GFIA warns Canadian regulator not to undermine global risk diversification

The Global Federation of Insurance Associations (GFIA) has warned Canada’s regulator, the Office of the Superintendent of Financial Institutions (OSFI), against introducing measures that it says could “undermine the fundamental principle of global risk diversification.”

In response to a draft of revised guidelines for property and casualty exposures by the OSFI, the GFIA highlighted several issues concerning the treatment of unregistered reinsurance.

Overall, GFIA encouraged the regulator to recognize ratings by major rating agencies as an indication of a reinsurer’s likelihood of default, irrespective of credit ratings or financial strength ratings.

In addition to deepening its collaboration with other international regulators, the OSFI was recommended to provide credit to local reinsurance branches based on the financial strength of its home office.

The GFIA also urged OSFI consider a calculation of insurance exposure that is calculated based on net retention and net counterparty reinsurance exposure but does not discriminately add a measure of exposure related to unregistered reinsurance.

Furthermore, it was noted that insurance and reinsurance companies are increasingly operating within affiliated group which use reinsurance as part of their overall capital management program, which may not be reflected in OSFI’s treatment of reinsurers.

“As we have highlighted previously, reinsurance markets are global in nature and depend on the global fungibility and transferability of capital across jurisdictions. Large commercial insurers and reinsurers rely on this globally accepted, long-standing insurance business model in order to optimally serve local and multinational clients,” wrote Brad Smith Chair of the GFIA Trade working group.

“International organizations and scholars have recognized the essential benefits of cross-border reinsurance in recent years in the face of measures in some markets that could limit access to global reinsurance markets,” Smith continued.

“By ceding insurance risk across borders, ceding insurers in the jurisdiction, and the jurisdiction as a whole, can benefit from a reduced concentration of insurance risk exposures at the ceding insurer and jurisdiction level respectively. This may also contribute to the financial stability of the jurisdiction.”

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