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|| <span style="font-size: 18px;">'''NEW for 2025-Fall:'''
* This is a new reading for 2025-Fall.
* We are currently working on the content and it will be posted here when we're done!
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'''Reading''': “Sound Reinsurance Practices and Procedures,” January 2025.

'''Author''': OSFI (Office of the Superintendent of Financial Institutions Canada)

[insert link<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]

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==Pop Quiz==

How is reinsurer non-performance risk handled in the calculation of the ARC/AIC?

==Study Tips==

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||  <span style="color: green;">'''Key Insight:'''</span> 
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* This paper is all about '''balancing the benefits and risks''' of reinsurance
* Reinsurance is a '''double-edged sword''': it reduces insurance risk but creates counterparty, operational, and liquidity risks

{| class='wikitable'
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||  '''Study Strategy Summary''':
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This is a '''principles-based''' guideline rather than rules-based with a focus on '''comprehensive risk management frameworks''' and '''ongoing processes'''. 

'''Key things to focus on:'''

* 4 Key Principles: '''RRMP, Due Diligence, Contract Terms, Adverse Effects'''
* RRMP Components: '''Purpose, Limits, Counterparty Risk, Concentration'''
* Due Diligence Factors: '''6 key areas to evaluate reinsurers'''
* Contract Requirements: '''Insolvency clauses, binding agreements, legal jurisdiction'''

{| class='wikitable'
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||  '''Before You Start''':
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This guideline is '''comprehensive and detailed''' - it's not a quick read! The key to success is understanding that '''every requirement exists to manage a specific risk'''. Ask yourself: "*What risk is this addressing?*" as you study each section.

* '''Benefits vs. Risks''': Understand the reinsurance trade-offs
* '''Process-oriented''': Focus on ongoing procedures, not one-time requirements  
* '''Perspective shifts''': Sometimes you're the cedant, sometimes the reinsurer

'''Estimated study time''': a few hours

==Overview: The Reinsurance Paradox==

{| class='wikitable' style='background-color: lightcyan;'
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|| 🎪 '''The Reinsurance Balancing Act'''
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Benefits of Reinsurance :
* Reduce insurance risks & volatility
* Stabilize solvency  
* More efficient capital use
* Withstand catastrophic events
* Increase underwriting capacity
* Access reinsurers' expertise

Risks Created by Reinsurance :
* Operational risk
* Legal risk  
* '''Counterparty risk''' ⭐ (most important)
* Liquidity risk

💡 '''Key Insight''': The goal is to capture the benefits while '''comprehensively managing the new risks created'''.

[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Reinsurance&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 1]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>

==Section I: The 4 Key Principles==

===Principle 1: Sound Reinsurance Risk Management Policy (RRMP) ===

:{| class='wikitable' style='background-color: pink;'
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| 📝 '''CRITICAL''': What must the RRMP document? [Hint: <span style="color: red;">'''PCCC'''</span>]
|}

:: <span style="color: red;">'''P'''</span>urpose and objectives for seeking reinsurance
:: <span style="color: red;">'''C'''</span>eding limits  
:: <span style="color: red;">'''C'''</span>ounterparty risk
:: <span style="color: red;">'''C'''</span>oncentration limits

====Managing Risks THROUGH Reinsurance ====

:{| class='wikitable'
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| '''Question''': When does OSFI recognize capital credit for reinsurance?
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Under '''MCT''' (Minimum Capital Test), if certain conditions are met, the FRI may '''reduce required capital''' for insurance risk ceded

⚠️ '''Important Exception''': OSFI will '''generally NOT''' recognize credit when:

* '''Foreign FRI''' cedes Canadian risks back to '''home office''' through '''affiliated reinsurers'''

====Managing Risks ARISING FROM Reinsurance ====

:{| class='wikitable' style='background-color: yellow;'
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| '''Golden Rule''': Should NOT cede '''100%''' or '''substantially all''' risk in normal course of business
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Counterparty Risk Management :
* Consider '''all elements''' of counterparty risk
* Include '''legal and insolvency framework''' of counterparty's home jurisdiction
* Assess at '''aggregate level''' (groups of affiliated counterparties)
* Evaluate '''going-concern AND gone-concern''' scenarios
* '''Consistent process''' across all counterparties (affiliates and non-affiliates)

Concentration Limits :
* Establish limits for '''individual counterparties'''
* Establish limits for '''groups of affiliated counterparties''' 
* Reflect both counterparty risks '''AND''' risks to be ceded

====Senior Management Oversight ====

:{| class='wikitable'
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| '''Question''': What are senior management's responsibilities for RRMP?
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* Oversee development, implementation, and operationalization
* Ensure appropriate policies, procedures, and internal controls exist
* Review RRMP annually (minimum)
* Monitor effectiveness and compliance on ongoing basis

