Canadian regulator’s proposals will significantly increase cost of insurance, says GFIA

The Global Federation of Insurance Associations (GFIA) has warned that proposals by the Canadian Superintendent of Financial Institutions (OSFI) to limit the ability of insurers to use reinsurance would require firms operating in Canada to more than triple their current capital base. GFIA said this would significantly increase the cost of insurance in Canada and reduce overall insurance capacity. In a letter to superintendent Jeremy Rudin of OSFI, the GFIA expressed serious concerns about a discussion paper on OFSI’s reinsurance framework. The letter states: “The proposal in the June 2018 discussion paper relating to the policy limit rule affecting large global commercial writers, if implemented, would increase the cost of insurance in Canada and reduce overall insurance capacity, while at the same time imposing burdensome measures designed to discourage the participation of foreign reinsurers in the Canadian market. While [the] GFIA recognises that a supervisor has the duty to ensure that insurers account for counterparty risk, the approach detailed in the discussion paper is drastic and will have enormous unintended consequences.” According to the GFIA, global insurance and reinsurance groups that currently serve Canadian customers are alarmed by the discussion paper, as the envisaged measures do not promote market-based solutions. The association states in the letter that when groups tested the effect of the policy limit rule recently at OSFI’s request, it became clear that the rule would create an estimated CAD21bn to CAD30bn capital gap. “This gap means that the affected insurers would on average need to more than triple their current capital base to remain in Canada and write the same policies as they currently do. The proposal would have the effect of significantly reducing the return on capital relative to opportunities [that] may be available to groups globally, thus disincentivising groups from offering insurance and reinsurance services or investing in Canada. Regrettably, it seems inevitable that such requirements will discourage participation in the Canadian market,” states the letter. It goes on to explain that instead of avoiding too much concentration of reinsurance risks in one place or in one reinsurer, as the OSFI hopes, the proposed capital requirement has the potential to result in a heavier and potentially detrimental concentration of reinsurance risk within Canada. Furthermore, notes the GFIA, these proposed regulations may restrict the flow of international reinsurance into Canada to such a degree that they would leave Canada-registered reinsurers in a situation where they do not have the capacity to address the reinsurance needs of Canada-registered insurers, particularly for reinsurance on large risks. The letter also notes that the proposal to restrict the ability of Canada-registered insurers with foreign parent companies to rely on the foreign parent’s use of global treaties to manage its risks globally is “troubling”, adding that the proposal amounts to interference with the insurer’s business operations.

Canadian regulator’s proposals will significantly increase cost of insurance, says GFIA

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