The slow pace of change for supervision and regulation of insurance companies is about to speed up, and Canadian brokers need to be ready, the Office of the Superintendent of Financial Institutions told an industry forum audience last night.
“While there has been a relatively slow pace of change in terms of global standards for supervision and regulation of insurance companies, this is about to change,” said Julie Dickson, the current superintendent of OSFI, “as seen by the recent announcements by the FSB and the IAIS. This is a significant development.”
Her remarks, made at the 2013 Life Insurance Invitational Forum in Cambridge, Ont., Thursday, focusing on the change in the global marketplace and their impact on Canadian insurers.
“Potential vulnerabilities in the global financial system remain a source of uncertainty. As noted by the FSB on November 8, volatility in asset prices and capital flows may occur as monetary policies are normalized,” she noted. “Companies and regulators should be considering downside scenarios, such as high asset-price volatility and an overshooting of long-term interest rates. Further, the FSB noted that companies and regulators should be factoring in amplifying factors, including the decline in secondary bond market liquidity.”
Her comments took a look ahead at the international implementation schedules for standards, and OSFI’s opinions on how the industry is creating and distributing products domestically. (continued.)
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“Today, in November 2013, where do we stand? The IAIS will field-test common regulatory and supervisory standards (ComFrame) for internationally active insurance groups (IAIGs), slated for final implementation in 2019,” said Dickson. “And a global capital standard is also expected in 2019. In addition, much has been accomplished in the areas of governance, risk management, supervisory colleges, and domestic capital requirements.
“Furthermore, OSFI has observed a much more thoughtful approach to the creation and distribution of new products, designed to sustain companies for the medium to long term. This needs to continue. In the past, there were too many examples of toxic products first being created by one or two insurers, which led to a herd mentality among insurers in the fight for new policyholder premium dollars.”
Dickson noted that actuarial functions are being strengthened and OSFI itself has” invested significantly” in actuarial resources (and more generally in life insurance talent).
“A robust risk appetite framework is being put in place by major insurance companies,” she said. “It allows the risk committee of the board, the CRO, and the company‘s management to more fully understand and monitor the level of risk a company is assuming in its risk-taking activities.”
Although new issues — like cyber risk — are emerging, Dickson noted, major insurance companies are stepping up to the plate to deal with them. And OSFI has recently issued guidance to help companies assess their own Cyber security requirements. (continued.)
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“For all insurers, the first round of the Own Risk and Solvency Assessment (ORSA) submissions are due in 2014. As we have said in the past, the O in ORSA stands for Own, not OSFI,” she pointed out, “and our expectation is that the assessment will help the senior management and the boards of insurers to understand how their risk taking is related to their risk appetite and can impact their solvency.”
Although lauding many advances on standards, there is still much work to be done, and much that remains unfinished, she said
“Major areas of uncertainty remain, such as IFRS,” she said. “Feedback on IFRS was due to the IASB by the end of October, and our view is that some change is needed in the exposure draft to recognize the long-term nature of the business. The Financial Accounting Standards Board (FASB) in the U.S. issued its own proposal to improve the financial reporting of insurance contracts in June.”
Potential vulnerabilities in the global financial system remain a source of uncertainty for OSFI. As noted by the FSB on November 8, volatility in asset prices and capital flows may occur as monetary policies are normalized.
“Companies and regulators should be considering downside scenarios, such as high asset-price volatility and an overshooting of long-term interest rates,” Dickson advised. “Further, the FSB noted that companies and regulators should be factoring in amplifying factors, including the decline in secondary bond market liquidity.” (continued.)
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Dickson urged life insurers to remain vigilant to grow and adapt with the coming tide of change.
“We are not in normal times. Successfully managing obligations takes considerable expertise,” she said. “Canadian life insurance companies have done well to manage through a difficult environment, and must continue to do so.”
