Codes on Reinsurance Arrangements

Codes on
Reinsurance Arrangements
FINANCIAL SERVICES AUTHORITY
Bois De Rose Avenue
P.O. Box 991
Victoria
Mahé
Republic of Seychelles
Tel: +248 4380800
Fax: +248 4380888
Website: www.fsaseychelles.sc
Email: enquiries@fsaseychelles.sc

Table of Contents

1. INTRODUCTION ................................................................................................................................... 3

2. DEFINITIONS ........................................................................................................................................ 4

3. OBJECTIVES ......................................................................................................................................... 5

4. GENERAL PRINCIPLES ............................................................................................................................. 6

5. SPECIFIC REQUIREMENTS .................................................................................................................... 7
   5.1 Board and Management Responsibilities ................................................................................. 7
   5.2 Reinsurance Management Strategy (RMS) ............................................................................... 8
   5.3 Reinsurance Arrangements ......................................................................................................... 9

6. PROHIBITED PRACTICES .................................................................................................................... 11

7. ENFORCEMENT.................................................................................................................................. 11
   7.1 Remedial Measures ................................................................................................................. 11
   7.2 Administrative Sanctions ........................................................................................................ 11

8. EFFECTIVE DATE ................................................................................................................................ 12

9. ENQUIRY ............................................................................................................................................... 12

10. INTRODUCTION
    In a world where catastrophes are becoming more regular and more costly, reinsurance plays a decisive role in helping insurers to better prepare for and manage risks which they undertake from policyholders. Their involvement in innovative financing solutions to address the consequences of such events is gaining significance. Reinsurers are at the forefront of efforts to identify emerging risks and as part of the myriad networking, reinsurers diversify their risks globally and share a wealth of risk expertise with their clients. Therefore, this code is being issued by the Financial Services Authority, (herein referred to as “the Authority”) and by the powers conferred by section 33 of the Financial Services Authority Act to be observed by all insurance and reinsurance companies (herein referred to as “insurers”) in Seychelles licensed under the Insurance Act, 2008 in order to provide guidance and establish best practices to be adhered on reinsurance management. The following must be considered:
    6.1 A reinsurance contract is a contract of indemnity between the reinsurer and an insurer and does
    not constitute a legal transfer of part of the underlying risk.
    6.2 This code is of equal relevance to life insurers, general insurers and reinsurers.
    6.3 Reinsurance forms a vital part of an insurer’s risk transfer strategy. It provides for protection
    against the potential large accumulations of individual losses that can result from losses.
    6.4 Reinsurance also functions as an alternative means of capital access in order to finance risk and
    business acquisition costs.
    6.5 Reinsurance provides flexibility for insurers in the size and types of risk and the volume of
    business they can reasonably underwrite.
    6.6 Use of reinsurance by insurers should be looked at as part of an overall risk assessment of the
    insurer and not merely with reference to a single type of risk and whether that risk has increased or decreased.
    6.7 A reinsurance contract is by nature a business‐to‐business transaction, made between
    professional counterparties as part of a wider risk and capital management approach.
    6.8 Reinsurance arrangements should take the following issues into account:
    (i) The relative financial strength and claims payment record of the reinsurers in question (both in normal and stressed conditions);

(ii) The soundness of the risk and capital management strategy; (iii) The appropriateness of the reinsurance strategy given the underlying insurance portfolios; (iv) The structure of the reinsurance programme; (v) The extent to which relevant functions are outsourced, either externally or within the same group of companies; (vi) The levels of aggregate exposure to a single reinsurer or different reinsurers being part of the same group; (vii) The proportion of business ceded so that the net risks retained are commensurate with the insurer’s financial resources; (viii) The level of effective risk transfer; (ix) The resilience of the reinsurance programme in stressed claims situations; and (x) The extent of any credit risk mitigation in place.
2. DEFINITIONS
The following key definitions apply:
“Authority” means the Financial Services Authority pursuant to the Financial Services Act, 2013; “Cedant” an insurer who enters into a reinsurance arrangement with a reinsurer. The term “the cedant” is synonymous with the term “the reinsured”; “Coinsurance” means the sharing of risk, on the same terms, between two or more insurance companies; “Facultative Reinsurance” means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the right to accept or reject each risk offered; “Fronting Arrangements” is the issuance of a policy by Seychelles licensed insurer on behalf of a second insurer because the second insurer is not licensed or admitted in Seychelles. The Seychelles licensed insurer who is not a licensed re‐insurer issues the policy to the insured and retains legal responsibility for meeting claim payments under it, but has reinsured 100% of its exposure to the second insurer;

