Principles proposed for regulating insurance-linked securities in Canada

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Almost exactly a year ago we wrote about a report from MSA Research Inc. and Baron Insurance Services Inc. which looked at the Canadian regulatory environment and asked how it could impact an insurance-linked securities market in Canada. Now, the latest MSA/Baron Outlook report has been published and an article in it makes proposals for improving the regulatory environment to encourage insurance-linked securities and catastrophe bonds to be used in Canada.

The article titled ‘Key Principles for a Canadian ILS Regulatory Regime’ discusses whether the Canadian financial, capital markets and insurance regulatory environments are ready for insurance-linked securities. There currently isn’t a regulatory environment to support insurance securitizations in Canada, it says, the primary reason being the lack of demand for one to date. But demand and interest is growing and the authors of the report suggest it’s time to start creating one.

Most of the proposals in the report revolve around the formation of special purpose vehicles (SPV’s) used to issue the notes resulting from an ILS transaction. Among the recommendations in the report the authors say that SPV’s should always be fully funded and collateralized, the assets must be held in trust and financial institutions shouldn’t be in charge of the SPV’s.

Aside from SPV’s the report recommends that investors have no recourse to the ceding reinsurer for payment, investors claims are subordinate to the claims made by the sponsor, any ILS transaction has to involve real transfer of risk for credit to be granted and transactions must be fully transparent so that the regulator can fully understand them.

These are all principles which are adhered to in other financial markets where insurance-linked securities and catastrophe bonds are issued, so it seems sensible that Canada should adopt a similar environment to encourage ILS transactions. We await the first Canadian issued and domiciled cat bond with much anticipation.

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