Rules-based approach,          •   Principles-based approach
    with prescribed limits that        that requires enhanced
    require little use of              governance by cedants over
     –   75% fronting limit            their reinsurance programs
     –   25% cap on unregistered

•   Inflexible – not kept pace     •   Flexible – adapt to unique
    and easily circumvented            institutional business

•   OSFI’s expectations            •   Clear OSFI expectations
    unclear                            and enhanced supervisory

Guideline B-3 –
Regulatory and supervisory
• Primary objective is to raise the bar for
  institutions and for OSFI
   – Improve reinsurance governance
   – Re-shape industry behaviour and practices
     (e.g., treaty terms and timing of treaty completion)
   – Link reinsurance risk management with enterprise-
     wide risk management planning
   – Promote reliance and risk-based regulation
     buttressed by stronger supervision
   – Enhance protections for policyholder (including
   – Improve regulatory neutrality between sectors
     (property and casualty and life, and registered and
     unregistered reinsurance)
   – Meet or exceed international standards                 6
Guideline B-3 – Core Principles

1. Governance and comprehensive
   Reinsurance Risk Management Policy

2. Due diligence on reinsurance counterparties

3. Contract clarity and certainty

4. Terms and conditions of the reinsurance

             These are not necessarily new concepts
Guideline B-3 – Core Principles

1. Governance and comprehensive
   Reinsurance Risk Management Policy
  –   Board oversees and senior management implements
  –   Reflect the scale, nature, and complexity of the
  –   Specify roles, responsibilities, and accountabilities
  –   FRFI’s objectives for reinsurance
  –   Practices and procedures for managing reinsurance
  –   Assess adequacy and effectiveness of reinsurance

               RRMP to be in place by July 1, 2011
Guideline B-3 – Core Principles

2. Due diligence on reinsurance
   – Effort should reflect the level of exposure to
   – Assess the ability of reinsurers to meet their
   – FRFI’s generally should not solely rely on 3rd
   – Evaluation of counterparties updated regularly
   – A higher level of due diligence on unregistered
     reinsurers, including legal and insolvency

Guideline B-3 – Core Principles

3. Contract clarity and certainty
   – Comprehensive and binding contract executed
     prior to effective date
   – “Summary documents” may be adequate for
     interim period – but must be binding
   – Final executed documents should be timely
     (e.g., within 120 days)
   – Reinsurance contracts should stand on their
     own – providing clarity and legal certainty of

Guideline B-3 – Core Principles
4.   Terms and conditions of the reinsurance contract
     – All contracts should include an appropriate “insolvency
        clause” that requires the reinsurer to continue to make
        full payments to the insolvent cedant without any
        reduction resulting solely from the cedant’s insolvency

     –    Terms and conditions should not frustrate the scheme of
          priorities under the Winding-up and Restructuring Act

     –    Cedants and reinsurers should consider the appropriate
          use of “off-set” and “cut-through” clauses, and the
          structure of “funds withheld” arrangements

Pre-insolvency Claims        Event of         Continue Arrangements
   & Assets Frozen          Insolvency           with Liquidator?
Guideline B-3 – Administration
•   Application
     –   B-3 applies to all FRFI’s – insurers and reinsurers

•   Capital / Asset Requirements
     –   Non-adherence to B-3’s principles could result in a reinsurance
         program that does not provide adequate protections for policyholders
     –   Commensurate with unmitigated risk, OSFI may not grant capital /
         asset credit for an arrangement, or OSFI may adjust a federally
         regulated insurer’s capital / asset requirements or target solvency

•   Reinsurance Declaration
     –   Declaration of B-3 compliance to the Board of Directors (Board) / Chief
     –   Attestation of risk transfer, appropriate documentation, and market
         terms and conditions
     –   Plans to address areas of non-compliance disclosed to the Board /
         Chief Agent and to OSFI

Guideline B-3 – Implementation

• December 2010 – Posted final guideline

• June 30, 2011 – Reinsurance regulations repealed

• July 1, 2011 – Effective date of Guideline B-3

• July 1, 2012 – Full implementation of Guideline B-3

Guidance for Reinsurance Security
Agreements (RSA)

•   Objective
     – set out minimum standards for RSAs and legal opinion and
       expectations on process

•   Ceding companies to
     – negotiate and enter into RSAs in accordance with Guidance
     – obtain and retain legal opinion asserting security interest
     – approve assets pledged or withdrawn
     – have Board approved policies
     – file monthly statements

•   Timing
     – July 1, 2011
     – January 1, 2012

From an Insurer perspective

             The Co-operators
• Canadian owned Multi-line insurer
• Owned by co-operatives and like minded
• Do business only in Canada

           Co-operators Insurance Companies
• 2 Life Insurance Companies
   – Co-operators Life Insurance Company
   – CUMIS Life Insurance Company

• 6 P & C Companies
   –   Co-operators General
   –   L’Union Canadienne
   –   Sovereign General
   –   COSECO
   –   CUMIS General
   –   The Equitable General

• Distribution
   – Career agents, Brokerage and Contact Centre

     Mix of centralized and decentralized
• Corporate Reinsurance Department
  – Manage Reinsurance for all P&C companies
  – Manage Reinsurance for Travel arm of Life
• Life Company managed by Department
  – Individual Life and Health
  – Group Life and Health
  – Corporate Catastrophe

