Securitization of Insurance Liabilities

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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
• Arms 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
  OSFIs 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

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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
OSFIs 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

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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

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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

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