Registered Reinsurance

Study guide: Exam 6C

Registered Reinsurance is reinsurance ceded to a reinsurer that is licensed by OSFI to reinsure risks in Canada. The distinction matters because the MCT gives full capital credit for liabilities ceded to a registered reinsurer, whereas unregistered cessions require collateral before credit is allowed.

• Why registration exists. OSFI can examine, set capital requirements for, and if necessary intervene in a registered reinsurer. It has no such power over a reinsurer operating entirely outside Canada, so the capital framework substitutes collateral for supervision.
• The capital consequence. Ceded Insurance Contract Liabilities reduce the cedant's Capital Required and its Base Solvency Buffer only where the reinsurer is registered — or where an unregistered cession is secured by acceptable collateral. Without one or the other, the cedant gets the accounting recoverable but no capital relief.
• Not a substitute for counterparty analysis. Registration means OSFI supervises the reinsurer; it does not mean the reinsurer is strong. The cedant remains liable to its policyholders regardless of the reinsurer's condition, so rating, concentration by reinsurer, and dispute history all still matter — and under IFRS 17 the non-performance risk allowance on the reinsurance asset must reflect them.
• OSFI's reinsurance guidance (the B-3 sound reinsurance practices expectations) requires a documented reinsurance risk management policy, due diligence on counterparties, limits on concentration, and confirmation that ceded risks are within the insurer's stated risk appetite.
• The cedant is never released. Reinsurance is a contract between insurer and reinsurer; the policyholder has no claim against the reinsurer. A reinsurer's insolvency converts a recoverable asset into a loss, which is why concentration limits exist.

Capital Credit and the Registration Status An insurer cedes \$120 million of claim liabilities: \$80 million to registered reinsurers, \$25 million to an unregistered reinsurer with \$25 million of acceptable collateral, and \$15 million to an unregistered reinsurer with no collateral. Its gross Base Solvency Buffer before reinsurance credit is \$210 million, and ceded liabilities reduce the buffer by 18\% of the amount credited.

Compute the buffer.

Answer Credited cessions:

\begin{align*}
&= \$80\text{M} \text{ (registered)} \\
&\quad + \$25\text{M} \text{ (collateralised)} \\
&\quad + \$0 \text{ (uncollateralised, unregistered)} \\
&= \$105\text{M}
\end{align*}

\begin{align*}
\text{Buffer} &= \$210\text{M} - 0.18(\$105\text{M}) \\
&= \$210\text{M} - \$18.9\text{M} \\
&= \$191.1\text{M}
\end{align*}

The \$15 million gets nothing. The insurer pays reinsurance premium, records a \$15 million recoverable in its financial statements, and receives no capital relief whatsoever — so from a capital standpoint it has bought nothing.

What to do about it. Three options: obtain collateral (a letter of credit or funds withheld) from that reinsurer; move the cession to a registered reinsurer at renewal; or accept the capital cost knowingly, which is a legitimate choice only if the board has been told.

The lesson for reinsurance purchasing: the capital effect of a treaty is not determined by its terms alone. Where it is placed, and whether that placement is secured, can be worth as much as the coverage itself — and it is a question the Appointed Actuary should be asked before the treaty is bound, not after.