“Insurer” means a registered insurance or reinsurance company authorised to conduct insurance business in Seychelles; “Investment Grade” ‐a rating on claims payment ability and financial strength of the reinsurer provided by ratings agency; “Maximum Event Retention (“MER”)” means the maximum amount retained, calculated separately by class of business, by the insurer in respect of the accumulation of all losses arising from a defined event; “Pool” is an organization of insurers or reinsurers through which particular types of risks are underwritten with premiums, losses, and expenses shared in agreed ratios; “Reinsurance” means a financial transaction by which risk is transferred (ceded) from an insurance company (cedant) to a reinsurance company (reinsurer) in exchange of reinsurance premium; “Reinsurer” ‐ An insurer assuming the risk of another insurer under are insurance contract; “Retention” means the net amount of risk which the ceding company or the reinsurer keeps for its own account; “Retrocession” means the reinsurance of reinsurance business accepted by a reinsurer. “Treaty” means a reinsurance agreement which is obligatory between the ceding company and the reinsurer containing the contractual terms applying to the reinsurance of some class or classes of business.
3. OBJECTIVES
The objectives of this code are to ensure that insurers:
(i) Set standards for the use of reinsurance and other forms of risk transfer; (ii) Have a framework to manage the selection, implementation, monitoring, review, control and documentation of reinsurance arrangements that are used to contribute to the insurer’s ability to meet its obligations to policyholders; and (iii) Adequately control and transparently report their risk transfer programmes.

4. GENERAL PRINCIPLES
   4.1 Insurer’s reinsurance strategy shall be part of the risk and capital management strategy.
   4.2 The reinsurance strategy shall take into account the insurers’ business model, levels of capital
   business mix.
   4.3 Responsibility for developing and agreeing upon the strategy shall rest with the Board and
   Management of the insurer,
   4.4 Board and Management shall be responsible for establishing appropriate monitoring mechanisms
   to ensure that the strategy is being delivered and complied with by the insurer.
   4.5 The Board and Management shall commission regular reviews of the performance of the
   reinsurance programme, to ensure that it functions as intended and continues to meet its strategic objectives;
   4.6 The Board and Management shall put in place appropriate written terms of reference for the
   individuals or departments involved in the day‐to‐day management of the reinsurance programme, including scope of authority and specification of matters reserved for the Board and Management;
   4.7 The insurer shall be required to put in place controls of reinsurance arrangements suitable in the
   context of the nature, scale and complexity of the business and the extent of their reinsurance exposures. These controls shall be part of the insurer’s overall internal control and governance structure.
   4.8 The insurer shall be required to consider the following features while conducting traditional
   reinsurance transactions;
   4.8.1 The characteristics of its reinsurance programme, including associated counterparty risk,
   are adequately reflected in any assessment of risk‐based solvency capital.
   4.8.2 Procedures for identifying reinsurers that provide security which it finds acceptable and
   for keeping this under review. There should also be processes for dealing with situations where there is a need to assess reinsurers outside the minimum investment grade.
   4.8.3 Set prudent limits or codes reflecting security and size of the reinsurer, in relation to its
   maximum aggregate exposure to any one reinsurer or to a group of related reinsurers.
   4.8.4 Procedures for monitoring this aggregate exposure to ensure that these limits or codes
   are not breached, including procedures to see that excess concentrations are brought back within limits or codes, or otherwise managed, going forward.

