OSFI provides a regulatory framework of guidance and rules that meets or exceeds international minimums for financial institutions. In addition to issuing guidance, OSFI provides input into the development of federal legislation and regulations affecting financial institutions; comments on accounting, auditing and actuarial standards development and determines how to incorporate them into our regulatory framework; and participates in a number of international and domestic rule-making activities.
During 2010-2011, OSFI continued to promote sound risk management practices through its rule-making activities. Evidence of the results of our measured approach and robust risk management can be found in the World Economic Forum’s ranking of Canada’s banking system as the soundest for the third year in a row.
The governing statutes applicable to federally regulated financial institutions (FRFIs) are reviewed every five years to ensure they remain current and promote an efficient, competitive and prudent financial services sector. Following the Government of Canada's September 2010 launch of the legislative review, OSFI submitted a number of proposals regarding amendments to the statutes and associated regulations. OSFI also worked closely with the Department of Finance in the review and analysis of proposals submitted by various financial industry stakeholders.
Through collaboration with Canadian and international standard setters, OSFI works to interpret and influence international accounting rules that may apply to Canadian financial institutions. (For details on collaboration with international organizations, see later section of Regulation and Guidance—International Activities.)
OSFI is a member of the Canadian Accounting Standards Board's User Advisory Council and the Insurance Accounting Task Force. In 2010-2011, OSFI collaborated with the Canadian Auditing and Assurance Standards Board (AASB), and participated in a Canadian Institute of Chartered Accountants Task Force to review auditing guidelines including: AuG-43—Audit of policy liabilities of insurance companies, and AuG-29—Audit of employee future benefits—defined benefit plans. OSFI is also a non-voting member of the Auditing and Assurance Standards Oversight Council, which oversees the activities of the AASB.
OSFI works closely with the Canadian Institute of Actuaries (CIA) and the Actuarial Standards Board to ensure that actuarial standards are appropriate and lead to acceptable practice in areas such as valuation, risk and capital assessment, as these topics relate to entities regulated by OSFI. In 2010-2011, we continued to participate on several CIA practice committees.
During 2010-2011, OSFI released three Advisories and an implementation letter related to the measurement of capital and capital adequacy of banks and trust and loan companies:
In October 2010, OSFI issued sound practices guideline E-19 (PDF Version, 234kb) on Internal Capital Adequacy Assessment Process (ICAAP) applicable to banks, bank holding companies, and trust and loan companies. The guideline reflects international standards that emphasize the importance of each institution developing and implementing its own ICAAP, to set internal capital targets and develop strategies for achieving them consistent with its business plans, risk profile and operating environment.
OSFI undertook its annual update of the Minimum Continuing Capital and Surplus Requirements (MCCSR) (PDF Version, 898kb) guideline during 2010, with the revised version coming into effect for the 2011 fiscal year. Many of the updates were necessary due to the introduction of International Financial Reporting Standards (IFRS), for which a phase-in period of two years was provided. The other major changes consist of: a consolidation and re-write of risk mitigation related provisions, including additional capital requirements and conditions with respect to reinsurance arrangements; and, adjustments to counter the effect of new mortality risk improvement provisions in actuarial standards for the determination of policy liabilities.
OSFI issued the Advisory Revised Guidance for Companies that Determine Segregated Fund Guarantee Capital Requirements Using an Approved Model (PDF Version, 215kb) in December 2010. This Advisory prescribed new minimum calibration criteria for equity index and bond fund models, whose use has been approved by OSFI, to determine a company's segregated fund guarantee capital requirement. The new criteria applied a measured approach to better capture the risks in segregated fund guarantee products by ensuring that more experience is reflected.
OSFI is developing a new framework for the standardized MCCSR approach with the help of the Autorité des marchés financiers (AMF) and Assuris. This responds to the anticipated move to International Financial Accounting Standards (IFRS—Insurance Contracts Phase II) that is expected to modify the principles for determining insurance liabilities.
Accordingly, during 2010-2011, OSFI and the life insurance industry continued discussions on how to update the existing approach to measuring life insurance regulatory capital requirements. OSFI sent a data request to the industry in order to conduct a second Quantitative Impact Study (QIS) to evaluate the impact of proposed modifications to the MCCSR’s standard approach, and published a report of the results (PDF Version, 36kb) in February 2011. Another QIS is scheduled for 2011-2012 to obtain further data from the industry on the impact of proposed MCCSR modifications.
OSFI is also developing a framework in which companies could apply to determine MCCSR requirements using company-specific models. The forum for these discussions is the MCCSR Advisory Committee, which has representatives from the Canadian Life and Health Insurance Association (CLHIA), the CIA, Assuris, the AMF, a number of large life insurance companies and OSFI.
Since 2009, the MCCSR Advisory Committee has focused its efforts on reviewing and revising the framework used to determine the capital requirements for segregated fund guarantee products. In 2010, it was decided that a new approach based on market consistent principles should be developed. A working group of technical experts from the industry and OSFI was established, and will be working under the supervision of the MCCSR Advisory Committee over the next few years to develop recommendations for the new approach.
In response to expressions of interest from the property and casualty (P&C) insurance industry, OSFI established in 2008-2009 the P&C Minimum Capital Test (MCT) Advisory Committee to develop a framework for the use of company-specific models to determine capital requirements for P&C insurance companies. The committee consists of representatives from OSFI, the Québec and British Columbia regulators, the Insurance Bureau of Canada, the Property and Casualty Insurance Compensation Corporation, the Canadian Council of Insurance Regulators and several insurance companies.
The P&C MCT Advisory Committee discussed a number of important conceptual issues during 2010 and a number of the companies represented on the committee have undertaken additional work to assist the committee in its formulation of recommendations on these issues. OSFI will provide regular updates on the work of the committee, and will follow its normal public consultation and approval process before any changes are made to the framework.
OSFI undertook an update of the Minimum Capital Test (MCT) guideline (PDF Version, 491kb) during 2010, with the revised version coming into effect as of January 1, 2011. Many of the updates were necessary due to the introduction of IFRS, for which a phase-in period of two years was provided. The major changes consist of: the calculation of the MCT on a consolidated basis, the introduction of a capital charge for letters of credit, a new minimum gross capital level and an audit requirement on the MCT.
OSFI continued developing a new capital framework for its standardized MCT approach with the objective of improving the fairness, effectiveness and efficiency of the MCT/BAAT (Branch Adequacy of Assets Test). This initiative will come into effect January 1, 2012. A data request to analyse the impact of the proposed changes was sent to the industry in April 2010 to enable OSFI to test the impact on P&C insurers’ capital requirements of varying parameters for the proposed changes. These initiatives are in keeping with OSFI’s long-term plans and priorities to ensure the MCT/BAAT remains a sensitive and forward looking risk management tool.