Property and Casualty Large Insurance Exposures and Investment Concentration

I. Purpose and Scope of the Guideline

This Guideline applies to all federally regulated property and casualty insurers (P&C FRIs). It applies to insurance companies on an individual and consolidated basis^{Footnote 1} and to individual foreign branches.^{Footnote 2}

The Guideline sets out OSFI's expectations related to large insurance exposures; that is, losses a P&C FRI could suffer from a single large insurance exposure and the sudden failure of an individual unregistered insurance counterparty. It also sets out OSFI's expectations related to investment concentration.

This Guideline complements OSFI's Supervisory Framework and Assessment Criteria. Excluding hyperlinks, terms that are capitalized and underlined in this Guideline are defined in Annex 1.

II. Large Insurance Exposures

Gross Underwriting Limit Policy

1. The GUWP should:

   1. Define what constitutes a Single Insurance Exposure by class of insurance, as appropriate. A P&C FRI could aggregate insurance exposures across multiple coverages and/or classes of insurance;

   2. Establish limits by class of insurance regarding the level of gross insurance risk that the P&C FRI is willing to accept in respect of a maximum loss related to a Single Insurance Exposure; and

   3. Be reviewed by Senior Management of the P&C FRI, at a minimum, annually.

2. Using relevant, reasonable and supportable information, P&C FRIs should measure and determine the maximum loss on a Single Insurance Exposure. They should make such a determination without regard to the probability of the loss event occurring, and using forward-looking approaches (i.e., not solely based on past losses).

3. With respect to the certain classes of insurance set out below, P&C FRIs should consider the following in respect of determining a Single Insurance Exposure:

   Property	The aggregated insurance exposures on in-force policies at a single location, including any exposures subject to the location.
   Credit	The aggregated insurance exposures on in-force policies to any one single buyer or group of connected buyers.
   Surety	The aggregated insurance exposures on in-force bonds to any one single contractor or group of connected contractors.
   Title	The aggregated insurance exposures on in-force policies related to the legal title for a single location.

4. P&C FRIs should have adequate systems to identify and actively manage insurance exposures.

5. P&C FRIs should have effective monitoring and internal reporting procedures to ensure ongoing operational compliance with the GUWP.

6. P&C FRIs are expected to provide, at OSFI's request, all information with respect to their large Single Insurance Exposures. OSFI may, at its discretion, advise a P&C FRI to use specific criteria or an approach to determine and measure its maximum loss on a Single Insurance Exposure.

Insurance Exposure Limit

7. This section applies to the direct business of P&C FRIs. It also applies to a P&C FRI's assumed business from an Affiliated Company, where that Affiliated Company is a P&C FRI and is a direct writer of that business.

8. At no time should any P&C FRI's Net Retention, plus its Largest Net Counterparty Unregistered Reinsurance Exposure, due to the occurrence of a maximum loss on a Single Insurance Exposure, exceed the following limits:

   Insurance Companies	100 per cent of Total Capital Available where any entity in the P&C FRI's control chain is: a widely held companyFootnote 5, and/or a regulated financial institution; 25 per cent of Total Capital Available otherwise.
   Foreign Branches	100 per cent of Net Assets Available of the foreign branch.

9. With respect to the Largest Net Counterparty Unregistered Reinsurance Exposure, P&C FRIs should measure their ceded unregistered reinsurance exposures to a given counterparty, or group of Affiliated Company counterparties, on both a gross and a net basis. That is, it should be measured before and after the recognition of any eligible Counterparty Risk Mitigation (CRM) technique. Only the aggregate net counterparty exposures for unregistered reinsurance are subject to the limits in Paragraph 8 above.

10. Eligible CRM techniques may include, as applicable:

    1. Excess collateral;
    2. Letters of Credit^{Footnote 6};
    3. Other CRM techniques deemed acceptable by OSFI.^{Footnote 7}

III. Investment Concentration

11. A P&C FRI's aggregate market value of Investments in any one Entity or group of Affiliated Companies should not exceed the following limit:

    Insurance Companies	5 per cent of the company's Assets
    Foreign Branches	5 per cent of the company's Assets in Canada

12. P&C FRIs should consider other Investments or commitments not shown on the balance sheet; for example, options, futures, forward contracts and unfunded portions of committed loans.

IV. Guideline Administration

13. Where a P&C FRI is in non-compliance of this Guideline, OSFI may, on a case-by-case basis, take or require the P&C FRI to take corrective measures. OSFI measures may include, but would not be limited to, heightened supervisory activity and/or the discretionary authority to adjust the P&C FRI's capital requirements commensurate with the risks being undertaken by the P&C FRI.

Annex 1 - Definitions

Single Insurance Exposure

14. P&C FRIs can define what constitutes a Single Insurance Exposure within their GUWP.

Affiliated Companies

15. One entity is affiliated with another entity if one of them is controlled by the other or both are controlled by the same person or entity.

Net Retention

16. The amount of insurance exposure which a P&C FRI retains net for its own account and does not pass on to another insurer (or reinsurer)^{Footnote 8}. Any reinstatement premiums should be included in the Net Retention value.

Largest Net Counterparty Unregistered Reinsurance Exposure

17. The largest amount of ceded unregistered reinsurance on an insurance exposure provided by a (re)insurance group (e.g., Affiliated Company counterparties that are part of a (re)insurance group). This amount should be on a net basis; that is, after recognition of any eligible CRM technique.

Total Capital Available

18. For a P&C FRI that is a company, the consolidated total available capital of a company as defined for the purpose of calculating the Minimum Capital Test (MCT) / Mortgage Insurer Capital Adequacy Test (MICAT).

Net Assets Available

19. For a P&C FRI that is a foreign branch, the net assets available as defined for the purposes of calculating the Branch Adequacy of Assets Test (BAAT).

Investments

20. An asset or item acquired with the goal of generating income or appreciation, excluding loans to, and loans guaranteed or securities issued or guaranteed by the Government of Canada, a Canadian province or a member jurisdiction of the Organisation for Economic Co-operation and Development (OECD).

Entity

21. As defined in the Insurance Companies Act, a natural person, a body corporate, trust, partnership, fund, unincorporated association or organization, an agency of the Crown in right of Canada or of a province, and any agency of a foreign government.

Assets

22. For a P&C FRI that is a company, the total value of assets reported on the balance sheet of the regulatory return filed with OSFI.

Assets in Canada

23. For a P&C FRI that is a foreign branch, the total value of assets under the control of the Minister (vested in trust in Canada), as reported on the balance sheet of the regulatory return filed with OSFI.