In an article outlining Canada's new requirement for reinsurance security agreements when using unlicensed reinsurance, McMillan LLP has raised the alternative possibility of administering an unlicensed reinsurance agreement on a "funds withheld" basis instead.
Canada's solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), has changed the mechanism by which Canadian insurers are allowed capital or asset credit for reinsurance placed with non-Canadian licensed insurers.
Previously, collateral arrangements for unlicensed reinsurance took the form of a reinsurance trust agreement between a cedant insurer and an unlicensed reinsurer, as prescribed by OSFI.
Now, however, the regulator is calling for trust arrangements to be replaced by reinsurance security agreements. These security agreements are to be vouchsafed by a legal opinion.
In an article for the International Law Office, McMillan LLP suggested the possibility of collapsing the trust arrangement and administering the reinsurance on a "funds withheld" basis instead.
"OSFI's related new guidance on reinsurance generally contemplates these arrangements, but cautions that the reinsurance agreement must clearly state that in the event of an insolvency of the ceding insurer or the reinsurer, the funds withheld (minus the amount properly due to the reinsurer) form the property under the cedant under applicable Canadian insurance law," McMillan LLP writes. "This appears to be a matter of legal drafting and as yet OSFI has not stated that a legal opinion confirming the legal effect of the wording will be required.
"However, it is uncertain whether this type of legal arrangement could have a regulatory impact on the reinsurer."
McMillan LLP suggests getting in touch with OSFI before attempting such an alternative arrangement.
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