Finite Reinsurance - Regulator perspective

1. Finite Reinsurance -Regulator perspective August Chow Senior Director, OSFINov 9, 2005

2. Agenda • Financial / finite reinsurance • International developments • OSFI supervision

3. 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

4. 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, ……

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. Thank you www.osfi-bsif.gc.ca