===Principle 2: Ongoing Due Diligence on Counterparties ===

:{| class='wikitable' style='background-color: lightgreen;'
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| 📋 '''The 6 Due Diligence Factors''' [Hint: <span style="color: red;">'''CBFMER'''</span>]
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:: 💰 <span style="color: red;">'''C'''</span>laims payment record
:: 📊 <span style="color: red;">'''B'''</span>alance sheet strength  
:: 💸 <span style="color: red;">'''F'''</span>unding sources (capital access, liquidity)
:: 👥 <span style="color: red;">'''M'''</span>anagement quality & governance
:: 🎯 <span style="color: red;">'''E'''</span>xpected future claims obligations
:: 🔄 <span style="color: red;">'''R'''</span>etrocession arrangements

* Due diligence should be '''commensurate''' with exposure level
* '''NOT''' less thorough for affiliates
* Should '''NOT rely solely''' on third parties (rating agencies, brokers)
* Must be '''updated throughout''' contract life
* '''Higher level''' required for '''unregistered reinsurers'''

Retrocession Visibility :
* If counterparty relies significantly on retrocessions → seek '''greater visibility''' of retrocessionaires
* Know the '''identities and financial standing''' of retrocessionaires

===Principle 3: Clear Contract Terms & Conditions ===

'''The Binding Agreement Challenge''' :

:{| class='wikitable'
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|  '''Question''': What if comprehensive contract isn't signed by effective date?
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OSFI expects (for interim period):
* '''Contractually binding summary documents''' prior to effective date
* Must include: premium, percentage of risk, risks reinsured, duration, exclusions, standard clauses
* Address '''material issues''' most likely to arise
* '''Final comprehensive contracts''' signed within '''reasonable timeframe''' (e.g., 120 days)

Generally NOT Acceptable: Agreement bearing '''only''' reinsurance intermediary signature (unless intermediary has proven authority)

===Principle 4: Terms Should NOT Adversely Affect Ceding FRI ===

This principle is all about '''protecting policyholders'''!

:{| class='wikitable' style='background-color: lightcoral;'
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|  '''Insolvency Clause Requirements'''
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For Third-Party Reinsurers:
* Reinsurer must continue '''full payments''' to insolvent cedant
* '''No reduction''' solely from cedant's insolvency
* Receivables paid '''directly to FRI-cedant in Canada'''

For Affiliated Reinsurers:
* Same requirement: receivables paid '''directly to FRI-cedant in Canada'''

Other Protective Requirements :
* Choice of forum: Canada or equivalent legal jurisdiction
* Choice of law: Canadian law or equivalent
* Agent appointment for service of legal processes
* Funds withheld: must form part of cedant's general estate in insolvency

'''Problematic Clauses''': Off-set and cut-through clauses may give preferential treatment contrary to WURA distribution scheme

[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Reinsurance&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 2]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>

==Section II: Guideline Administration==

:{| class='wikitable'
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| 📁 '''What must FRIs maintain & provide to OSFI?''' [Hint: <span style="color: red;">'''RRDS'''</span>]
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:: 📋 <span style="color: red;">'''R'''</span>RMP (Reinsurance Risk Management Policy)
:: 📝 Complete description of all <span style="color: red;">'''R'''</span>einsurance arrangements
:: 🔍 <span style="color: red;">'''D'''</span>ue diligence performed on counterparties
:: 📊 <span style="color: red;">'''S'''</span>tress testing performed on reinsurance program

Ongoing Reporting :
* '''Regular reports''' to senior management
* Confirm practices meet guideline principles
* '''Assurances''' that arrangements effect risk transfer
* '''Appropriate accounting''' for arrangements

Material Issue Notification :
* '''Promptly inform OSFI''' of issues that could materially impact financial condition
* '''Document and disclose''' any deviations from principles
* Include nature, extent, and corrective measures

[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Reinsurance&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 3]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>

[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Reinsurance&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>

==Quick Reference Charts==

{| class='wikitable' style='background-color: lightcyan;'
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! 🎯 Principle !! 📝 Key Requirements !! 🔍 Focus Areas
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| 1️⃣ RRMP || Document PCCC, Annual Review || Purpose, Limits, Risk Management
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| 2️⃣ Due Diligence || Ongoing evaluation, 6 factors || CBFMGR, Retrocession visibility  
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| 3️⃣ Contract Terms || Binding agreements, 120 days || Summary docs, Comprehensive contracts
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| 4️⃣ No Adverse Effects || Insolvency clauses, Canadian law || Policyholder protection, Legal jurisdiction
|}

{| class='wikitable' style='background-color: lightyellow;'
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! 🎪 Benefits !! ⚡ Risks Created !! 🛡️ Risk Management
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| Reduce insurance risk || Counterparty risk || Due diligence, concentration limits
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| Stabilize solvency || Operational risk || Comprehensive RRMP
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| Efficient capital use || Legal risk || Proper contract terms
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| Catastrophic protection || Liquidity risk || Ongoing monitoring
|}

== Practice Questions ==

'''Conceptual Questions''':
:: What are the 4 key elements that must be documented in an RRMP?
:: What 6 factors should be considered in due diligence?
:: When will OSFI generally NOT recognize capital credit for reinsurance?
:: What's the difference in insolvency clause requirements for affiliated vs third-party reinsurers?

'''Application Questions''':
:: A FRI wants to cede 95% of its catastrophe exposure. What principle does this violate?
:: What documents are needed if a comprehensive reinsurance contract isn't signed by the effective date?
:: Why might OSFI require higher due diligence for unregistered reinsurers?
:: What must FRIs maintain and provide to OSFI upon request?

