Summer 2015

Remarks by Superintendent Jeremy Rudin to the C.D. Howe Institute

On June 17, 2015, Jeremy Rudin gave a speech to the C.D. Howe Institute in Toronto entitled, “Away from the Lamp post: Culture, Conduct and the Effectiveness of Prudential Regulation”. Following are some key excerpts:

The role of culture in effective risk management

In our approach to prudential regulation, OSFI likes to emphasize that it is the boards and senior management of financial institutions, and only they, who are responsible for taking risks and managing those risks.

That said, one of our most important roles is to restrain risk-taking by financial institutions that would be excessive from the public’s point of view.

Given the nature of financial services, we can only accomplish this goal by being proactive, by acting well before a situation becomes dire. We cannot rely much, if at all, on backward-looking indicators of risk management.

To that end, we have instituted new or reinforced guidance on risk management in the years following the financial crisis, as have many other countries.

Effective boards and their culture

It was not that long ago that a typical major bank in Canada had a board of well over thirty members, many of them corporate clients of the bank, few of them with knowledge of the inner workings of large financial institutions or the broader financial services industry. This approach to board membership was already seen as outmoded by the time that OSFI issued its first Corporate Governance Guideline in 2003.

OSFI has taken a principles-based approach to corporate governance guidance, leaving boards with the flexibility they need to organize their work as they see fit. The question of “culture” is as important at the board level as it is within the institution itself. Every question that a board member poses to senior management both reflects and shapes the culture of that board. Moreover, those questions will transmit to senior management how the board sees its oversight responsibilities and how it wants to exercise them.

Culture, Conduct and Prudential Regulation

As a principles-based regulator, we endeavour to set high-level principles and allow flexibility in how financial institutions meet those expectations. In my view, we are fortunate that we have, in Canada, the preconditions that allow for effective principles-based prudential regulation. One of those preconditions is clear, honest, open and reliable two-way communication between us and the individual financial institutions. For principles-based prudential regulation to work well, we need to be able to rely on the information that we receive from institutions.

We do a lot of checking, to be sure. We are guided by the old Russian proverb, famously translated by Ronald Reagan as: “Trust, but verify.” Just as important as the verification is the trust. If we saw repeated major misconduct in the institutions that we supervise, we would have to ask ourselves if our “trust but verify” approach was really reliable.

Click here to read the full remarks.

Remarks by Superintendent Jeremy Rudin to the 2015 Property and Casualty Insurance Industry Forum

On June 4, 2015, Jeremy Rudin gave a speech to the 2015 Property and Casualty Insurance Industry Forum in Cambridge, Ontario. The speech focused on some of the issues currently facing the property and casualty insurance industry in Canada. Following are some key excerpts:

International Capital Standards for Insurance

Many of the pieces that are currently being discussed at the international level are already in place in Canada. So the work we have already accomplished positions our industry well for the eventual introduction of an international insurance standard.

The work on the new standard is far from complete, and calibration exercises have not yet begun. However, we currently believe that the international discussions are going in the right direction.

What I can do is to sketch out some possible scenarios regarding Canadian implementation. If we at OSFI find that the eventual international capital standard for insurance companies is too low for Canadian purposes, we will not relax our own domestic requirements. My predecessors did not race to the bottom when the first agreement on bank capital was completed, and all Canadians have benefitted from those decisions.

Own Risk and Solvency Assessments

I cannot emphasize enough that the key word in “Own Solvency and Risk Assessment” is “Own”.

We expect all insurers to conduct a robust ORSA. Part of that expectation is for each company to apply the process in a way that is tailored to its own business. Otherwise, the ORSA process will not be effective, and the effort will be wasted.

Trends in the use of Reinsurance

History has shown that over-reliance on reinsurance can be dangerous if it is used as a means to “rent” capital to support rapid growth in insurance premiums. Our Guideline B-3 provides valuable considerations on reinsurance risk management practices such as the importance of diversification of reinsurers and robust, frequent credit evaluation of reinsurers. Risk management practices should also be applied to reinsurance provided by affiliates.

We are currently assessing the scope and potential impacts that recent changes in reinsurance practices may have on the ability of insurance companies to meet their obligations to policyholders if the insurer were to encounter stress.

We want to ensure that when the use of reinsurance serves as a substitute for capital, it is not used in a manner that leaves policyholders less protected.

Click here to read the full remarks.

Neville Henderson appointed Assistant Superintendent, Insurance Supervision Sector

On July 13, 2015, Superintendent Jeremy Rudin announced the appointment of Neville Henderson as Assistant Superintendent, Insurance Supervision Sector, effective July 20, 2015.

Mr. Henderson brings nearly 40 years of varied experience to his new position, including roles as Partner at PricewaterhouseCoopers and as a senior executive with medium and large insurance companies. He is a Fellow of both the Canadian Institute of Actuaries (CIA) and the Society of Actuaries and a former president of the CIA. Most recently, he has been working as the Managing Director within OSFI’s Life Insurance Group (Conglomerates).

Mr. Henderson joins OSFI’s Executive Committee, which includes Mark Zelmer, Deputy Superintendent, Regulation Sector; Gary Walker, Assistant Superintendent, Corporate Services Sector; Jamey Hubbs, Assistant Superintendent, Deposit-Taking Supervision Sector and Superintendent Jeremy Rudin.

Click here to read the letter.

Surveys, Studies and Notices

Impact of Revised Capital Framework for P&C Insurers

On July 13, 2015, OSFI published a letter outlining the impact of the Revised Capital Framework on P&C Insurers.

