Reinsurance and Other Forms of Risk Transfer Risk Based Supervision of Reinsurers and Insurer’s Reinsurance Coverage - Case Study – Possible Responses May 26-28, 2015 Connie Dewar, Managing Director Life Insurance Group Office of the Superintendent of Financial Institutions

Possible Responses What are the key inherent risks in the underlying products? (focus on disability income) What assessment would you give (high/medium/low)? Interest rate risk – long term nature of product, reinvestment risk Insurance risk – morbidity, lapse, expenses Operational risk – new line of business, requires different expertise to underwrite and adjudicate claims Strategic risk – need business to improve growth Which of these could be mitigated by reinsurance? Insurance risk – morbidity – 80% of business has been ceded Operational risk – new line of business, requires different expertise to underwrite and adjudicate claims – reinsurer could provide support What risks are created by the use of reinsurance? What assessment would you give (high/medium/low)? Credit/counterparty risk – lower for local reinsurer, higher for New Re Operational risk – need to set up reinsurance systems/processes since did not use reinsurance much in the past Regulatory risk – new reinsurer, contracts need to be negotiated

Possible Responses How would you assess the quality of risk management of the reinsurance program? What would you consider? Reinsurance philosophy – is it in line with risk appetite and risk tolerance? Review process to select and evaluate reinsurer Review processes to implement reinsurance – contract negotiation, administration, reporting, etc. Roles and responsibilities – board, senior management, line managers Expertise of those responsible Appropriate oversight / independence Review attestation program regarding compliance with reinsurance policy and guideline Internal audit reviews and findings on reinsurance program

Possible Responses What is the net risk of the reinsurance program? / How would you assess the effectiveness of the reinsurance? Good that they assessed the need for reinsurance – don’t have expertise in disability income Didn’t appear to do appropriate due diligence when selecting second reinsurer Lack of independence of CRO since he made the decision to choose the reinsurer without proper due diligence Poor governance by Board since they agreed on reinsurer without proper review What recommendations, if any, would you give to the company? Review reinsurance policy and procedures, specifically the due diligence process for selecting reinsurers Ensure board receives appropriate materials to make informed decisions Review mandate of CRO to ensure independence