Office of the Superintendent of Financial Institutions
CHECK AGAINST DELIVERY
Thank you for joining us at our first combined insurance sector risk management seminar.
I’d like to start out with an acknowledgement that that has become a custom for me, and that I encourage others to consider doing as well. I am speaking speak to you from the traditional unceded territory of the Anishnaabeg Nation and the Algonquin First Nations Peoples. I am grateful to have the opportunity to be present in this territory and I thank all the generations who have taken care of this land. I recognize that those joining us today may work and live in different traditional Indigenous territories across the country. I mention this because I believe that recognition of and reconciliation with Indigenous peoples are important concepts that all Canadians should understand, and that these efforts are key to our healing and fulfillment as a nation. I urge you to read the Final Report of the Truth and Reconciliation Commission of Canada.
Our focus here today is on the shared risks across the sector and, frankly, across the Canadian and global economies.
Many of the issues that we speak about today have roots outside of the insurance sector, and even outside the financial sector, but they are the risks that require consideration, engagement and action. You will hear more about risks we see and our actions we are taking to address them.
While I know that the changes around us can be daunting and sometimes overwhelming, we are always better placed to make good decisions when we are able to engage directly with the sector.
Even before the COVID pandemic economic pressures, growing exposures to non-financial risks were impacting the future of the insurance sector.
These risks have not disappeared and in some cases have intensified over the past 2 years. We have adapted our public facing approach to become more transparent about our risk priorities while remaining agile to possible changes in risk landscape.
We’ve publicly released our
Blueprint, Strategic Plan, restructuring and Annual Risk Outlook to contribute to a more transparent and predictable approach for engaging with the sector on the risks that matter. This function will provide better and forward-looking coordination of industry engagement.
While you will hear more on this later, the
Annual Risk Outlook provides our forward-looking view on the most material risks facing federally regulated financial institutions and private pension plans for fiscal year 2022-23. The risks we identified will not be a surprise and are likely on your lists as well.
We are setting out this directional guidance with the understanding that the risks and responses will be revised as needed should the risk landscape change during the fiscal year.
When confronted with continued uncertainty and volatility, and the expectations of safe and sound operations, we all have little choice but to adapt. Including, the speed and scope of our own adjustments to try to stay ahead of the risks.
We have reorganized ourselves to integrate our supervision sector, which my colleague Ben Gully will speak about in a few minutes. But we have also reprioritized our supervisory and regulatory work to what is both the urgent and important. Climate change, digitalization, cyber risk, and IFRS 17 all come to mind for the insurance sector and they are on the agenda today.
I recently spoke at an event hosted by the
Responsible Investment Association and won’t repeat myself here. Climate change is an issue that private sector investors, and many other stakeholders, have noticed and are demanding an intensified focus on climate-related risks at the institutions in which they invest. While OSFI is not solely responsible for dealing with Climate change, I hope it is clear how seriously and urgently we are working on an effective regulatory and supervisory framework for climate risk management and disclosure. The insurance sector has practical skills and experience in moving the ball forward for the whole financial sector on managing climate related risks.
Insurers have become more digital with changes in business models and service delivery. This has been to find efficiencies and to meet shareholder and policyholder expectations. Some of these innovations have occurred at a faster rate than changes to the regulatory framework and faster than contracts are written and renewed.
We are taking steps to update our supervision and regulation to reflect these risks and your feedback helps to make sure we calibrate our expectations that balance protection and innovation. Our steps include creating a new division at OSFI that will focus on all thing digital, including topics like open insurance, open data and crypto across the insurance and broader financial sector.
The elevated use of third-party suppliers, the increased chances of a significant cyber attack, and more generally, digital innovations are transforming the nature of financial services. With these changes comes increased operational, compliance, reputational and financial risks.
The breadth of adoption of technology is across the economy and broader society. There is little doubt when looking to the future that its holds more digital disruption rather then less. It is simple to confront this future with resistance, but that is likely to result in being left behind rather than becoming more resilient.
Our planned internal modernization efforts and external consultations on this new future reflect the need for transformation and the context of risks and efforts outside of the traditional boundaries. We have opened consultation on our updated guideline on third party risk management (revised
guideline B-10), we are finalizing input and responses on our technology and cyber risk management consultation (draft
guideline B-13), and expect to launch consultations on guidelines for culture risk management and operational resilience (revised guideline E-21) this fall.
As we approach milestones and consider next steps for our regulatory and supervisory framework, we will continue to monitor and engage with the industry to ensure our expectations continues remain fit-for-purpose and appropriate.
The value and depth of our efforts to consult with the sector are apparent when you consider our approach to IFRS 17.
IFRS 17 is an international effort to introduce more consistent, comparable, and transparent measures of accounting for insurance contracts. Transitioning to this new standard is a huge undertaking by insurers as it is the most significant change to insurance accounting requirements in over 20 years. Implementation will impact insurance companies, by fundamentally changing accounting, actuarial, and reporting practices and significantly impacting supporting systems and practices.
Shortly after the standard was first published in June 2017, we began a multi-year exercise to update its capital tests, guidance, reporting requirements and supervisory expectations to support a robust implementation by insurers of IFRS 17. We’ve worked with the sector to create solutions that make sense in Canada in advance of the global adoption date of January 1, 2023.
We conducted extensive consultations with insurers, stakeholders and fellow regulators.
We have successfully adapted our capital tests, other guidelines and regulatory returns to the new accounting rules. This is the result of an enormous amount of work at OSFI and extensive consultation with the industry. Updates capture the new information available under IFRS 17.
Canada’s insurance industry is well-capitalized today under current accounting rules and the implementation of IFRS 17 will not change that. As IFRS 17 is a new standard, and we continue to operate through an extended period of economic uncertainty, we expect insurers to act conservatively when making decisions that would result in changes to their levels of capital.