A high-level capital impact summary comparing the previous (old) and the revised (new) capital frameworks, based on regulatory filings by P&C insurers as of March 31, 2015, is presented within the letter. The summary includes the overall industry-wide capital impact as well as the impact on the distribution of capital requirements by major risk category in relation to the total capital required. Reported data indicates that the P&C industry is well positioned to meet the new capital requirements.

Click here to read the letter.

Draft Minimum Capital Test (MCT) Guideline for Industry Consultation

On July 22, 2015, OSFI issued the draft 2016 Minimum Capital Test (MCT) Guideline, which includes proposed amendments to the regulatory capital requirements for federally regulated property and casualty (P&C) insurers.

The most significant change to the guideline is the addition of further provisions for equity risk exposures. The provisions include capital requirements for equity derivatives (such as equity total return swaps, futures and forwards) and equity instruments held short, and the recognition of equity hedging strategies employed by P&C insurers.

OSFI would appreciate receiving comments on the proposed changes prior to September 4, 2015.

Click here to view the guideline.

Proposed Revisions for the MCCSR Guideline

On July 30, 2015, OSFI issued for comment a draft revised version of its Minimum Continuing Capital and Surplus Requirements (MCCSR) guideline for life insurers and insurance holding companies, which will come into effect on January 1, 2016. Comments on the proposed changes to the MCCSR should be provided to OSFI no later than September 4, 2015.

Click here to view the guideline.

Newsletter – InfoPensions, Issue 13

OSFI released the 13th edition of its newsletter on issues related to federally regulated private pension plans, InfoPensions, in May 2015.

Click here to view the InfoPensions newsletter.

Overview of the Pension Plans Survey Findings

In the fall of 2014, the Office of the Superintendent of Financial Institutions commissioned Harris/Decima, an independent research firm, to conduct a confidential, on-line survey with administrators and professional advisors of active private pension plans regulated by OSFI. The primary objective was to assess OSFI’s performance and to collect suggestions for improvement.

The results from the 2014 survey are comparable to those from the previous study conducted in 2011. High positive ratings pertain to effectiveness in supervising plans, guidance that provides a clear indication of OSFI’s expectations, satisfaction with the processing of approval applications and being able to communicate in the official language of choice.

Click here to read the entire overview.

Remittance of Pension Plan Assessments

OSFI has issued a Pension Assessment Remittance Form to assist plan administrators in the calculation and remittance of their annual pension assessment for plan years ending between October 1, 2014 and September 30, 2015.

Click here to access the remittance form.

OSFI congratulates the CIA on its 50th anniversary

OSFI congratulated the Canadian Institute of Actuaries (CIA) on its 50th anniversary.

OSFI and its predecessor organizations have benefited from and valued the many contributions made by actuaries. OSFI uses the work of internal and external actuaries due to the professionalism of the CIA’s members, as well as the strength of its standards of practice. OSFI takes comfort in the fact that Fellows of the Canadian Institute of Actuaries (FCIAs) hold the duty of the actuarial profession to the public above the needs of the profession and its members.

Click here to read the congratulatory letter to the CIA on its 50th anniversary.

Canada’s Chief Actuary returns a piece of its past

The Office of the Chief Actuary (OCA) showcased a bit of its history earlier this spring, when it returned an important piece of Canadian history to the family of the late Andrew D. Watson, the Government of Canada’s first Chief Actuary. In a small commemorative ceremony, Chief Actuary Jean-Claude Ménard presented Mr. Watson’s family with the former chief actuary’s 1922 UK Institute of Actuaries fellowship diploma, which had been housed at the former Department of Insurance and then OSFI for more than 50 years.

Canada Pension Plan Retirement, Survivor and Disability Beneficiaries Mortality Study: Actuarial Study No. 16

According to an actuarial study by the Office of the Chief Actuary (OCA), the mortality rates of Canada Pension Plan (CPP) retirement, survivor, and disability beneficiaries have fallen over the past two decades, leading to gains in life expectancy and with further gains expected in the future.

The Canada Pension Plan Retirement, Survivor and Disability Beneficiaries Mortality Study: Actuarial Study No. 16 provides a detailed historical analysis of the mortality of CPP beneficiaries over the period 1990 to 2013.

The Office of the Chief Actuary operates independently within the Office of the Superintendent of Financial Institutions (OSFI) and provides actuarial services for key government plans and programs such as the CPP, Old Age Security, Canada Student Loans, Employment Insurance, and pension and benefit plans that cover public servants, members of Parliament, and the Canadian Forces, among other groups.

Click here to read the news release.

Recent Postings

Guide for Incorporating Banks and Federally Regulated Trust and Loan Companies

OSFI’s Guide for Incorporating Banks and Federally Regulated Trust and Loan Companies, which sets out the various prudential, regulatory and legislative criteria and information requirements relative to applications for the incorporation of a bank or trust and loan company, has been revised and updated to reflect OSFI’s current information requirements and practices.

Click here to view the revised guide.

Advisory 2006-01-R1 – Foreign Banks

On June 29, OSFI posted Advisory 2006-01-R1 – Foreign Banks. This revised advisory provides an overview of how OSFI administers and interprets Parts XII and XII.01 of the Bank Act, which set out the framework for the branches, activities and investments in Canada of certain foreign banks and entities associated with a foreign bank.

Click here to view the revised advisory.

Advisory 2015-01 – Substantial Investments

On June 29, OSFI posted Advisory 2015-01-01-R1 – Substantial Investments. This advisory provides an overview of how OSFI administers and interprets the substantial investment regimes set out in the statutes that govern federally-regulated financial institutions.

Click here to view the advisory.

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The OSFI Pillar is published by the Communications Division of the Office of the Superintendent of Financial Institutions Canada.

For more information on the articles in this issue, or to provide feedback, please e-mail OSFI Communications at: communications@osfi-bsif.gc.ca.

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