Securitization of Insurance Liabilities IP-34 CIA Annual Meeting Vancouver, June 29, 2007 Allan Brender

2 Canadian Experience Limited to three applications All three dealt with life insurance only Two of these applications were dropped –The primary reasons were due to high expense and to tax problems The third application was not approved by OSFI

3 Canadian Experience Purposes for securitization proposals vary –Realize embedded future profits –Reduce the cost and complexity of reinsurance arrangements –Modify ownership structure Proposals for Special Purpose Reinsurers vary –Arm’s length SPV –Controlled SPV –Income trust

4 Canadian Experience Degree of transfer of risk and protection for SPR varies –Stop loss and retrocession arrangements with third party reinsurers –Instruments sold to unit holders may carry a credit guarantee (issued by a bank) –Risk is ultimately carried by trust unit holders

5 Concerns and Issues Institutional investors are concerned about OSFI’s Reinsurance Trust Agreement –RTA gives OSFI the right to seize all assets held in the trust in case of business failure Proposed capital instruments may not qualify as regulatory capital or as Tier 1 capital Retained control over the insuring entity requires consolidation of financial requirements

6 Concerns and Issues Risk may not be fully transferred to trust unit holders Who is bearing the risk Regulation is incomplete –No legislative provision for SPRVs (are SPRVs regulated insurers?) –Can an income trust own a federally regulated financial institution?

7 OSFI’s Current View Few and varied proposals Each requires a detailed analysis In the absence of significant interest and standard approaches to securitization in Canada, the is little incentive to develop regulations and supervisory guidance There is little literature internationally –Two IAIS guidance papers (2003) –NAIC model law

8 Principles for Securitization Principle 1: Securitization must not hamper the interests or rights of policyholders Principle 2: The accounting, actuarial and capital treatment should reflect the terms of the transaction, particularly the nature and degree of risk transferred

9 Principles for Securitization Principle 3: Transactions must not be designed to circumvent capital rules, reinsurance regulations and guidelines Principle 4: Capital instruments created in the transaction must meet the criteria set out in the MCCSR and MCT guidelines to qualify as regulatory capital

10 Review of Proposals Proposals must include sufficient information and analysis of all important aspects, including legal, capital, risk etc. OSFI will review all serious proposals –May be subject to a user fee, depending upon the volume of necessary work OSFI does not promote insurance securitization but also does not discourage it

11 Thank you for your attention