A Comprehensive Guide to Assumption Reinsurance

Assumption reinsurance is a type of insurance that allows one insurance company to assume all or part of another company's liability for a specific policy or group of policies.

Assumption reinsurance can be used to transfer risk from one company to another, providing financial stability and reducing uncertainty.

This type of reinsurance is often used in the context of mergers and acquisitions, where one company may assume the liabilities of another company's existing policies.

In some cases, assumption reinsurance can also be used to take on the liabilities of a company that is experiencing financial difficulties.

For another approach, see: What Type of Reinsurance Contract Involves Two Companies

Reinsurance is a way for insurance companies to transfer some of their risks to another company, called a reinsurer. This is done to reduce the financial burden of a large number of claims.

In an assumption reinsurance scenario, the ceding insurance company is under a legal obligation to inform the original policyholders and obtain consent from them. If a large number of policyholders object, the ceding insurer may have to hold on to their business.

Assumption reinsurance requires a large number of regulatory approvals from the concerned regulatory bodies. This is because the policyholders will no longer have any recourse to the original ceding insurance company they signed a contract with.

The ceding insurance company is no longer required to maintain any further administrative records of the policy or the policyholders in an assumption reinsurance contract. This saves the company on costs and efforts related to administration.

Explore further: A Life Insurance Policy That Is Subject to a Contract

In assumption reinsurance, reinsurers play a crucial role. They assume a portion of the risk from the primary insurer, helping to share the financial burden.

Reinsurers are typically large, established companies with significant financial resources. They are often well-capitalized and have a strong credit rating, which makes them attractive to primary insurers looking for a reinsurer.

The reinsurer's main goal is to provide financial protection to the primary insurer in the event of a large loss.

Explore further: What Are Reinsurers

If you're a reinsurer looking to provide information to OSFI, there are specific requirements you'll need to meet.

The first requirement is to provide a description of how you propose to address the related rights to vote, particularly when it comes to Voting Policies.

You'll also need to confirm whether you propose to grant the holders of these policies the right to vote at your meetings, and if so, describe how you'll do this.

For Distribution Policies or Adjustable Policies, you'll need to provide a description of how you'll ensure that the rights and interests of their holders won't be prejudiced by the transaction.

Here are the key information requirements for reinsurers:

Provincial entities can be reinsurers under certain conditions.

A provincial entity may be a reinsurer if the Superintendent has entered into satisfactory arrangements with the official or public body responsible for supervising the entity.

These arrangements are governed by subparagraph 254(2)(a)(iii) and paragraphs 254(2.01)(c) and 587.1(2)(c) of the ICA.

If you're an applicant considering assumption reinsurance with a provincial entity, you can contact OSFI for information on these arrangements.

This will help you determine whether you can cause yourself to be assumption reinsured by a provincial entity.

For foreign companies, the information requirement is specific to their insurance business in Canada.

References to "capital" in this requirement should be substituted with the term that applies to the circumstances.

When assuming reinsurance, it's essential to consider the type of policies involved. This can impact the information required from the applicant.

For Voting Policies, the applicant needs to provide a description of how they propose to address the related rights to vote. This includes confirming whether the reinsurer will grant policyholders the right to vote at meetings.

The applicant must also confirm whether the reinsurer will grant policyholders the right to vote at meetings, and if so, provide a description of how this will be done.

In the case of Distribution Policies or Adjustable Policies, the applicant must provide a description of how they propose to ensure that policyholders' rights and interests are not prejudiced by the transaction.

Additional reading: Vehicle Insurance Policies

Due diligence is a crucial step in assessing a reinsurer's suitability as an assumption reinsurance counterparty. It involves evaluating the reinsurer's expertise and resources to manage risks and service policies.

As part of due diligence, applicants should consider whether the reinsurer can manage the risks to be assumed and service the policies. This includes evaluating the reinsurer's expertise and resources.

Applicants should also consider whether there will be any material changes to the level of service provided to policyholders. This is particularly important in cases where the reinsurer is seeking to assume the rights and obligations of the applicant under indemnity reinsurance contracts.

To ensure compliance with OSFI's expectations, applicants and reinsurers should consider the B-3 Expectations outlined in Guideline B-3: Sound Reinsurance Practices and Procedures.

A different take: Work Injury Insurance

In the due diligence process, it's essential to provide clear and accurate notice and disclosures to all parties involved. This includes sending a Notice that provides copies of the proposed assumption reinsurance agreement and, if applicable, the IA report.

OSFI expects the Notice to be in a language that the applicant regularly communicates with the Policyholder. This is a crucial aspect to consider when drafting the Notice.

The Notice is typically sent on the date it's published or promptly after such publication. This ensures that all parties have access to the necessary information in a timely manner.

