Fall 2013

Superintendent Julie Dickson Addresses the 2013 National Insurance Conference of Canada (NICC)

Excerpt from remarks delivered by Superintendent Julie Dickson to the 2013 National Insurance Convention of Canada – Gatineau, QC – September 23, 2013

What a difference a year makes

When I was here last year, I commented on how well the Property and Casualty (P&C) insurance industry was doing. At the time, the P&C sector was enjoying relative stability compared to other sectors. Although companies were being affected on the investment side by low interest rates and market performance, overall measures like Return on Equity (ROE) looked good and underwriting performance was the strongest since 2006.

In terms of P&C-focused risks, what a difference a year makes. Three major events occurred within the space of a month (extreme flooding in Calgary and Toronto and the tragic explosion in Lac Mégantic). The industry’s response to these catastrophic events has been admirable, but they will cause a negative impact on company bottom lines.

Last year, when most P&C companies were enjoying a good year, I mentioned at this forum that OSFI was being asked why – given the positive indicators in the industry – we were pursuing a range of initiatives, such as Own Risk and Solvency Assessment (ORSA), a new earthquake guideline, new governance expectations and a new framework for the Minimum Capital Test (MCT). My response was that the P&C industry is an essential part of a thriving economy and that P&C companies need to be prepared for everything, from financial turmoil in global markets to natural catastrophes, and therefore cannot be complacent – even in a good year – about the need to manage risk.

Catastrophe Risk Management

Increased frequency and severity of catastrophe losses are part of the new reality for insurance companies. Within the last five years, we have seen a level change in insurer losses to around $1 billion or more annually. A number of reasons have been cited for this increase including: changing weather patterns and climate conditions; aging infrastructures in municipalities across the country; increasing urbanization; and even an increase in finished basements.

Insurers need to be increasingly focused on climate risk and stress testing, pricing, quality of risk modeling and “non-modeled” risks, such as flooding. The short-term impact of the recent catastrophe losses in Canada is becoming clearer. Some lessons learned include a growing need to meet the additional challenge of being prepared to deploy claims teams in the case of the occurrence of multiple events, as we had in Canada. In addition, insurers for catastrophes, at least above a certain size, will need to actively manage their capital. Another lesson is that ambiguity in policy wording can be expensive and difficult to avoid, especially under the public spotlight of a major catastrophe. And companies will also need to think about how many reinsurance reinstatements to have, what type of coverage and what collateral arrangements to put in place.

Risk assessment continues to be important. Establishing tolerance limits for each risk, assessing risk exposure using your own methodologies, establishing internal targets and documenting the process all contribute to strengthening the Enterprise Wide Risk Management process. A strong ORSA supports good governance and risk awareness and is an effective way for companies to determine how much capital to have on hand.

Capital and Governance

Changes to capital requirements are often scrutinized by companies, analysts and regulators alike. OSFI has been consulting with you on the Minimum Capital Test to ensure that our framework remains effective in an ever-changing world. On May 24, 2013, we released a discussion paper setting out proposed changes for the 2015 MCT capital framework, along with a proposed Quantitative Impact Study (QIS) that was due to OSFI by July 31, 2013. About 125 companies responded to the request to complete a QIS on the proposed changes and, of those, 50 provided comments, which is very helpful to us.

Once OSFI’s analysis of the results and our review of the comments are completed, a draft version of the MCT will be posted for comment, likely by the end of the calendar year, and the final version of the guideline will be issued well in advance of the 2015 implementation date.

Perhaps of greatest importance to sound risk management is strong governance by a company’s board of directors. Boards must be engaged in questioning and understanding the factors that affect a company’s performance and make sure that planning and preparation for the unexpected is occurring, appropriate to the size and complexity of the company and the risks it assumes. This is what shareholders and policyholders expect, as well as OSFI. And while branches do not have boards of directors, our expectations for branches are similar when it comes to risk oversight and management. In this regard, OSFI plans to review and consider changes to Guidelines E-4A and E-4B sometime next year. This will allow us to align our expectations for branches with the new approaches reflected in our revised Corporate Governance Guideline as well as to address the concerns expressed by the industry in recent consultations.

Robust Risk Management and Governance

Sometimes concerns are raised about the industry’s ability to cope simultaneously with ORSA, capital and increased governance requirements. Sometimes companies say that this could cause them to be distracted from the effective running of their companies. In OSFI’s view, those companies that have top-notch risk management and governance regimes in place will be ahead of the curve and better able than their peers to deal with challenges as they arise.

Click here to view the full text of the Superintendent’s remarks.

OSFI Releases 2012-2013 Annual Report

The 2012-2013 Annual Report for the Office of the Superintendent of Financial Institutions (OSFI) was tabled in Parliament on October 22, 2013. The report provides a summary of OSFI’s performance and achievements against stated priorities for the year under review. These priorities included responding to risks emanating from the economy and from regulatory reform, maintaining a high-performing and effective workforce, and enhancing OSFI’s corporate infrastructure.