==Practice Questions Answer Key==

=== Conceptual Questions ===

====Question 1: What are the 4 key elements that must be documented in an RRMP?====

{| class='wikitable' style='background-color: lightgreen;'
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|| '''Answer: <span style="color: red;">PCCC</span>'''
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:* <span style="color: red;">'''P'''</span>urpose and objectives for seeking reinsurance
:* <span style="color: red;">'''C'''</span>eding limits  
:* <span style="color: red;">'''C'''</span>ounterparty risk
:* <span style="color: red;">'''C'''</span>oncentration limits

====Question 2: What 6 factors should be considered in due diligence?====

{| class='wikitable' style='background-color: lightgreen;'
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|| '''Answer: <span style="color: red;">CBFMER</span>'''
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:* <span style="color: red;">'''C'''</span>laims payment record
:* <span style="color: red;">'''B'''</span>alance sheet strength
:* <span style="color: red;">'''F'''</span>unding sources ''(including level of and access to capital, and form, amount and sources of liquidity)''
:* <span style="color: red;">'''M'''</span>anagement quality ''(including governance practices and procedures)''
:* <span style="color: red;">'''E'''</span>xpected future claims obligations
:* <span style="color: red;">'''R'''</span>etrocession arrangements and their direct or indirect impact

====Question 3: When will OSFI generally NOT recognize capital credit for reinsurance?====

{| class='wikitable' style='background-color: lightcoral;'
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|| '''Answer:''' When a '''foreign FRI''' cedes Canadian risks back to the '''foreign FRI's home office''' through '''affiliated reinsurers'''.
|}

OSFI will generally not recognize or grant credit for such arrangements.

====Question 4: What's the difference in insolvency clause requirements for affiliated vs third-party reinsurers?====

{| class='wikitable' style='background-color: lightyellow;'
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|| '''Third-party reinsurers:'''
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|| Must contain insolvency clause stipulating that reinsurer continues '''full payments''' to insolvent cedant '''without reduction''' solely from cedant's insolvency, '''AND''' all receivables paid '''directly to FRI-cedant in Canada'''
|}

{| class='wikitable' style='background-color: lightyellow;'
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|| '''Affiliated reinsurers:'''
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|| Must contain clause stipulating that all reinsurance receivables are paid '''directly to FRI-cedant in Canada''' ''(but doesn't specifically require the "no reduction" language for insolvency)''
|}

=== Application Questions===

====Question 5: A FRI wants to cede 95% of its catastrophe exposure. What principle does this violate?====

{| class='wikitable' style='background-color: pink;'
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|| '''Answer:''' This violates '''Principle 1''' (Sound RRMP)
|}

'''Explanation:''' The guideline states that "a FRI should not, in the normal course of its business, cede 100 per cent, or substantially all" of its risk. Ceding 95% would likely be considered "substantially all" and therefore inappropriate.

====Question 6: What documents are needed if a comprehensive reinsurance contract isn't signed by the effective date?====

{| class='wikitable' style='background-color: lightblue;'
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|| '''Answer:''' '''Contractually binding summary documents''' that include:
|}

:* Premium/consideration paid by cedant
:* Percentage of risk assumed by each reinsurer
:* Risk(s) reinsured
:* Duration of coverage
:* Exclusions to terms of coverage ''(where applicable)''
:* Standard clauses to be relied upon or incorporated by reference
:* Address material issues most likely to arise
:* Final comprehensive contracts must be signed within reasonable timeframe ''(e.g., 120 days)''

====Question 7: Why might OSFI require higher due diligence for unregistered reinsurers?====

{| class='wikitable' style='background-color: navajowhite;'
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|| '''Answer:''' Unregistered reinsurers present '''higher counterparty risk''' because they:
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:* Are not subject to Canadian regulatory oversight
:* May operate under different legal/regulatory frameworks
:* Present greater uncertainty regarding financial strength and claims-paying ability
:* May have different insolvency protections
:* Could create additional complexity in recovery processes

====Question 8: What must FRIs maintain and provide to OSFI upon request?====

{| class='wikitable' style='background-color: lightgreen;'
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|| '''Answer: <span style="color: red;">RRDS</span>'''
|}

:* <span style="color: red;">'''R'''</span>RMP ''(Reinsurance Risk Management Policy)''
:* Complete description of all <span style="color: red;">'''R'''</span>einsurance arrangements  
:* <span style="color: red;">'''D'''</span>ue diligence performed on reinsurance counterparties
:* <span style="color: red;">'''S'''</span>tress testing performed on the reinsurance program

==Final Exam Strategy==

'''High-Probability Exam Topics''':
* The 4 key principles
* RRMP components (PCCC)
* Due diligence factors (CBFMGR)  
* Insolvency clause requirements
* What FRIs must maintain/report (RRDS)

* Perspective: Make sure you can think from both '''cedant''' and '''reinsurer''' perspectives - the guideline addresses both!

==POP QUIZ ANSWERS==

As a decrease in expected recovery cash flows from reinsurance held