OSFI requires the Information Package to be in the language in which the applicant regularly communicates with the Policyholder. However, only the English and/or French copies of the draft and final versions of these documents need to be provided to OSFI.

Here's a summary of the key points to consider when it comes to notice and disclosures:

OSFI expects applicants to consider the expertise and resources of the Reinsurer to manage risks and service policies as part of due diligence. This includes assessing the Reinsurer's ability to provide material changes to the level of service provided to policyholders.

To ensure effective reinsurance practices, applicants and Reinsurers must consider OSFI's expectations set out in Guideline B-3: Sound Reinsurance Practices and Procedures. This guideline outlines the necessary procedures for assumption reinsurance transactions.

In certain cases, Reinsurers seeking to assume rights and obligations as cedants under indemnity reinsurance contracts must consider B-3 Expectations in both capacities. They should be mindful of non-transfer and non-assignment clauses, as well as potential regulatory approvals required for related party contracts.

Reinsurers must perform ongoing due diligence on the Reinsurer to ensure awareness of counterparty risk and ability to assess and manage such risk. This is typically done in conjunction with International Accounting Standard 37, when assessing provisions for policy risks that may return to the applicant's books.

For your interest: Life Insurance Contracts

A provincial entity may be a Reinsurer under certain conditions. The Superintendent must have entered into satisfactory arrangements concerning assumption reinsurance transactions with the official or public body responsible for the supervision of the provincial entity.

If you're considering assumption reinsuring with a provincial entity, you can contact OSFI to obtain information regarding such arrangements. This will help you determine if it's possible for you to cause yourself to be assumption reinsured by a provincial entity.

For foreign companies, the information requirement is specific to the Reinsurer's insurance business in Canada. This means that references to "capital" will need to be substituted with the term that the circumstances require.

Indemnity reinsurance is a type of reinsurance where the reinsurer agrees to indemnify the cedant in respect of the payment of claims made under the policies that are the subject of the transaction. In other words, the reinsurer steps in to cover the costs of claims, but the policyholders continue to pay premiums to the original insurer.

There is generally no change to the party to which the premiums are requested to be paid or to the party that performs the policy administration functions. This means that policyholders may not even know that their policies have been reinsured.

Expand your knowledge: Public Liability Third Party Insurance

Indemnity reinsurance is often used when the original insurer wants to reduce its risk exposure without having to transfer the policies to another insurer. This can be a more straightforward process than an assumption reinsurance transaction, which involves transferring liability to the reinsurer.

In contrast to assumption reinsurance, indemnity reinsurance does not involve a transfer of liability to the reinsurer. The reinsurer only agrees to cover the costs of claims, and the original insurer remains responsible for policy administration.

As of April 2007, indemnity reinsurance, as well as legal transfers of policies, are no longer subject to certain Legislative Authorities. This means that insurers have more flexibility when it comes to reinsurance and policy transfers.

Explore further: Mutual Insurer

Self-dealing is a critical concept in reinsurance, and it's defined as any transaction where a reinsurer has a conflict of interest or a personal stake in the transaction. This can include situations where a reinsurer is also a policyholder or has a financial interest in the ceding company.

Here's an interesting read: Insurable Interest in One's Own Life Is Legally Considered as

In the US, the NAIC's Model Act prohibits self-dealing in reinsurance transactions. This means that reinsurers must avoid any actions that could be seen as favoring their own interests over those of the ceding company.

Self-dealing can take many forms, including the purchase of reinsurance from a related party or the sale of reinsurance to a related party. Reinsurers must be transparent about their relationships with related parties to avoid any appearance of self-dealing.

The NAIC's Model Act requires reinsurers to disclose any relationships with related parties in their annual statements. This includes disclosing any transactions with related parties, as well as any material changes to those relationships.

Reinsurers must also comply with the NAIC's requirements for related party transactions, which include obtaining prior approval from the NAIC before engaging in any such transactions.

Here's an interesting read: Captive Self Insurance

OSFI views assumption reinsurance as a transaction where the applicant remains liable for the policies until the transaction takes effect, at which point the reinsurer becomes an additional obligor.

From an accounting and actuarial perspective, however, OSFI acknowledges that the policy risks are generally transferred to the reinsurer from the moment the transaction takes effect.

OSFI expects applicants to cease reporting these risks at this point.

In cases where policies contain "non-transfer" or "non-assignment" clauses, OSFI generally expects applicants to obtain policyholder consent to delete or amend these clauses or to proceed with the transaction.

Alternatively, if obtaining consent is not commercially reasonable, OSFI expects applicants to be transparent about these clauses in the notice and information package.

OSFI also expects the assumption reinsurance agreement to not contain any "no third party beneficiary" clause that may prejudice policyholders' coverage from the reinsurer.

Here's an interesting read: Insurance Cover on Business - Merchant Services