The Global Federation of Insurance Associations (GFIA) has issued its response to the draft revised guideline B-2 proposed by the Office of the Superintendent of Financial Institutions (OSFI), noting that there are still some issues with the guideline with respect to how foreign reinsurers can transfer risk outside of Canada.
In November 2020, OSFI released a draft revision of its Guideline B-2, which addresses single large insurance exposures of P&C federally regulated insurers (FRI). The revisions tackle issues raised with OSFI’s previous 2018 discussion paper on its reinsurance framework, which proposed increases to the capital base requirements for insurance and reinsurance firms operating in Canada.
GFIA had criticized this 2018 framework proposal, saying that should the proposal ever be written into law, it would significantly raise the cost of insurance in Canada, and potentially reduce overall insurance capacity.
OSFI’s 2020 draft revised guideline proposes an amended rule, which instead allows a P&C FRI to be able to cover the maximum loss related to a single insurance exposure on any policy it issues – assuming the default of its largest unregistered reinsurer on that exposure. In other words, the amended rule is expressed as a percentage of total capital available, or net assets available for foreign re/insurers.
Now, months after the draft revised guideline’s release, GFIA has issued its own response to the proposal.
In an open letter to OSFI director of prudential policy and strategic policy liaison Vlasios Melessanakis, GFIA explained that it supports the modification of the original proposal to one that is largely “principles-based and focused on supervision.” But the group still sees several issues with the guidelines, especially when it comes to the treatment of unregistered reinsurance.
GFIA said in its letter that it remains concerned about provisions that “could undermine the fundamental principle of global risk diversification that is the central premise of the global insurance industry.”
“Overall, GFIA would encourage OSFI to recognize that existence of a rating from a major rating entity is itself an indication that the reinsurer’s likelihood of default is low irrespective of the particular credit rating or financial strength rating,” the group advised in its letter.
GFIA also urged OSFI to “continue to deepen its collaboration with regulators and supervisors in reinsurers’ home markets, and to take into account the supervision that is being conducted in home markets.”