                   The B3 challenges
• For the most part the things in B3 were done in some form
  throughout the whole organization
• Differences between Life & P&C
   – Not always the same way or at the same time
   – No central view and/or reporting
   – Each company had its own standards
• Modest level of Board approvals or reporting currently
   – Education sessions
   – Earthquake Risk Management reporting done annually
• Challenge – boiling down the things which should be in the
  policy to keep it succinct and prevent it becoming dated but
  provide more board information and formalize the process

                  Some gaps
• ERM is evolving at Co-operators
• Risk appetite boundaries for reinsurance not
  formalized at Board level

• RRMP reflects what is already in place, i.e. the
  measures used for operational decisions

• Compliance with value
  – Have to meet B3
  – Want it to work for our organization
• Wanted to develop a Policy for the Group
• Needed to be broad enough to encompass the
  characteristics of our diverse companies
  – both life and P&C

               Not “Once and Done”
• The disciplines of B3 are not “once and done”
• It becomes the way we conduct reinsurance business
  going forward
  –   Follow our policy and risk appetite
  –   Treaty documentation and terms
  –   Reinsurer security and concentration limits
  –   Formalized reporting to Management and Board

  For us not much net new but its more formalized
                    What we built
• Policy (RRMP)
  – contains high level statements, shouldn't be changed very
    often; requires board and management approval.
• Standards
  – contain more detail and outline the standards to be adopted
    by each company;
  – requires management approval at each Company
• Procedures
  – vary by company and implemented as appropriate to each;
    managed operationally.
               The Challenges
need to get each Company’s management team
  – to understand what the RRMP would mean to
  – What effect RRMP would have on their operations;
  – what they would have to do to support it

                    First Steps
• Corporate Reinsurance drafted RRMP
• Went to “client” companies for consultation
• Corporate Management Risk Committee
  – looks at Risk Management issues for our whole
  – Functioned as first “gate” for RRMP approval
  – Supported the policy and liked the fit with newly
    developed Risk Tolerance policy
              Board approvals
• Executive Committee of the Board
• Corporate Governance Committee
• Full Board presentation resulted in adoption by
  The Co-operators Group Board of a policy
  which has also been adopted by each
  Company’s management group through MRC
• Then approved by each Company’s Board

    OSFI expectations - We did it Part 1
By July 1, 2011 :
• “A FRI should have a sound and comprehensive
  reinsurance risk management policy, subject to the
  oversight of the FRI’s Board of Directors and
  implementation by senior management. “
• “OSFI expects that a FRI’s RRMP will form an
  integral component of its overall enterprise-wide risk
  management plan. “

           What did we find difficult?
• Fitting a policy to a diverse series of
  reinsurance transactions
  – P&C
     • Approximately 35 reinsurers
     • Mostly short and medium tail risks
     • Primarily Excess of loss
  – Life
     • 4 reinsurers used
     • Long tail risks for the most part
     • Primarily quota share
                Concentration Limits
• A specific new requirement from OSFI
• Limits how much business we do with any specific
   – Limits already in place for our P&C companies
   – New for our life companies
• Why have it?
   – Deals with ability of Company to withstand an adverse
     event involving a reinsurer
   – What would effect be on our equity if each reinsurer were
     not able to continue or honour obligations

       Two sides to the analysis - Capital
• Acceptable level of equity to put at risk
• Couldn’t find a precedent in other jurisdictions
  or other specific guidance so adopted a limit in
  line with that in B2 for investments .
• 25% of equity exposed to any one entity

             The other side – Risk
• P&C companies with short to medium tail
  exposure adopted 100% of the aggregate
  limits ceded as the risk measure
• For the Life Companies long tail risks
  represent a unique challenge
  – Long tail contracts could be “sold” to another
  – Loss could arise from increase in price and
    perhaps decreased cession limit                  31
             Compromise solution
• Short tail risks Life Company will use 100% of
• Long Tail risks will use a lower limit for liability
  based on stress testing and other analysis

       Interesting sidebar – Stress testing
• In a separate OSFI initiative stress testing of
  balance sheets including reinsurer insolvency
  has raised the profile of reinsurance and the
  companies we rely on
• For the Life Company analysis continues
• Struggle to find a solution in a long tail market

        Measuring Security of Reinsurers
• RICS had done this by establishing
  – tests and measures to apply to raw data
  – review process to meet suitability
• Work with reinsurance intermediary to gather data
• Attend reinsurer meetings, monitor industry reports,
  press releases etc.
• Meet regularly to monitor and approve reinsurers
• Some markets and risks thinly represented by
  reinsurance and need a process where management
  of a company can obtain special approval

      Somewhat inefficient procedure
• Many insurers evaluating and quizzing the
  same reinsurer
• “look through to retrocessionaires” probably
  not practical

                      Next steps
•   Communications – Internal & OSFI
•   Rolling out the Reinsurance Standards
•   Reviewing procedures at each Company
•   Formalizing Reinsurance Risk Appetite at Board level

• All needed within OSFI’s B3 timeframe of
  July 1, 2012

                  RICS role
• Reinsurance and Insurance Counterparty
  Standards committee has traditionally had
  oversight on reinsurer security
• Cross company committee managed by
  Corporate Reinsurance
• RICS will work with each Company and as
  needed its reinsurers/intermediaries to meet
  the B3 requirements on counterparties

         Other activities arising from B-3
• Review contract wordings and obtain treaty amendments
  where needed e.g.:
   – Insolvency
   – Offset/cut through
• Will require negotiations with reinsurers particularly on long tail
  in force treaties
• Establish reporting re RRMP
• Establish Concentration risk reporting for Life business
  through RICS
• Review RICS security analysis against OSFI expectations
• Interlocking rules for reinsurer covering long and short tail

Warning - Unauthorized Graphic



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