Finite Reinsurance Regulator perspective

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Finite Reinsurance -Regulator perspective

• August Chow
• Senior Director, OSFINov 9, 2005

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Agenda

• Financial / finite reinsurance
• International developments
• OSFI supervision

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Financial / finite reinsurance

• Reinsurance is an effective risk management tool
  when it is properly used to transfer insurance
  risk between counterparties
• A problem arises when there is no significant
  risk transfer between ceding company and the
  reinsurer, and the primary motive of reinsurance
  is to smooth income, enhance earnings or reduce
  capital requirements

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Financial / finite reinsurance

• Insurers (both ceding company and reinsurer) face
  significant financial and reputation risk as
  reinsurance practices come under close scrutiny
  by regulators
• AIG
• General Re
• Others receiving probe from SEC and Spitzer
  included ACE, Swiss Re, Chubb,

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IAIS developments

• In March 2005, IAIS established a task force to
  draft a finite reinsurance paper
• On October 21, 2005, the finite reinsurance paper
  was passed at the IAIS General Meeting
• The paper is not a core principal paper but a
  supervisory guidance paper
• Guidance Paper on Risk Transfer, Disclosure and
  Analysis of Finite Reinsurance

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IAIS developments

• From a supervisory perspective, key issues
  addressed in paper are whether there is
• Adequate risk transfer
• Appropriate accounting, and
• Appropriate disclosure
• Paper suggests that supervisors should focus on
• Characteristics of finite reinsurance
• Evaluation of risk transfer
• Accounting and disclosure

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IAIS developments

• Some of the recommended supervisory approaches
  include
• Review insurers reinsurance strategy
• Understand motives of entering into arrangement
• Determine amount and types of risk transferred
• Have access to all reinsurance documents
  including side letters
• Require insurer to perform analysis of risk
  transfer and economic value of the transaction
• Have power to take corrective measure and apply
  sanction against insurer who mislead supervisor
• Cooperation among supervisors
• www.iaisweb.org

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Other recent developments on finite reinsurance

• Actuarial profession
• Canadian Institute of Actuaries (CIA) formed a
  task force in June 2005 to address risk transfer
  and implication for the reserving calculation
• Casualty Actuarial Society (CAS) produced a paper
  in August 2005 on methods of testing risk
  transfer
• American Academy of Actuaries (AAA) did a survey
  among insurers on the risk transfer issue and
  produced a paper in August 2005

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Other recent development on finite reinsurance

• Regulators
• On October 14, 2005 NAIC approved a new
  reinsurance disclosure requirement (effective Dec
  31 2005)
• Reinsurance transactions affecting at least 3 of
  companys surplus, ceded premium or losses
• CEO and CFO are required to sign an attestation
  that there is no side agreement and that risk
  transfer has occurred
• On October 11, 2005 FSA UK released to the
  industry a new proposed disclosure rules on
  financial reinsurance

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Action taken by OSFI

• In June 2005, OSFI issued a letter to insurance
  companies engaging in reinsurance
• Develop risk management practices on reinsurance
• Review each major reinsurance treaty the issue of
  risk transfer, intent of entering into the
  treaty, side letter etc
• Report findings to Board with copy to OSFI
• OSFI is also conducting a holistic review of
  sample life reinsurance treaties to assess
  consistency of reporting between the ceding
  company and the reinsurer

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• Thank you
• www.osfi-bsif.gc.ca