4.8.5 Processes to ensure that all reporting due to and from reinsurers is timely and complete
and that settlements are made as required by the contract.
4.8.6 The cedant shall give due consideration to the risk posed by a mismatch, unintended or,
in terms and conditions between reinsurance contracts and the underlying policies, meaning that the cedant may bear a greater net exposure than it intended because of this gap.
4.8.7 The insurer should have a specific process in place to approve, monitor and confirm the
placement of each facultative risk. The facultative reinsurance shall be secured before the commencement date of the policy for the risk that exceeds its treaty capacity and/or its risk appetite. The insurer should further ensure that reporting of balances due to and from facultative reinsurers is timely and complete and that settlements are made as required by the contract/within a specific duration.
4.8.8 Monitor the performance and potential exhaustion of its reinsurance programme, to
ensure compliance with the reinsurance strategy and to make decisions about the ongoing suitability of the programme.
4.9 An insurer shall be required to have processes in place to ensure that it has accurate and complete
reinsurance documentation at, or shortly after, the inception date of its reinsurance arrangements. Reinsurance documentation ensures clarity in the contract terms and conditions and reducing the possibility of dispute between the parties when called upon to fulfill their contractual obligations.
4.10 The insurer shall be required to control its liquidity position taking into account the structure of
the risk transfer contracts and their likely payment patterns. These can include clauses which allow for accelerated payment of amounts due from reinsurers in the event of a large claim and/or the use of collateral or deposit accounts, giving cedants access to funds as needed.
4.11 The insurer shall be required to transact insurance business with reinsurers having minimum
investment grade rating of BBB provided by international ratings agency Standard and Poors, AM Best, Moody’s or the equivalent.
5. SPECIFIC REQUIREMENTS
5.1 Board and Management Responsibilities
5.1.1 The Board of Directors shall approve limits on:
(i) The net risk to be retained per class of business and aggregate for the company; and (ii) The maximum foreseeable amount of reinsurance protection to be obtained from approved reinsurers.

5.1.2 Management shall document clear policies and procedures for implementing the
reinsurance strategy set by the Board of Directors, including:
(i) Setting underwriting codes that specify the types of insurance to be underwritten, policy terms and conditions, and aggregate exposure by class of business; (ii) Establishing and documenting limits on the amount and type of insurance that will be automatically covered by treaty reinsurance; and (iii) Establishing and documenting criteria for acquiring facultative cover.
5.1.3 The Board of Directors shall review the reinsurance strategy at least biennially and
whenever there have been material changes in the company’s circumstances.
5.1.4 An insurer shall seek the advice of Appointed Actuary on the soundness of risk and capital
management strategy before entering into, modifying or terminating a reinsurance arrangement.
5.2 Reinsurance Management Strategy (RMS)
5.2.1 Every insurer shall have a written reinsurance management strategy (RMS), approved by
the company’s Board of Directors that is appropriate to the insurer’s overall risk profile.
5.2.2 An insurer shall be required to review and submit its RMS to the Authority annually and
whenever there have been material changes in the company’s circumstances prompting revision of the RMS, within 20 working days of the insurer’s Board approving the RMS.
5.2.3 At a minimum, the RMS of an insurer shall:
(i) Identify the insurer’s tolerance for risk; (ii) Identify the level of cessions appropriate for the insurer’s tolerance for risk; (iii) Identify, and clearly articulate, any other reasons for seeking reinsurance cover, such as risk diversification, financing of new business or expertise transfer; (iv) Determine what types of reinsurance arrangements are most appropriate to limit risks to the insurer’s level of tolerance; (v) Set out how liquidity will be managed where there is a timing mismatch between the payment of claims and the receipt of reinsurance recoveries; (vi) Identify the insurers appetite for credit risk.
5.2.4 The RMS shall be part of the insurer’s overall underwriting strategy which in turn is a
subset of the company’s risk management strategy.
5.2.5 The RMS shall define and document the insurer’s approach for reinsurance management
framework, identifying the procedures for:

(i) The reinsurance cover(s) to be purchased;
(ii) The selection process of reinsurers;
(iii) What collateral, if any, is required from the reinsurer at any given time; and (iv) How the reinsurance program will be monitored, including reporting and internal control systems.
5.3 Reinsurance Arrangements
5.3.1 Insurers may enter into reinsurance arrangements whereby insurance risk is transferred
from the direct insurer to the reinsurer. Reinsurance contracts may be:
(i) Traditional contracts, such as “treaty” and “facultative” reinsurance; and (ii) Within treaty reinsurance, reinsurance cover may be proportional or non‐ proportional, and contracts such as surplus reinsurance, excess of loss reinsurance, stop loss reinsurance and catastrophic excess of loss reinsurance may be entered into.
5.3.2 Insurers may enter into coinsurance arrangements, provided that any such
arrangements are clearly identified and fully taken into account in the insurer’s reinsurance strategy.
5.3.3 Insurers may enter into inward reinsurance arrangements, provided that:
(i) Any such arrangements are clearly identified and fully taken into account in the insurer’s reinsurance strategy; (ii) Adequate retrocession arrangements are in place, so that the insurer entering such arrangements only retains the levels of risk in accordance with its risk management and reinsurance strategies; (iii) The insurer has provided for adequate reserving for any inwards reinsurance business; and (iv) The terms and conditions of the reinsurance cover must be compatible with those of the underlying insurance business, in order to avoid uncovered risk.
5.3.4 Limits on the net risk to be retained need to be set both by line of business and for the
whole company. The insurer will also need to set limits per risk or per event, or a combination thereof. The limits must be based on an evaluation of the insurer’s risk profile and the cost of reinsurance. The limits, or retentions, must be based on calculations by line of business.
5.3.5 In calculating the quantum of reinsurance cover required, insurers shall apply the
following methodology:

