OSFI.Concentration

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Reading: “Property and Casualty Large Insurance Exposures and Investment Concentration,” January 2025 Official Link

Author: OSFI (Office of the Superintendent of Financial Institutions Canada)

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BA Quick-Summary: Large Exposures & Investment Concentration This reading applies to federally regulated P&C insurers (including foreign branches) and covers these topics: Insurance Exposure: Limits large exposures to protect against major single-event losses. Investment Caps: Limits investments in one entity/group to 5% of total assets. Governance: Requires internal policies, monitoring, and compliance with OSFI reviews.

Pop Quiz

What are the 4 qualitative considerations for determining capital available?

Study Tips

Key Focus Areas:

• This guideline establishes OSFI's expectations for managing two critical risk areas: large insurance exposures and investment concentration
• Focus on the quantitative limits and policy requirements
• Pay special attention to the differences between insurance companies and foreign branches

Study Tips Summary:

This OSFI guideline is all about risk management limits. The key is understanding the numerical thresholds and policy requirements that P&C insurers must follow. The material is straightforward but detail-oriented.

Possible topics on the exam:

Section II: Large Insurance Exposures - Focus on the exposure limits and Net Retention calculations

Section III: Investment Concentration - Know the 5% investment limit

Definitions (Annex 1): Critical terminology - especially Single Insurance Exposure and Net Retention

Before You Start:

This guideline is relatively short but dense with specific requirements. This is a rules-based rather than conceptual paper. That means:

• Exact percentages matter - don't approximate
• Definitions are critical - I don't think they will test you on this directly, but it is good to have a strong knowledge base
• Policy requirements are as important as numerical limits

Estimated study time: a few hours

Key Concepts & Exam Focus

Section I: Purpose and Scope

Question: What entities does this guideline apply to? [Hint: P&C FRIs]

• All federally regulated property and casualty insurers (P&C FRIs)
• Applies to insurance companies (individual and consolidated basis)
• Applies to individual foreign branches

This guideline addresses two main risk areas:

• Large insurance exposures - losses from single large exposures and unregistered reinsurance counterparty failure
• Investment concentration - concentration risk in investment portfolios

Section II: Large Insurance Exposures

Gross Underwriting Limit Policy (GUWP)

Question: What are the key requirements for a Gross Underwriting Limit Policy? [Hint: DEL]

The GUWP should:

Define what constitutes a Single Insurance Exposure by class

Establish limits by class for maximum gross insurance risk

Review by Senior Management at Least annually

Single Insurance Exposure by Class

MEMORIZE THIS: Single Insurance Exposure definitions by class [Hint: PCST]

Property: Aggregated exposures at a single location

Credit: Aggregated exposures to one buyer or group of connected buyers

Surety: Aggregated exposures to one contractor or group of connected contractors

Title: Aggregated exposures related to legal title for a single location

Insurance Exposure Limits

This is probably the most important section:

Net Retention + Largest Net Counterparty Unregistered Reinsurance Exposure ≤ Limit (described below)

For Insurance Companies:

• 100% of Total Capital Available if control chain includes:

 - Widely held company, AND/OR
 - Regulated financial institution

• 25% of Total Capital Available otherwise

For Foreign Branches:

• 100% of Net Assets Available

Question: What are eligible Counterparty Risk Mitigation (CRM) techniques? [Hint: ELO]

Excess collateral

Letters of Credit

Other techniques deemed acceptable by OSFI

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Section III: Investment Concentration

Much simpler:

SIMPLE RULE: Investment concentration limit in any entity = 5% of Assets

• Insurance Companies: 5% of company's Assets
• Foreign Branches: 5% of company's Assets in Canada

Question: What should P&C FRIs consider beyond balance sheet investments?

• Off-balance sheet items: options, futures, forward contracts
• Unfunded portions of committed loans

Section IV: Guideline Administration

Question: What can OSFI do for non-compliance?

