Sound Reinsurance Practices and Procedures

Question 1

Reinsurance can expose an insurer to what types of risks?

Answer 1

• Operational
• Legal
• Counterparty
• Liquidity

Question 2

What are 4 key principles of sound reinsurance practices and procedures?

Answer 2

1. A FRI should have a sound and comprehensive reinsurance risk management policy that is overseen by senior management.
2. A FRI should perform due diligence on its reinsurance counterparties on an ongoing basis sufficient to ensure that the FRI is aware of its counterparty risk and is able to assess and manage such risk.
3. The terms and conditions of the reinsurance contract should provide clarity on reinsurance coverage.
4. The terms and conditions of the reinsurance contract should not adversely affect the ceding FRI.

Question 3

What are the requirements for sound reinsurance practices and procedures? What does the OSFI expect an insurer to do so that it has adequate risk management when it comes to reinsurance?

Answer 3

1. Maintain its reinsurance risk management policy (RRMP)
2. Maintain a complete description of all reins. arrangements
3. Due diligence is performed on reins. counterparties
4. Stress testing is performed on reins. program

Question 4

What should the Reinsurance Risk Management Policy (RRMP) of the insurer include? (5)

Answer 4

1. A way to identify risks arising from reinsurance
2. Establishment of appropriate ceding limits
3. Role and responsibilities of those in charge of implementing RRMP
4. Process for an update of RRMP
5. Policy on use of registered and unregistered reinsurers

Question 5

When performing due diligence on a reinsurer, what are things that the insurer can look into to make his assessment?

Answer 5

• Claims payment record
• Expected future claims
• Balance sheet strength
• Funding sources
• Risk Management of the reinsurer
• Retrocession arrangements