(i) A calculation of the quantum of maximum loss arising from the catastrophic event determined by the Board to be the most financially damaging to the insurer; (ii) In calculating the maximum loss, the Board shall include the impact of this catastrophic event on all classes of business underwritten by the insurer; (iii) Establishing the Maximum Event Retention (MER). (iv) Effect reinsurance cover between the maximum loss and the MER.
5.3.6 The insurer must put in place adequate internal control systems to ensure that:
(i) All underwriting is carried out in accordance with company policy; (ii) Planned reinsurance cover is in place at all times; (iii) Claims are reported to the reinsurer in a timely manner and in accordance with the reinsurance agreement; (iv) Reinsurance claims payments are being promptly recovered; and (v) Material deviations from items (i) to (iv) above are identified and reported to Management and the Board of Directors.
5.3.7 The insurer must have in place written procedures in respect of:
(i) Timely payments of reinsurance premiums to reinsurers; and (ii) Timely recovery of reinsurance claims.
5.3.8 Insurers may establish reinsurance pools, provided that such pools have been authorized
by the Authority in writing. In providing such authorization, the Authority will take into account that:
(iii) Any such arrangements are clearly identified and fully taken into account in the cedant’ s reinsurance strategy; (iv) Adequate retrocession arrangements are in place, so that each cedant participating in the pool only retains the levels of risk in accordance with its risk management and reinsurance strategies; (v) The business within the reinsurance pool is accounted for separately; and (vi) The reinsurance pool has provided for adequate reserving for any inwards reinsurance business.
5.3.9 Approval to participate in an international reinsurance pool managed and administered
outside Seychelles must be obtained from the Authority in writing.
5.3.10 The Authority reserves the right to request further details of reinsurance arrangements
and copies of reinsurance slips and reinsurance treaties from time to time. Such a request must be complied with within the reasonable time limit set by the Authority.

6. PROHIBITED PRACTICES
   6.1 Reinsurance arrangements must involve transfer of risks from direct insurers to reinsurers.
   6.2 Fronting Arrangements are prohibited.

7. ENFORCEMENT
   7.1 Remedial Measures
   7.1.1 When the Authority determines non‐compliance with the provisions of this code, it may
   take any intervention prescribed in the relevant law.
   7.1.2 When the Authority determines that the insurer’s non‐compliance with the provisions
   of this reinsurance directive impact the company’s ability to meet claims as and when they fall due, the Authority may issue such orders which it considers necessary to protect policyholders in accordance with the Insurance Act.
   7.2 Administrative Sanctions
   7.2.1 Where the Authority determines that an insurer has not met the requirements of this
   code, the Authority may impose any or all of the administrative sanctions to correct the situation in accordance with the provisions of the Insurance Act, including but not limited to:
   (i) Prohibition from declaring and/or paying dividends; (ii) In the case of insurers and/or intermediaries carrying out unauthorized fronting arrangements, suspension of license; (iii) Suspension or closure of the insurer to new business; (iv) Suspension of acquisition of fixed assets; and (v) Monetary penalties.

8. EFFECTIVE DATE
   The effective date of this code is October 01st, 2018.

9. ENQUIRY
   Enquiries on any aspect of this code shall be referred to; Director of Insurance and Pension Supervision Section Financial Services Authority P.O. Box 991, Victoria, Mahé SEYCHELLES Telephone: +248 4 380 800 Facsimile: +248 4 380 888 E‐mail: insuranceservices@fsaseychelles.sc