Transcript Finite Reinsurance - A Regulator's Perspective

Finite Reinsurance Regulator perspective
August Chow
Senior Director, OSFI
Nov 9, 2005
Agenda
• Financial / finite reinsurance
– International developments
– OSFI supervision
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
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, ……
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
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
IAIS developments
• Some of the recommended supervisory
approaches include
–
–
–
–
Review insurer’s 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
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
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
company’s 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
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
Thank you
www.osfi-bsif.gc.ca