“The Canadian financial sector remains respected internationally for its stability and prudence,” said Superintendent Julie Dickson. “While well earned, this reputation is not one that can be taken for granted, and financial institutions must continue to stay focused on managing risk.”

Click here to view OSFI’s 2012-2013 Annual Report.

Chief Actuary of Canada unveils external peer review panel for Actuarial Report on CPP

The Office of the Chief Actuary (OCA) has announced the establishment of a panel of actuaries to review the 26th Actuarial Report on the Canada Pension Plan (CPP).

Produced every three years, the Actuarial Report on the CPP is considered by the federal and provincial Ministers of Finance when reviewing and making recommendations on the CPP. This is the sixth external peer review of the CPP Actuarial Report. The external peer review process has been in place since 1999 and generated a number of valuable recommendations that have been a source for continued improvements in the quality and transparency of actuarial reports.

The panel members are all Fellows of the Canadian Institute of Actuaries (CIA). The panel comprises: Dr. Robert L. Brown, who is the current President-Elect of the International Actuarial Association (IAA) and also serves as an Officer of the organization, member of the Nominations Committee and Chair of the IAA Leaders’ Forum and Strategic Planning Subcommittee; Mr. Mark W. Campbell, a former member of the CIA Actuarial Standards Board; and Mr. Thomas D. Levy, a current member of the U.S. Actuarial Standards Board and former Vice-Chair of the CIA's Practice Standards Council. Each panel member has extensive experience in pension plan actuarial valuation and is a previous reviewer of the CPP Actuarial Report. Dr. Robert L. Brown will serve as Chair of the panel.

To ensure impartiality and enhance the credibility of the peer review process, the globally recognized social security experts at the United Kingdom Government Actuary's Department (GAD) selected the panel members and will also provide an independent opinion on the work done by the reviewers.

The tabling of the Actuarial Report on the CPP is expected to take place before year end. After the report is tabled, the panel will have three months to perform its review and prepare a report. Once the GAD has issued its opinion, the review panel’s report and GAD’s opinion will be made public.

Click here to view previous CPP Actuarial Reports, independent reviews, and GAD opinions.

Memo from Assistant Superintendent Mark Zelmer: Longevity Risk Transfer – Market and Regulatory Developments

In July 2013, the Canadian Institute of Actuaries released a draft report on Canadian Pensioner Mortality. The report provides updated mortality tables showing that the life expectancies of Canadian pensioners continue to increase. Increasing longevity increases the cost of funding both pension plan obligations and insurer annuities involving life contingencies.

These increases are causing some pension plans to consider how they can best manage the larger financial obligations associated with longer periods of retirement. Life insurance and re-insurance companies have traditionally played an important role in assuming mortality risks, including longevity risk. It is therefore natural to see a growing interest in transferring longevity risk from pension plans to insurance and reinsurance companies. If properly managed, longevity risk can be used to hedge the mortality risk in other life insurance obligations, and some jurisdictions (notably the UK) are already experiencing a trend in defined benefit pension plans transferring longevity risk.

The international regulatory community is working to increase understanding of the risks associated with longevity risk transfers and to help set international principles for effective supervision of these arrangements. The Joint Forum also released a draft consultation paper entitled “Longevity Risk Transfer Markets: Market Structure, Growth Drivers and Impediments, and Potential Risks”. The Joint Forum was seeking comments from industry, policymakers and supervisors within and across the financial sectors by October 15, 2013.

OSFI supports the development of international principles and standards that help promote a level playing field and limit the arbitrage of regulatory rules between jurisdictions. To this end, the industry and provincial insurance supervisors were encouraged to provide comments on the report directly to the Joint Forum. OSFI will consider what steps are necessary to meet the international expectations within the Canadian regulatory framework as international work progresses.

Similar to OSFI’s advisory to defined benefit pension plans, OSFI expects that those insurers and reinsurers that may be interested in assuming longevity risk should have the appropriate risk management expertise and governance in place to assume this particular risk.

Click here to read the full memorandum on longevity risk transfer.

Credit Valuation Adjustments and Market Risk Hedges

OSFI posted a letter clarifying the application of the Credit Valuation Adjustment (CVA) capital charge in Chapter 4 of the Capital Adequacy Requirements (CAR) Guideline.

As specified in the CAR Guideline, the CVA capital charge will take effect as of January 1, 2014. To ensure an implementation similar to that in other countries, the CVA capital charge will be phased in over a five-year period beginning in 2014, according to either Option 1 or Option 2, as mentioned in the annex to the posted letter.

OSFI would also like to clarify that, although market risk hedges of CVA are not recognized in the CVA capital charge, market risk hedges of CVA used for the purposes of mitigating CVA risk, and managed as such, are exempt from market risk capital requirements.

All of these changes will be reflected in the next revision of the CAR Guideline. In the interim, the annex of the posted letter reflects the new CVA methodology.

Click here to view related documents.

Memorandum to the Actuary (Life Insurance)

Every year, OSFI updates the Memorandum to the Actuary pursuant to Section 667(2) of the Insurance Companies Act.

