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Securitization of Insurance Liabilities

Securitization of Insurance Liabilities. IP-34 CIA Annual Meeting Vancouver, June 29, 2007 Allan Brender. Canadian Experience. Limited to three applications All three dealt with life insurance only Two of these applications were dropped

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Securitization of Insurance Liabilities

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  1. Securitization of Insurance Liabilities IP-34 CIA Annual Meeting Vancouver, June 29, 2007 Allan Brender

  2. Canadian Experience • Limited to three applications • All three dealt with life insurance only • Two of these applications were dropped • The primary reasons were due to high expense and to tax problems • The third application was not approved by OSFI

  3. Canadian Experience • Purposes for securitization proposals vary • Realize embedded future profits • Reduce the cost and complexity of reinsurance arrangements • Modify ownership structure • Proposals for Special Purpose Reinsurers vary • Arm’s length SPV • Controlled SPV • Income trust

  4. Canadian Experience • Degree of transfer of risk and protection for SPR varies • Stop loss and retrocession arrangements with third party reinsurers • Instruments sold to unit holders may carry a credit guarantee (issued by a bank) • Risk is ultimately carried by trust unit holders

  5. Concerns and Issues • Institutional investors are concerned about OSFI’s Reinsurance Trust Agreement • RTA gives OSFI the right to seize all assets held in the trust in case of business failure • Proposed capital instruments may not qualify as regulatory capital or as Tier 1 capital • Retained control over the insuring entity requires consolidation of financial requirements

  6. Concerns and Issues • Risk may not be fully transferred to trust unit holders • Who is bearing the risk • Regulation is incomplete • No legislative provision for SPRVs (are SPRVs regulated insurers?) • Can an income trust own a federally regulated financial institution?

  7. OSFI’s Current View • Few and varied proposals • Each requires a detailed analysis • In the absence of significant interest and standard approaches to securitization in Canada, the is little incentive to develop regulations and supervisory guidance • There is little literature internationally • Two IAIS guidance papers (2003) • NAIC model law

  8. Principles for Securitization Principle 1: Securitization must not hamper the interests or rights of policyholders Principle 2: The accounting, actuarial and capital treatment should reflect the terms of the transaction, particularly the nature and degree of risk transferred

  9. Principles for Securitization Principle 3: Transactions must not be designed to circumvent capital rules, reinsurance regulations and guidelines Principle 4: Capital instruments created in the transaction must meet the criteria set out in the MCCSR and MCT guidelines to qualify as regulatory capital

  10. Review of Proposals • Proposals must include sufficient information and analysis of all important aspects, including legal, capital, risk etc. • OSFI will review all serious proposals • May be subject to a user fee, depending upon the volume of necessary work • OSFI does not promote insurance securitization but also does not discourage it

  11. Thank you for your attentionwww.osfi-bsif.gc.ca

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