Forma Estructural del Centro Municipal del Niño y la Familia

This section describes the forms of credit risk mitigation for which the deductions from

Available Capital that are required under section 10.4 may be reduced, and replaces the rules that would otherwise apply under sections 3.2 and 3.3.

10.5.1. Credit available

A company is given credit, for each unregistered reinsurer, equal to the sum of:

• the funds held by the ceding company for the exclusive benefit of the ceding company (e.g., funds withheld reinsurance) to secure the payment to the ceding company by the reinsurer of the reinsurer's share of any loss or liability for which the reinsurer is liable under the reinsurance agreement; and

• the value of assets pledged by the unregistered reinsurer that are located in Canada and subject to the company’s claim under a valid and perfected first priority security interest under applicable law in accordance with OSFI’s guidance for reinsurance security agreements. All pledged assets must:

o be held to secure the payment to the ceding company by the reinsurer of the reinsurer's share of any loss or liability for which the reinsurer is liable under the reinsurance agreement92,

o be in the form of cash93 or securities, o be owned by the reinsurer, and o be freely transferrable;

and

• the amount ofacceptable letters of credit94 heldto secure the payment to the ceding company by the reinsurer of the reinsurer's share of any loss or liability for which the reinsurer is liable under the reinsurance agreement.

All collateral must be available for as long as the assuming insurer will have financial obligations under the reinsurance agreements for which the ceding company is taking credit. Where contract stipulations regarding the collateral may vary during the period, credit may only be taken if the ceding company maintains the exclusive option to retain the collateral and the additional cost of that option, if any, is fully recognized and explicitly accounted for at inception of the agreement.

All letters of credit used to obtain credit in respect of an unregistered reinsurer must be issued by or have a separate confirming letter from a Canadian bank that is listed on Schedule I or

92 _{A foreign company ceding risks related to its Canadian business will be given credit for assets located in Canada}

only where the reinsurance arrangement provides that the reinsurer does not have any right of set-off against the obligations of the foreign company other than obligations related to the foreign company’s insurance business in Canada. In particular, the reinsurer must not be able to set off amounts due to the foreign company against any liabilities of the home office or affiliates of the foreign company that are not liabilities arising out of the Canadian operations of the foreign company.

93 _{Cash must be in a form in which it is possible to perfect a security interest under applicable law.} 94

Companies should contact OSFI’s Securities Administration Unit at 121 King Street West, 22nd Floor, Toronto Ontario M5H 3T9; by e-mail at [email protected]; or by facsimile at (416) 973-1171 to obtain OSFI’s standards for letters of credit. Templates as well as general guidelines for the use of letters of credit may be found on OSFI’s web site at http://www.osfi-bsif.gc.ca.

Schedule II of the Bank Act. In aggregate, the amount of credit taken for letters of credit is limited to 30% of the total positive policy-by-policy liabilities ceded to unregistered reinsurers. The assets used to obtain credit for a specific unregistered reinsurer must materially reduce the risk arising from the credit quality of the reinsurer. In particular, the assets used may not be related-party obligations of the unregistered reinsurer (i.e. obligations of the reinsurer itself, its parent, or one of its subsidiaries or affiliates). With respect to the above three sources available to obtain credit, this implies that:

• To the extent that a ceding company is reporting obligations due from a related party of the reinsurer as assets in its annual return (e.g. LIFE-1), the ceding company is precluded from taking credit for funds held to secure payment from an unregistered reinsurer; • Assets located in Canada in which a ceding company has a valid and perfected first

priority security interest under applicable law may not be used to obtain credit if they are obligations of a related party of the unregistered reinsurer; and

• A letter of credit is not acceptable if it has been issued by a related party of the unregistered reinsurer.

Guideline B-2:Large Exposure Limits applies to assets used to obtain credit in respect of unregistered reinsurance. As a consequence, a company may not take credit for assets in which it has perfected a security interest or letters of credit, held under an unregistered reinsurance transaction or a series of such transactions (not necessarily all with the same reinsurer), if

consolidating these assets95 on the company’s balance sheet, along with the ceded liabilities they support, would cause a large exposure limit to be breached96. A company must comply with all other OSFI guidelines and advisories concerning investments (e.g. Guideline B-1:Prudent Person Approach, Guideline B-5:Asset Securitization) in respect of the aggregate of the assets it has used to obtain credit for unregistered reinsurance with the assets it holds in its own portfolio.

10.5.2. Application to requirements for ceded liabilities

The credit available in respect of an unregistered reinsurer may be applied to the following requirements of section 10.4:

1) The requirement for aggregate positive liabilities ceded to the reinsurer (reference section 10.4.1). This requirement may be reduced to a minimum of zero using the credit available.

2) The requirement for offsetting policy-by-policy liabilities ceded to the reinsurer

95

Or for letters of credit, recording the full amount of the letters of credit as obligations due from the issuing banks

96 _{This consolidation test must be performed in respect of unregistered reinsurance notwithstanding that Guideline}

B-2 does not establish quantitative limits for exposures to reinsurers. Assets and letters of credit having a residual maturity of less than one year may not be excluded from the definition of exposure. For the purpose of the consolidation test, the additional amount of total capital that a ceding company may assume would be available is limited to the lower of 150% of the marginal capital requirements for the ceded business, or the value of the assets and letters of credit posted by the reinsurer(s) that are used to support the capital requirements for the ceded business.

(reference section 10.4.2). The requirement may be reduced to a minimum of zero for a particular reinsurer, but the credit taken for this requirement in aggregate is subject to the limit below.

The total credit available that may be applied toward requirement 2) in respect of all reinsurers in aggregate is limited to the greater of zero or:

N – max ( R – C, 0) where:

• N is the total requirement for offsetting policy-by-policy liabilities ceded to unregistered reinsurers;

• R is equal to 50% of the company’s Base Required Capital or Required Margin, where the required capital or margin is calculated net of registered reinsurance only; and • C is Adjusted Net Tier 1 capital (for Canadian companies) or Available Margin less

Other Admitted Assets (for foreign companies), where the amount is calculated without deducting the requirement for offsetting policy-by-policy liabilities ceded to unregistered reinsurers;

If the maximum credit that may be applied toward requirement 2) is less than the total of the requirement, the difference must be deducted from tier 1 and added to tier 2c (for Canadian companies) or added to Assets Required (for foreign companies) and may not be covered by collateral or letters of credit. If this situation occurs, the ceding company may allocate the maximum total credit allowed to particular unregistered reinsurers in any manner it chooses. Any credit available for a particular reinsurer that exceeds the sum of the maximums allowed under 1) and 2) above or that is otherwise not applied towards these requirements may be applied towards the capital requirements for business ceded to the reinsurer, subject to the conditions in section 10.6.

10.5.3. Asset risk requirements

Consistent with the substitution capital treatment used for collateral and guarantees, companies are required to include, in the MCCSR Base Required Capital or TAAM Required Margin, the C-1 and C-3 capital charges (as determined under chapter 397 and section 5.4) for all assets subject to the company’s claim under a perfected security interest, and for all letters of credit, that are used to obtain credit for ceded liability or capital requirements relating to unregistered reinsurance. In addition, such collateral and letters of credit will give rise to a charge for foreign exchange risk under section 9.7 if there is a currency mismatch with the reinsured policy

liabilities they support.

97 _{Although the requirements of chapter 3 do not apply to reinsurance assets, they do apply to collateral and letters}