• Heightened supervisory activity
• Discretionary authority to adjust capital requirements
• Other corrective measures on case-by-case basis

Core Definitions (Annex 1)

These definitions are imo the most important:

Definition: Net Retention

• Amount of insurance exposure a P&C FRI retains for its own account
• Does NOT pass on to another insurer/reinsurer
• Include reinstatement premiums

Definition: Largest Net Counterparty Unregistered Reinsurance Exposure

• Largest amount of ceded unregistered reinsurance from a reinsurance group
• Measured on net basis (after CRM techniques)

Definition: Total Capital Available

• For insurance companies: consolidated total available capital per MCT/MICAT calculation

Definition: Net Assets Available

• For foreign branches: This is analogous to capital available

Definition: Investments (for concentration purposes)

• Assets acquired for income or appreciation
• EXCLUDES: loans to/guaranteed by Government of Canada, provinces, or OECD members

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Practice Questions

1. What percentage limits apply to investment concentration?

2. Under what conditions can an insurance company have 100% vs 25% exposure limits?

3. How is a Single Insurance Exposure defined for each class (PCST)?

4. What must be included in Net Retention calculations?

5. What are the three eligible CRM techniques?

6. How often must the GUWP be reviewed?

Practice Questions Answer Key

Question 1: What percentage limits apply to investment concentration?

Answer: 5% across the board

• Insurance Companies: 5% of the company's Assets
• Foreign Branches: 5% of the company's Assets in Canada

(This applies to aggregate market value of Investments in any one Entity or group of Affiliated Companies)

Question 2: Under what conditions can an insurance company have 100% vs 25% exposure limits?

100% of Total Capital Available when control chain includes:

• Widely held company, AND/OR
• Regulated financial institution

25% of Total Capital Available otherwise

(This refers to the limit for Net Retention + Largest Net Counterparty Unregistered Reinsurance Exposure)

Question 3: How is a Single Insurance Exposure defined for each class (PCST)?

Answer: PCST Classifications

Property: Aggregated insurance exposures at a single location

(including any exposures subject to the location)

Credit: Aggregated insurance exposures to any one single buyer or group of connected buyers

Surety: Aggregated insurance exposures to any one single contractor or group of connected contractors

Title: Aggregated insurance exposures related to the legal title for a single location

Question 4: What must be included in Net Retention calculations?

Answer: Net Retention Definition

Net Retention = The amount of insurance exposure which a P&C FRI retains net for its own account and does NOT pass on to another insurer (or reinsurer)

Must Include:

• Any reinstatement premiums should be included in the Net Retention value

Key Point: This is the amount the FRI keeps for itself after all reinsurance arrangements.

Question 5: What are the three eligible CRM techniques?

Answer: ELO Techniques

Excess collateral

Letters of Credit

Other CRM techniques deemed acceptable by OSFI

(CRM = Counterparty Risk Mitigation techniques used to measure ceded unregistered reinsurance exposures on both gross and net basis)

Question 6: How often must the GUWP be reviewed?

Answer: Annually (at minimum)

Full Requirement: The Gross Underwriting Limit Policy (GUWP) should be reviewed by Senior Management of the P&C FRI, at a minimum, annually.

Quick Reference Summary

Question Type	Key Answer	Memory Aid
Investment Concentration	5% of Assets	"5 floors in the building"
100% vs 25% Limits	Widely held AND/OR regulated	"100 widely-held people vs 25 others"
PCST Definitions	Location/Buyer/Contractor/Title	"PCST classes"
Net Retention	Include reinstatement premiums	"What you keep + reinstatements"
CRM Techniques	Excess/Letters/Other	"ELO techniques"
GUWP Review	Annual minimum	"Once per year minimum"

Key Formulas

Critical Formula: Net Retention + Largest Net Counterparty Unregistered Reinsurance Exposure ≤ Limit

Where Limit =

• 100% of Total Capital Available (if widely held and/or regulated)
• 25% of Total Capital Available (otherwise)
• 100% of Net Assets Available (for foreign branches)

Bottom Line: These are specific regulatory limits that must be memorized exactly. Unlike conceptual readings, precision in numbers and definitions is critical for exam success!

Quick Reference Summary

Risk Type	Key Limit	Applies To
Large Insurance Exposures	100% or 25% of Total Capital	Insurance Companies
Large Insurance Exposures	100% of Net Assets Available	Foreign Branches
Investment Concentration	5% of Assets	Both
GUWP Review	Annual (minimum)	All P&C FRIs

POP QUIZ ANSWERS

Availability, Permanence, Absence, Subordination