Document Properties
- Type of Publication: Guideline
- Category: Accounting
- Date: December 1997
- Revised: July 2010
- No: D-1A
- Audiences: Life / IHC
Introduction
This guideline outlines disclosures OSFI expects federally regulated life
insurance enterprises to provide to
supplement the disclosures required by International Financial
Reporting Standards (IFRSs).
OSFI expects all life insurance enterprises to include required IFRSs
disclosures and disclosures of this Guideline in their OSFI annual return
or supplementary management report appended to the annual return. These
same disclosures are also expected to appear in any separate annual
statement of life insurance enterprises that prepare both an annual
statement and an annual return.
The disclosures required by this guideline, as well as IFRSs requirements,
should be kept on file at the Canadian head office or the chief agency of
the life insurance enterprise. In addition, until such time as a
regulation pursuant to Subsection 673.1 (1)(b) is issued requiring all
federally regulated life insurance enterprises to make their financial
reports and associated disclosures available to the public on request,
enterprises are strongly encouraged to adopt this practice. The
enterprises and their respective financial reports and disclosures
include:
-
federally regulated life insurance enterprises, other than branches –
their audited annual financial statements and the disclosures expected
by this guideline; and
-
branches of foreign life insurance enterprises - the audited portion
of their OSFI annual return and the disclosures expected by this
guideline.
The disclosures that are required by IFRSs must be presented in the
audited financial statements or annual return.
Part 1 -
Quantitative Disclosure
Part 1 of the guideline sets out minimum levels of quantitative disclosure
for certain financial statement items. Disclosures by category or type
need not be met where the amounts are not material. The quantitative
disclosures should be made in the notes to the annual financial statements
(if prepared) or in the audited portion of the annual return in cases
where annual financial statements are not prepared.
Portfolio
Investments
In disclosing the information required by IFRSs, a life insurance
enterprise should disclose the aggregate statement of financial position
value and the fair value of its portfolio investments showing separately
any amounts relating to:
-
bonds and debentures,
-
residential mortgage loans,
-
non-residential mortgage loans,
-
common,
-
preferred shares,
-
real estate, and
-
other investments.
Separate disclosure is recommended, within the above categories, for any
type of portfolio investment that constitutes 10% or more of the carrying
value of the total portfolio investments.
In disclosing the information required by IFRSs, the life insurance
enterprise is expected to disclose separately, where applicable, the
income, expense and gains and losses resulting from each investment
category.
Part 2 -
Risk Management and Control Practices
Part 2 outlines the disclosures OSFI expects regarding the risk management
and control practices adopted by a life insurance enterprise. OSFI expects
the enterprise to provide the following qualitative disclosures, if not
already included in the financial statement notes, in a supplementary
management report appended to the annual financial statements or in a
supplementary management report appended to the audited portion of the
annual return in cases where annual financial statements are not prepared.
Each life insurance enterprise should identify and describe the risks that
are significant to its business. These include, but are not limited to,
interest rate risk, credit risk, reinsurance risk, foreign exchange rate
risk, liquidity risk, and the other major risks that are inherent in
managing a life insurance enterprise. The enterprise should describe the
way in which it monitors and controls such risks. It should also set out
the responsibilities of the board of directors and senior management for
risk management, including policy setting, implementation, monitoring and
review.
The enterprise should discuss the extent of any significant exposures to
areas where there recently has been, or there is the potential for,
significant loss due to industry specific factors or general industry
recession and outline the steps it has taken to contain risks in these
areas.
The enterprise should also discuss methods of measuring and controlling
other market-related risks where they are significant.
Risks
Associated with Policy Liabilities
Since policy liabilities generally constitute the largest single balance
of a life insurance enterprise's statement of financial position, OSFI
expects specific disclosure relating to the management of the risks that
significantly impact it in addition to the risks referred to in the
following paragraphs. These risks include mortality/morbidity risk,
business retention risk, investment yield risk and expense risk.
The enterprise should discuss its risk management policies for each of
these risks, including the role of the board and management in their
development, review, approval and implementation, and the procedures in
place to effectively monitor and control them.
The enterprise should identify and describe the techniques used to analyze
and review mortality experience risk, the claims management processes to
mitigate morbidity risks, the underwriting practices to ensure appropriate
risk classification and premium levels for each customer, pricing and
dividend policies, the controls placed on the growth of expenses and the
management of investment yields.
Interest
Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in market
interest rates. An enterprise should set out its objectives and associated
business strategy in interest rate risk management.
The enterprise should discuss its interest rate risk management policies,
including the role of the board and management in the development, review,
approval and implementation of interest rate risk policies, and the
procedures in place to effectively monitor and control the interest rate
risk. The discussion should include information on the policies that exist
for measuring the enterprise's interest rate risk exposure, including the
frequency of measurement.
Consistent with the requirements of IFRSs, the enterprise should explain
how it uses derivative instruments to manage interest rate risk and
provide quantitative information on the extent to which these instruments
are used.
Credit
Risk
Credit risk is the risk that one party to a financial instrument will fail
to discharge an obligation and cause the other party to incur a financial
loss. This risk can relate to recognized and unrecognized financial
assets.
The enterprise should discuss its credit risk management policies,
including the role of the board and management in the development, review,
approval and implementation of credit risk management policies, and the
procedures in place to effectively monitor and control the credit
function. The discussion of the credit risk management policies should
include information on the methods used by the enterprise to identify
existing and potential risks inherent in the portfolio and the policies
that exist for monitoring and controlling these risks. The enterprise
should include a description of its risk measurement and rating
classification systems.
Reinsurance
Risk
Reinsurance risk is the risk that a ceding enterprise could suffer a loss
or liability in the event a reinsurer is unable to meet its obligations to
pay claims reinsured under the terms of a reinsurance contract with the
ceding enterprise.
The enterprise should discuss its reinsurance risk management policies,
including the role of the board and management in the development, review,
approval and implementation of reinsurance risk policies, and the
procedures in place to effectively monitor and control the reinsurance
risk. The discussion should include information on the policies that exist
for measuring the enterprise's reinsurance risk exposure.
Currency
Risk
Currency risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign exchange
rates.
The enterprise should discuss its currency risk management policies,
including the role of the board and management in the development, review,
approval and implementation of currency risk management policies, and the
procedures in place to effectively monitor and control the foreign
exchange risk function.
The enterprise should identify and describe the analytical techniques used
to measure currency risk, the limits it imposes and the frequency of
measurement. The enterprise should also set out the key sources of
currency risk within its portfolio. It should also provide information on
how it measures foreign exchange gains and losses.
Consistent with the requirements of IFRSs, the enterprise should explain
how it uses derivative instruments to manage currency risk and provide
quantitative information on the extent to which these instruments are
used.
Liquidity
Risk
Liquidity risk is the risk that an entity will encounter difficulty in
meeting obligations associated with financial liabilities.
The enterprise should discuss its liquidity risk management policies,
including the role of the board and management in the development, review,
approval and implementation of liquidity risk management policies, and the
procedures in place to effectively monitor and control the function. It
should describe the methods used for measuring the enterprise's current
and projected future liquidity.
The enterprise should include a description of its policies and
performance with respect to:
-
controlling the mismatch between recognized and unrecognized financial
assets and liabilities; and
-
ensuring it has sufficient liquid assets on hand in relation to its
daily cash inflows and outflows.