1. Unlicensed Reinsurance Can Mean A Hit on Regulatory Capital
When a Canadian insurance company cedes risk to an unlicensed reinsurer, it will take a hit on its regulatory capital unless adequate security is maintained in cash or in a reinsurance security account.
2. There is a Formula for Determining the Amount of Reinsurance Security
The amount of money required in a reinsurance security account is a function of the unearned ceded premium, the unpaid claims, and the incurred but not reported claims.
3. Reinsurance security accounts may be established at most major banks in Canada.
Most if not all of the major banks have standard documents that are used for reinsurance security accounts. It is only within the last several years that reinsurance security accounts have existed in their current form, and most banks seem to have developed their forms from a common standard.
4. Insurance companies face some credit risk when ceding to an unlicensed reinsurer.
Even with a Reinsurance Security Account, if the losses on a program greatly exceed the expected levels, and the reinsurer suffers other financial hardships, Trisura could be left with unrecoverable reinsurance. For this reason, Trisura will evaluate the financial strength of the reinsurance company itself.
5. When fronting for a program, Trisura will need to pay premium taxes on the Gross Written Premium.
Insurance companies are liable to pay the premium tax on insurance policies. In addition to any net fees that the insurer requires to front for an unlicensed reinsurer, it will want to be reimbursed for the premium tax it must pay.