In our prudent application of the insurance capital tests, regulatory returns, disclosures, and other guidelines we continue to fulfill our commitment to protect the rights and interests of Canadian policyholders and creditors and contributing to public confidence in the Canadian financial system.
Consistent with our previous practice, post IFRS 17 implementation we will continue to monitor the effectiveness of our guidelines to ensure they remain fit-for-purpose. Any refinements would be introduced in transparent manner and in consultation with external stakeholders.
When and where risks are building, we all have an obligation to address them. The rate of change to the risk landscape is accelerating, OSFI must respond when it deems this necessary.
We need to work together. Consultation with the industry is an important part of improving effectiveness and efficiency of the oversight framework. Without industry input, the resulting expectations will not be as reasonable or targeted.
It is at sessions like this one where we can share risks and objectives and I look forward to the improvements that will result from this level of engagement.
Thank you Peter. I am delighted to be here at the first combined Life and P&C insurance Risk Management Seminar to speak about our integrated Supervision Sector.
Since April 1, I have been overseeing a new, single Supervision Sector responsible for all three of OSFI’s regulated industries. This change builds upon OSFI’s status as an integrated regulator and recognizes that many of the risks facing the financial system do not distinguish neatly between banks, insurers, or private pension plans.
Risks are converging within and outside of the insurance sector and more broadly across financial services. Technology, cyber, third party, climate, geopolitical risks are all on the radar of institutions and integrated supervision can ensure that insurance supervision is supported with a broader view of the sector.
While this is a transformation of our structure and how we look at risks, we will continue to make assessments appropriate to each sector.
Going forward, OSFI’s Supervision Sector will pursue three strategic shifts while it continues to deliver on OSFI’s mandate. We will continue to prioritize and preserve sound capital, liquidity and funding standards for regulated entities, while responding proactively to risks.
Risk Assessment & Intervention, where we will focus on honing our analysis and follow-up activities by simplifying and streamlining risk assessments, leveraging risk analytics and automation to free up supervisors’ time, and promoting greater focus on a subset of specific supervisory outcomes to drive communications with regulated entities and, when necessary, intervention. Our aim here is to focus on the risks that matter in the context of the different industry sectors. In particular for insurers are the timelines of how risks manifest differently than the banking sector.
Under this theme we will be sharpening our focus on capital and capital management. Capital is core to financial and overall resilience as capital can absorb unexpected losses and allow time to address challenges. Our new structure brings capital specialists into the Supervision Sector as part of our Risk Advisory Hub to support our assessments of financial resiliency and the management of capital. Actuaries play an important part in key roles throughout the industry and they will continue to do so at OSFI as part of our Risk Advisory Hub.
Methods, Standards and Controls, where we will add new tools and assurance to our supervisory arsenal by evolving our supervisory practices through best-in-class tools that are fit for the evolving risk environment and match the rapid transformation in the financial services sector, including additional investments in quality assurance and more intensive supervisory oversight. This is about increasing our ability to make the most of the data we have and creating efficiencies in assessing risks and applying more attenuated supervision that supports sound risk management at institutions.
Finally, we will shift our collective supervision
Capabilities by creating a dedicated unit – called the Supervision Institute - designed to champion more formal learning and development opportunities for supervision staff as well to advance automation, digital literacy, and overall effectiveness of the supervisory review process through the creation of a supervisory technology (or ‘sup-tech’) incubator. These are table stakes in the current environment and many of the people attending the sessions today are likely doing the same in their own organizations.
I believe these strategic shifts are critical to meet the demands of the future and make the most of the opportunities set out in OSFI’s
Blueprint for Transformation.
You’re no doubt thinking, “why is OSFI doing this now?” Put simply, we believe that recent years have radically redefined the range of “severe but plausible” scenarios that the entities under our supervision can expect to see. Two of the most striking examples, of course, are a once-in-a-century global pandemic, and a land war in Europe for the first time since the Second World War.
To us, it’s clear that OSFI must evolve to meet the challenges of this “new normal”, where developments outside the regulated financial system mean a much more complex and fast-moving risk environment, accompanied by increased uncertainty, complexity and interconnectedness.
While we can’t predict from what quarter the next outlier event may come, what it will look like or precisely how it will affect Canada’s financial system, we do know what will help mitigate its severity and impact: strong risk management by the Boards and senior (or branch) management of insurers, and for OSFI, sound supervision.
This Supervisory Renewal will convert our current Supervisory Framework and give us the tools, structure, and competencies to help supervisors remain focused on prudential risk and its mitigation and work with institutions to maintain an agile posture so we can minimize the impact of the next outlier event as much as possible.
These changes will result in a Supervisory Framework that better reflects the assessment of risks, both financial and non-financial, and overall resilience for the entities we regulate. It will also build greater risk appetite for corrective action into the Supervisory Framework to reflect the changing risk environment.
Through this transformational process, we will be guided toward our organizational “true north” of strengthened relations with the financial sector and our partners, more risk-based, evidence-based and consistent decision-making, and a more responsive and innovative approach to supervision.
I suspect that there may be concerns that the center of gravity of supervision may be perceived as shifting towards banking. However, our transformation moves us to a more horizontal approach that recognizes the value of diversity of thought by making sure that insurance perspectives are captured throughout our structure.
Making sure that we get the right balance in our guidelines and expectations means that we will increase our stakeholder engagement. Under the new model, relationships with industry associations and insurers continue to be very important. We need industry input to ensure that we are focusing our work on our mandate, while allowing allow financial institutions to compete effectively and take reasonable risks.
We are determined to get this right and create an organization that can help Canada’s financial system navigate whatever challenges the future may bring.
That concludes my remarks, Thank you.