Canadian regulatory environment could trigger insurance-linked securities market

A new report from MSA Research Inc. and Baron Insurance Services Inc., both based in Canada, looks at the Canadian legal and regulatory environment and asks how that could impact the formation of a market for insurance-linked securities in the country. The MSA/Baron Outlook report is released quarterly and looks at P&C trends in Canada.

There isn’t a market for ILS in Canada right now, we haven’t heard of any catastrophe bonds being issued to cover solely Canadian risks to date. A number of cat bonds have been issued which include some Canadian risks (usually Canadian earthquake risks) but they have been issued by large, mainly U.S. based insurers.

The report looks at the state of Canadian law and regulation and how the current state and future changes could impact the formation of an insurance-linked securities market there. It suggests that new governance and expectations around risk management of reinsurance risk transfer that are coming from the Office of the Superintendent of Financial Institutions (OSFI) may lead some Canadian insurers to think of issuing ILS or cat bonds.

Recent regulatory and legislative developments in Canada which could encourage the growth of an ILS market include:

• The new risk and governance expectations of the OSFI (see its paper Reforming OSFI’s Regulatory and Supervisory Regime for Reinsurance and its Guideline B-3 both PDF documents)
• An increase in capital requirements which is a result of Basel III
• PCS Canada (which was only launched in March 2010) and it’s industry loss data and indices.

The report suggests that despite these regulatory changes and the formation of indices Canada will still require a harder reinsurance market if ILS is to be attractive to insurers. As with the market elsewhere, large catastrophes affecting local insurers would also help to trigger demand and interest in catastrophe bonds.

It’s interesting as the regulatory environment that is appearing in Canada is similar to the one that Solvency II will bring, with it’s increased capital requirements, focus on risk transfer etc. Many say that Solvency II could trigger demand for insurance-linked securities and it seems Canada could experience a similar demand.