Actuarial Notes

Sound Reinsurance Practices and Procedures

By Office of the Superintendent of Financial Institutions · 2025 · Guideline B-3

Study guide: Exam 6C

OSFI's guideline setting out its expectations for effective reinsurance practices and procedures at federally regulated insurers (FRIs). Guideline B-3, dated January 1, 2025, in the Sound Business and Financial Practices category, applies to every FRI that is party to reinsurance cessions, retrocessions and, where applicable, assumption reinsurance transactions. It opens by describing reinsurance as an important risk management tool that also exposes an insurer to operational, legal, counterparty and liquidity risks, and it sets out four principles against which OSFI assesses an FRI's reinsurance risk management framework.

On the syllabus

  • Exam 6C — objective C5; the guideline of January 2025, with no sections excluded.

I Key Principles

  • 1 A FRI should have a sound and comprehensive reinsurance risk management policy that is overseen by senior management.
    • Key Elements of the Reinsurance Risk Management Policy (RRMP)
      • The RRMP should be an integral component of the enterprise-wide risk management framework, reflect the scale, nature and complexity of the business, consider the risk appetite, and document the purpose and objectives for seeking reinsurance, ceding limits, counterparty risk and concentration limits.
      • Managing risks through reinsurance
        • Under the LICAT and the MCT, a FRI may reduce its required capital for insurance risk ceded if certain conditions are met; a FRI using reinsurance against large and catastrophic losses must regularly assess its adequacy and effectiveness, which may involve stress testing.
        • OSFI will generally not recognize or grant credit for a foreign FRI's arrangements when risks insured in Canada are ceded back to its home office through affiliated reinsurers.
      • Managing risks arising from the use of reinsurance
        • Ceding limits should be set for the overall book, and may be set by line of business; a FRI should not, in the normal course of its business, cede 100 per cent, or substantially all, of its insurance risks.
        • Counterparty risk should be assessed under both going-concern and gone-concern scenarios of the reinsurers, consistently across affiliates and non-affiliates, with concentration limits to individual counterparties and to groups of affiliated counterparties.
      • Other information to be included in the RRMP
    • Senior Management Oversight of the RRMP
      • Senior management oversees the RRMP's development, implementation and operationalization and should review it at least annually.
  • 2 A FRI should perform due diligence on its reinsurance counterparties on an ongoing basis sufficient to ensure that the FRI is aware of its counterparty risk and is able to assess and manage such risk.
    • The evaluation should not rely solely on third parties such as rating agency assessments or broker analysis, and considers each counterparty's claims payment record, expected future claims obligations, balance sheet strength, funding sources, management and retrocession arrangements; see Reinsurance Credit Risk.
    • OSFI expects a higher level of due diligence for an unregistered reinsurer, or a cedant not regulated by OSFI, including the robustness of its home jurisdiction's regulatory, legal and insolvency frameworks.
  • 3 The terms and conditions of the reinsurance contract should provide clarity and certainty on reinsurance coverage.
    • A comprehensive, written and binding contract should be executed before the effective date of coverage; where it is not, contractually binding summary documents should be obtained before that date and the final contract signed within a relatively short timeframe (e.g., within 120 days of execution).
  • 4 The terms and conditions of a reinsurance contract should not adversely affect the ceding FRI.
    • Contracts should include an insolvency clause under which the reinsurer continues to make full payments to an insolvent cedant without reduction resulting solely from the cedant's insolvency.
    • Off-set and cut-through clauses and funds withheld arrangements should not frustrate the scheme of priorities under the Winding-Up and Restructuring Act, and contracts should be subject to the laws and courts of Canada or another equivalent jurisdiction.

II Guideline Administration

  • A FRI should maintain, and provide to OSFI on request, its RRMP, a complete description of its reinsurance arrangements, the due diligence performed on counterparties and the stress testing performed on the reinsurance program.
  • Regular reporting to senior management should include assurances that the arrangements effect a risk transfer and are appropriately accounted for.
  • For a program or contract that does not adhere to the guideline, OSFI may not grant a capital credit, or may adjust the FRI's capital requirements or target solvency ratios.

III Other OSFI Guidance

  • The guideline is to be read with the Guidance for Reinsurance Security Agreements; Guideline B-10 on outsourcing; Guideline A (LICAT), the Minimum Capital Test and the Branch Adequacy of Assets Test; the Corporate Governance guideline; and Guideline E-17 on background checks.
  • Reinsuring with an unregistered related party may require approval under subsection 523(2) or 597(1) of the Insurance Companies Act.

Footnotes

  • An "unregistered reinsurer" is generally one that is not reinsuring in Canada risks in accordance with OSFI Advisory 2007-01-R1 and so is not regulated and supervised by OSFI.
  • Under funds withheld arrangements, assets (generally the premium) that would normally be paid to a reinsurer are withheld and retained by the ceding company as security enabling a capital credit for unregistered reinsurance.

Related readings

  • OSFI MCT — the Minimum Capital Test, under which the guideline says a FRI may reduce its required capital for insurance risk ceded
  • OSFI Corporate Governance — the Corporate Governance Guideline, to which the guideline refers for Boards' oversight and policies

Sources