The Memorandum to the Appointed Actuary (AA) specifies the contents of the annual Appointed Actuary’s Report (AAR) to OSFI. This year’s Memorandum includes the following changes from the 2012 Memorandum:

• References in the Memorandum to the MCCSR and TAAM have been removed since such reporting is required in a separate report to OSFI.
• The AA’s opinion required in the AAR in previous years was different from the standard wording specified in the CIA Consolidated Standards of Practice. This year we are requiring the standard form of the opinion. The change to the GAAP opinion reflects the evolution in the acceptance of GAAP statements by financial statement users (including OSFI) since the time the previous opinion was created.
• The requirement for the AA to follow the methodology outlined in the “Report of the CIA Task Force on Segregated Fund Investment Guarantees” dated March 2002, has been replaced with reference to more recent guidance.
• The disclosure requirements for credit risk, for both the valuation assumptions and the actual gains/losses, have been clarified to ensure that all the effects of credit risk are captured.
• The provisions for adverse deviations for mortality, mortality improvement, morbidity and morbidity improvement are to be disclosed separately in the summary table and product data tables.
• The AAR is to include disclosure of the reporting relationship of the AA.
• In addition, various minor changes have been made to clarify information requirements. Also, some sections have been relocated in the Memorandum, but with no substantive changes.

Click here to view the full Memorandum to the Actuary (Life)

Memorandum to the Actuary (Property and Casualty)

Every year, OSFI updates the Memorandum for Actuarial Reports on Property and Casualty Business pursuant to section 667 of the Insurance Companies Act.

The Memorandum outlines the guidelines and requirements for the actuaries who are required to prepare reports to be filed with the P&C-1 and P&C-2 annual returns. This year’s Memorandum includes the following changes from the 2012 Memorandum:

• The AA’s opinion required in the AAR in previous years was different from the standard wording specified in the CIA Consolidated Standards of Practice. This year we are requiring the standard form of the opinion. The change to the GAAP opinion reflects the evolution in the acceptance of GAAP statements by financial statement users (including OSFI) since the time the previous opinion was created.
• The AAR is to include the reason for re-submitting AAR (re-submissions only).
• The AAR is to include disclosure of the reporting relationship of the AA.
• The following field has been added to the ULCRE analysis exhibit:
  • A drop down in the UCLRE exhibit for accident year or underwriting year reporting.
  • In such cases, Line 15 of the “Total” exhibit must be adjusted so that Line 16 (Grand Total) equals to the net unpaid claims and expenses reported on the opinion page.
• In addition, various minor changes have been made to clarify information requirements. Also, some sections have been relocated in the Memorandum, but with no substantive changes.

Click here to view the full Memorandum to the Actuary (P&C)

Industry Consultations on OSFI’s Assessment Methodology

OSFI has undertaken a review of the Assessment of Financial Institutions Regulations, 2001 for all federally regulated financial institutions, including banks, authorized foreign banks, trust and loan companies, and cooperative credit associations (collectively referred to as “federally regulated entities” or “FREs”), to ensure that distribution of OSFI’s expenses through assessments appropriately reflects the time and resources that OSFI devotes to supervising and regulating individual FREs.

For each type of FRE, the Consultation Paper summarizes the current assessment methodology, identifies key considerations in developing a new methodology, outlines the proposed amendments, and summarizes the expected aggregate impact using data from the 2008-09 and 2009-10 assessment years. To assist FREs in gauging the impact of the proposed changes on their institution, all active FREs that received an assessment during the 2008-09 and 2009-10 assessment years will receive a letter from OSFI detailing their institution-specific impact.

Interested parties are invited to provide comments on the proposed assessment methodology by November 29, 2013 through their industry association or directly to OSFI.

Click here to view the consultation documents.

Recent Postings

Capital Ruling – NHA MBS and the Asset-to-Capital Multiple

OSFI issued its second Capital Ruling on the application of exceptions that may be granted in relation to the calculation of the assets to capital multiple (ACM) under International Financial Reporting Standards.  The Ruling describes the specifics of a second situation involving National Housing Act Mortgage Backed Securities and how OSFI concluded with respect to the treatment under the ACM.

Click here to view the capital ruling.

Actuarial Report on the RCMP Pension Plan

The Actuarial Report on the Pension Plan for the Royal Canadian Mounted Police, as at 31 March 2012, was tabled in Parliament on October 16, 2013.

Click here for the actuarial report.

Final 2014 BCAR Return Changes

The Deposit-Taking Institutions (DTIs) 2014 final BCAR (BA) return templates and instructions have now been posted on OSFI’s website.

Click here to view the updated return templates and instructions.

Draft revisions to Earthquake Financial Resource Formula and Earthquake Data Collection Form for Consultation

OSFI issued a memorandum outlining the proposed measure of earthquake exposure and earthquake financial resource formula within the Minimum Capital Test (MCT). The memorandum also includes a proposed revision to the annual Earthquake Exposure Data Form.

Click here to view the memorandum.