The regulatory hammer is poised to come down hard on Canadian insurers. In June 2018, the Office of the Superintendent of Financial Institutions (OSFI) released its Reinsurance Framework Discussion Paper, in which it proposed to substantially increase the capital base requirements for insurance and reinsurance firms operating in Canada.
Some estimates project that OSFI’s proposals would require firms operating in Canada to more than triple the amount of capital they have access to. Should such a proposition become law, this could significantly increase the cost of insurance in Canada and potentially reduce overall insurance capacity, according to an open letter produced by the Global Federation of Insurance Associations (GFIA) which was shared with Insurance Business.
The GFIA states: “The proposal in the June 2018 discussion paper relating to the policy limit rule affecting large global commercial writers, if implemented, would increase the cost of insurance in Canada and reduce overall insurance capacity while at the same time imposing burdensome measures designed to discourage the participation of foreign reinsurers in the Canadian market. While GFIA recognizes that a supervisor has the duty to ensure that insurers account for counterparty risk, the approach detailed in the discussion paper is drastic and will have enormous unintended consequences.”
OSFI’s philosophy behind the policy limit rule is intended to limit risks associated with large exposures and concentration, particularly in the property and casualty (P&C) insurance sector. Essentially, the government agency is trying to avoid too much concentration of reinsurance risk in one place or in one reinsurer. As Neville Henderson, assistant superintendent, Insurance Supervision Sector, said when the proposal was first published: “In light of the increasing reliance on reinsurance and the emergence of new and evolving business models related to the use of reinsurance, OSFI is working to ensure its reinsurance framework remains appropriate.”
Rather than reducing reinsurance risk concentration, the GFIA believes the proposed changes have “the potential to result in a heavier and potentially detrimental concentration of reinsurance risk within Canada.” In fact, the insurance advocacy group said Canadian registered reinsurers could be left in the lurch as a result of these changes, having to pick up more slack if international reinsurance firms are restricted from the market.
“OSFI wants to substantially increase the amount of capital required to operate in Canada, especially for companies with global operations that cover large commercial risks in Canada,” explained Don Forgeron, president and CEO of the Insurance Bureau of Canada (IBC). “This would make it uneconomical to implement the global risk management model endorsed by the Organisation for Economic Co-operation and Development (OECD) and utilized by reinsurers and global insurers alike. This is a very serious problem.
“It’s important to remember that global commercial insurers operating in Canada have choices to make when it comes to deploying their capital. We want to be in the business of encouraging global companies to invest in Canada – to build and expand their operations here, to help increase the market capacity, and to spread the risk around the world rather than concentrate it here in Canada.”
The GFIA has also made arguments around letting insurance firms in Canada have a choice in terms of how they reinsure and manage their risks, even if that means tapping into a foreign parent’s global treaties to manage risks globally. In its open letter, the GFIA states: “Each insurer is unique and its reinsurance arrangements may encompass many forms of reinsurance (global treaty, quota share, excess of loss, surplus, facultative, or fronting), all of which have a legitimate role. Consistent with OSFI’s desire for a principles-based regime, the decision as to what reinsurance structure works best should be left to the Canadian registered insurer to determine, based on optimal arrangements for its own business operations.”