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Canada expands rules to treat natural catastrophe bonds as reinsurance
The OSFI is revising its Minimum Capital Test Guideline to grant capital credit only when cat bond collateral is held in Canada and indemnity triggers are used.
Canada’s insurance regulator, the Office of the Superintendent of Financial Institutions (OSFI), has expanded its rules on allowable reinsurance to include natural catastrophe bonds as a form of reinsurance that can reduce capital requirements for insurance risk.
OSFI says the change to Section 4.3 of the Minimum Capital Test Guideline is intended to put catastrophe bond structures on a more level footing with traditional insurance-linked securities and reinsurance arrangements, and to provide guidance for insurers using cat bonds within their reinsurance towers.
The regulator describes catastrophe bonds as unregistered reinsurance with no margin requirement, and it expects deals to use an indemnity trigger and collateral invested in high-quality assets. OSFI also says the collateral must be held in Canada rather than overseas or offshore, and it must be fully paid in under a reinsurance security agreement for the instrument to receive reinsurance capital credit.
The update follows OSFI’s earlier assessment in 2018 of alternative reinsurance, including ILS and catastrophe bonds, and its caution at the time about risks associated with third party capital. Artemis reports the rules shift signals greater parity in capital requirements for cat bond sponsors compared with other parts of the reinsurance structure, with approvals still required for insurers seeking to sponsor catastrophe bonds.