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The Office of the Superintendent of Financial Institutions (OSFI) is contemplating reforms to the regime for supervising the use of reinsurance, in a bid to address evolving risks.

A discussion paper OSFI published on Friday examines possible changes to the federal regulator’s existing reinsurance framework.

OSFI is contemplating reforms to address risks associated with large exposures and concentration risks, according to the paper, and specific changes to the capital rules for the property and casualty (P&C) insurance sector are also being considered.

Financial institutions in Canada are increasingly reliant on reinsurance, the discussion paper says.

“Particularly in the P&C sector, there are concerns about the risks associated with writing large policies in Canada, and subsequently ceding a significant portion of these risks outside of Canada, with little capital or vested assets maintained in Canada to support the increased risk exposure,” it states.

Additionally, reinsurance exposes insurers to increased operational, counterparty and legal risks, the paper says.

“Prudently managing these risks, and balancing them against the benefits of reinsurance, is complex. At the same time, failure to do so can materially affect an insurer’s financial soundness and reputation, and can ultimately contribute to its failure,“ it states.

OSFI’s previous comprehensive review of the framework happened nearly 10 years ago.

“Since that time, the insurance environment and reinsurance practices have changed significantly. This review was initiated to deepen our understanding of the broader reinsurance practices being used in both the property and casualty and life insurance sectors, and determine whether OSFI’s current reinsurance framework remains appropriate and effective,” the discussion paper states.

The consultation will help shape OSFI’s approach to both short-term and longer-term proposals to strengthen the reinsurance framework.

“In light of the increasing reliance on reinsurance and the emergence of new and evolving business models related to the use of reinsurance, OSFI is working to ensure its reinsurance framework remains appropriate,” says Neville Henderson, assistant superintendent, insurance supervision sector, at OSFI, in a statement. “This discussion paper is a key step in OSFI’s commitment to engage stakeholders, and all responses that will help maintain an effective regulatory approach to reinsurance will be carefully considered.“

Comments on the paper are due by Sept. 15.