Where the industry stands with OSFI’s redrafted reinsurance rules

When the Office of the Superintendent of Financial Institutions (OSFI) released its reinsurance discussion paper in 2018, it created quite a stir in Canada’s property and casualty insurance industry.

The association representing Canadian P&C insurers, the Insurance Bureau of Canada (IBC), said at the time that insurers would need to post an additional $21-30 billion in capital to insure risks if the rules went through. On average, this would require Canadian carriers to more than triple their capital base, IBC president and CEO Don Forgeron said in September 2019 at the National Insurance Conference of Canada.

But that was then and this is now. “To OSFI’s credit, they took all of our meetings and they heard all of our discussions,” Jill Lankin, senior vice president and general counsel with Zurich Canada said during an industry event Tuesday. “And so, we’ve come a long way.”

In November 2020, a new draft guideline was released, “and we were pleased to see that it was significantly different than the original proposals,” Lankin said during a panel on emerging regulatory issues at IBC’s 21^st annual Regulatory Affairs Symposium.

For example, the original paper had a stress scenario where insurers were “required to capitalize for three of our largest policies incurring total losses all at the same time, and getting zero recoverability from any unregistered reinsurance,” Lankin said.

“We all know that created quite a stir in the industry,” she said. “And as a result, we formed coalitions, we met individually with OSFI to talk about our concerns, most notably the capital impact being [$21-30 billion] projected on the industry.”

By contrast, the new draft focuses on a capitalization requirement for a maximum loss on insurers’ single largest insurance exposure, Lankin reported. “And there’s an expectation that each insurer will develop and establish their own criteria and approach for determining and measuring maximum loss. So obviously, we’re very happy with the shift.”

In terms of industry feedback to OSFI, questions revolved around the following:

• How do you benchmark single insurance exposure?
• Should all unregistered reinsurers be treated the same?
• Why can’t we have capital credit for home office capital?
• Who determines if the home office regulator is appropriate (one of the concepts in the paper)?
• How long is the transition period going to be?

Lankin said the newly updated guidelines will likely come in February 2022.

The industry will also be looking closely at the final version of OSFI’s Revised Guideline B-2, Property and Casualty Large Insurance Exposures and Investment Concentration and what it says around implementation, as there was some allowance for a phase-in period.