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Blaney McMurtry LLP

Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:

Re: Financial Services Sector Consultation Paper

I am pleased to provide you with my comments on the Government's consultation paper, An Effective and Efficient Legislative Framework for the Canadian Financial Services Sector.

In general, I support the Government's commitment to achieving the three principal goals of enhancing the interests of consumers, increasing legislative and regulatory efficiency and adapting the framework to new developments. With respect to specific statutes, I have the following comments:

Reinsurance Regulations

Pursuant to Sections 465 and 596 of the ICA, insurers are restricted, by regulation, to the use in any calendar year of no more reinsurance with non-approved reinsurers than 25 percent of the risks insured in their policies as measured by written premium. This has effectively limited the ability of Canadian P&C insurers to purchase reinsurance. In recent years, most of the new reinsurance capacity entering the Canadian market has come from reinsurers outside of Canada (hence non-approved under the definition in the ICA). In addition, as the Canadian insurance market consists of a significant number of companies with foreign affiliations, it is common for a company's corporate group to negotiate and purchase global reinsurance coverage in order to obtain the best possible terms. However, the restrictions in Sections 465 and 596 impede these companies from achieving ideal business solutions as they are then limited to the Canadian approved reinsurers to meet the requirements. For particular lines of coverage (e.g. Directors & Officers liability), there are few reinsurers in the Canadian marketplace that can provide the appropriate level of reinsurance capacity.

Under OSFI's capital guidelines, a margin is required for the amount of reinsurance ceded to non-approved reinsurers. The calculation of margin required includes "credit" for collateral held in OSFI approved formats (letter of credit or trust account). These margin and collateral requirements help ensure the capacity of unauthorized insurers to meet their Canadian commitments.

In considering this issue, the Government should also keep in mind that the current restriction is not in line with international practices. For example, the United Kingdom, United States and Australia do not have a similar restriction. In addition, there have been a number of international initiatives to strengthen domestic reinsurance supervision including new principles by the International Association of Insurance Supervisors, IMF reviews of insurance supervision, and a proposed EU Directive on reinsurance supervision.

Eliminating the restriction on reinsurance by non-approved reinsurers would contribute to the strength and solvency of P&C insurers by allowing them to more effectively manage their risks. In addition, it would facilitate another public policy objective; it will improve the availability of lines of insurance which primary insurers may be reluctant to provide because of the lack of reinsurance capacity within Canada.

Thank you considering my submission.

Yours very truly,

Blaney McMurtry LLP