Actuarial Notes

Report of the CIA Task Force on the Appropriate Treatment of Reinsurance

By Canadian Institute of Actuaries · 2007 · 207081

Study guide: Exam 6C

A CIA task force report giving guidance on reinsurance, and on assessing risk transfer, to the actuarial and insurance community in Canada. OSFI had asked the CIA to look into the treatment of reinsurance amid scrutiny of transactions transferring a reduced degree of risk. Issued by the Task Force on the Appropriate Treatment of Reinsurance in October 2007 (document 207081) and circulated for comment, it also examines finite and financial reinsurance, side agreements, mirroring, bifurcation and reinsurance counterparty risk; as a task force report it is not binding.

On the syllabus

  • Exam 6C — objectives C1, C3 on the exam page; the Fall 2026 content outline does not list this reading.

Introduction

  • The report is intended to supplement the CIA Standards of Practice, most importantly on the concept of risk transfer, on which they are silent; the task force's mandate covered finite reinsurance, the degree of risk transfer, side agreements, stop loss arrangements and reinsurance counterparty risk.

Definitions

  • The definitions are based on IFRS 4; reinsurance risk is risk, other than financial risk, transferred from a cedant to a reinsurer.

Background

  • Overview of Reinsurance Concepts and Terminology
  • Finite Reinsurance
    • "Finite" and "financial" reinsurance are ambiguous terms; the report does not use them, and instead presents the types of limitation that can exist in reinsurance contracts.
  • Reinsurance and the Actuary
    • The task force holds it strongly implied by the SOP that the valuation considers all cash flows arising from the reinsurance contract, all modifications and side agreements, and the credit rating of the reinsurer.
  • Current Reinsurance Accounting Practice
    • Reinsurance Accounting and Deposit Accounting
    • Relevant Accounting Standards
    • Canadian GAAP
    • Canadian Regulatory Requirements
      • For P&C insurers, OSFI Guideline D-7 effectively imports US GAAP (FAS 113) for assessing reinsurance risk transfer.
    • United States GAAP (US GAAP)
      • "At least a 10% chance of at least a 10% loss" is a commonly expressed rule of thumb, not part of any authoritative guidance.
    • International Financial Reporting Standards (IFRS)

The Concept of Risk Transfer

  • Key Principles of Risk Transfer
    • Four principles: several approaches can assess the existence of risk transfer; professional judgment is required; the entire agreement, including all written and verbal agreements, must be considered; and existence is assessed at inception and whenever a change significantly alters the contract's expected future cash flows.
    • The Appointed Actuary must assess risk transfer for each reinsurance contract, and consider a qualified opinion if not reaching the conclusion presented in the financial statements.
  • Assessing the "Existence" of Risk Transfer
    • The approaches fall into qualitative assessment, including "reasonably self-evident" risk transfer for arm's-length contracts with no potentially limiting features, and quantitative testing.
  • Assessing the "Extent" of Risk Transfer
    • Regulatory capital requirements (MCCSR, and the MCT for P&C insurers) assume risk transfer is absolute and do not reflect the possible limitations on it.
  • Limitations of Risk Transfer
    • The presence of a potentially limiting feature does not mean risk has not been transferred, but calls for further work; the features are listed under terms set in advance, such as profit sharing, adjustable commissions and commutation clauses, and experience-based renewals.

Other Issues

  • Side Agreements
    • Side agreements can obscure or misrepresent a contract and may even negate any true transfer of risk; OSFI and the AMF strongly discourage them.
  • Mirroring and Communication
    • The prevailing opinion in the international actuarial community is that mirror reserving should not be required; in a principles-based environment the safeguards are data integrity and communication between cedant and reinsurer actuaries.
  • Bifurcation
    • Reinsurance contracts are not intended to be bifurcated; they are only valid contracts in their entirety.
  • Reinsurance Counterparty Risk
    • Factors for a credit provision include the reinsurer's ratings, history of disputes, run-off status, expertise, diversification, retrocession and capital ratio; for P&C, the SOP then required a margin of 0–15% of best estimate ceded claim and premium liabilities (reinsurance credit risk).

Appendix

Recommendations and Opinions of the Task Force

  • CIA Standards of Practice (SOP)
    • The SOP are adequate when properly applied; the task force recommends stating explicitly that the entire contract, including reinsurance contracts and side agreements, be considered, and removing Life–P&C differences in margins for counterparty risk.
  • Principle versus a Rules-Based Approach
    • A rules-based approach to assessing the existence of risk transfer is not advisable: it cannot be comprehensive and would tempt practitioners to "manage to the test".
  • Regulatory Capital Formulae
    • Factor-based formulae may not recognize that risk is not always completely and permanently transferred; that assessment should be left to the Appointed Actuary's judgement.
  • Mirroring of Liability Amounts
    • Mirroring of liability amounts by the cedant and the reinsurer is not appropriate for accounting purposes.
  • Bifurcation of Reinsurance Contracts
    • Requiring bifurcation of reinsurance contracts into insurance and financial components is not appropriate for accounting purposes.

Related readings

  • CIA IFRS 1 — the June 2025 educational note, whose preamble says it adapts this 2007 report as its appendix, Principles of Risk Transfer in Reinsurance

Sources