Actuarial Notes

Property and Casualty Large Insurance Exposures and Investment Concentration

By Office of the Superintendent of Financial Institutions · 2025 · B-2

Study guide: Exam 6C

OSFI Guideline B-2 sets out expectations for federally regulated property and casualty insurers on large insurance exposures and investment concentration. Large insurance exposures are the losses an insurer could suffer from a single large insurance exposure and from the sudden failure of an individual unregistered insurance counterparty. The guideline applies to insurance companies on an individual and consolidated basis and to individual foreign branches, and complements OSFI's Supervisory Framework and Assessment Criteria. This version is dated January 1, 2025.

On the syllabus

  • Exam 6C — objective C5; the whole guideline.

I Purpose and Scope of the Guideline

  • Terms capitalized in the guideline are defined in Annex 1; OSFI's Corporate Governance Guideline sets its expectations of Boards for operational, business, risk and crisis management policies.

II Large Insurance Exposures

  • Gross Underwriting Limit Policy
    • P&C insurers should have a comprehensive Gross Underwriting Limit Policy (GUWP), consistent with their Risk Appetite Framework, that defines a Single Insurance Exposure by class of insurance, sets limits by class on the gross insurance risk accepted for a maximum loss on a Single Insurance Exposure, and is reviewed by Senior Management at least annually.
    • The maximum loss is measured with relevant, reasonable and supportable information, without regard to the probability of the loss event occurring, and using forward-looking approaches rather than past losses alone.
    • A Single Insurance Exposure aggregates in-force exposures at a single location (property), to one buyer or group of connected buyers (credit), to one contractor or group of connected contractors (surety), and related to the legal title for a single location (title).
    • Insurers set their own criteria for measuring the maximum loss, provide OSFI on request with information on their large Single Insurance Exposures, and may be advised by OSFI to use specific criteria.
  • Insurance Exposure Limit
    • Net Retention plus the Largest Net Counterparty Unregistered Reinsurance Exposure, from a maximum loss on a Single Insurance Exposure, should at no time exceed 100% of Total Capital Available where any entity in the insurer's control chain is a widely held company and/or a regulated financial institution, 25% of Total Capital Available otherwise, and 100% of Net Assets Available for a foreign branch.
    • The limit applies to direct business, and to business assumed from an Affiliated Company that is a P&C insurer and the direct writer of that business.
    • Unregistered reinsurance exposure to a counterparty is measured before and after eligible counterparty risk mitigation (excess collateral, letters of credit, other techniques OSFI accepts); only the net exposures are subject to the limit.

III Investment Concentration

  • Insurers should have policies on investment concentration, with internal limits, consistent with their Risk Appetite Framework.
  • The aggregate market value of Investments in any one Entity or group of Affiliated Companies should not exceed 5% of the company's Assets, or 5% of Assets in Canada for a foreign branch; investments and commitments not shown on the balance sheet should also be considered.

IV Guideline Administration

  • For non-compliance OSFI may take, or require the insurer to take, corrective measures, including heightened supervisory activity and adjusting its capital requirements.

Annex 1 Definitions

  • Single Insurance Exposure
  • Affiliated Companies
  • Net Retention
    • The insurance exposure an insurer retains net for its own account and does not pass on to another insurer or reinsurer, including any reinstatement premiums.
  • Largest Net Counterparty Unregistered Reinsurance Exposure
    • The largest amount of ceded unregistered reinsurance on an insurance exposure provided by a (re)insurance group, net of eligible counterparty risk mitigation.
  • Total Capital Available
    • For a company, the consolidated total available capital as defined for the Minimum Capital Test (MCT) or the Mortgage Insurer Capital Adequacy Test (MICAT).
  • Net Assets Available
    • For a foreign branch, net assets available as defined for the Branch Adequacy of Assets Test (BAAT).
  • Investments
    • Excludes loans to, and securities issued or guaranteed by, the Government of Canada, a Canadian province or an OECD member jurisdiction.
  • Entity
  • Assets
  • Assets in Canada

Related readings

  • OSFI Corporate Governance — the guideline §I refers to for Boards' policies, and footnote 4 for the requirements of the Risk Appetite Framework
  • OSFI MCT — Guideline A, whose definition of total available capital Annex 1 adopts and whose requirements counterparty risk mitigation must meet (footnote 7)
  • OSFI Reinsurance — Guideline B-3, whose requirements counterparty risk mitigation (footnote 7) and credit for ceded reinsurance (footnote 8) must meet

Sources