Remarks by Stewart McIlwraith, Senior Director of Insurance Supervision Sector Office of the Superintendent of Financial Institutions
June 9, 2021
Hi, and welcome to OSFI’s Risk Management Webcast for Life Insurers.
I am Stewart McIlwraith, Senior Director of OFSI’s Life Insurance Group. It is my pleasure to be your host today.
What I would like to do now is to cover the key areas that OSFI will be focusing on over the coming months. Through consultations and supervisory efforts, these are the discussions that you can expect to have with us, and likely within your own companies as well.
The key areas are:
- IFRS 17 Implementation;
- LICAT modifications for IFRS 17;
- Climate-related prudential risks; and
- Evolving technology-related risks.
Before getting into the specific areas, it makes sense to start this discussion with where we find ourselves today.
It has been a challenging year for many at home and at work, especially as the dividing lines between the two have blurred throughout the pandemic. The quick shift to remote work arrangements required new tools, processes and governance, all of which placed stress and new demands on people and institutions alike.
The extraordinary public health measures, uncertain outcomes and an uncertain economic environment are all complicating decision making. The persistently low interest rates, uncertain, volatile and uneven business conditions, and growing exposures to non-financial risks are driving actions today that will have long-term impacts.
Regarding the impact of COVID-19, we recognize that the insurers’ financial impact from higher mortality has so far been manageable for the insured population. The initial annuity business experience has had an offsetting influence for the industry.
We are all looking forward to the day when vaccinations will help us return to a more normal operating environment. However, there is uncertainty of the extent and severity of long-term health and long-term mortality impacts for those that have had COVID-19. The data is sparse and is still too early to tell if any post COVID-19 health issues will have a material impact for the insurers.
It is clear that the economy is experiencing an unusual time. Following the lockdowns and suspension of activity with unprecedented job losses, we are now seeing:
- Equity markets at, or near, all-time highs,
- credit market spreads have narrowed,
- bankruptcies are at very low levels,
- demand for many products is exceeding the ability of suppliers and supply chains to meet it,
- there are worries of inflation and employers having difficulty finding qualified workers with some employers offering higher wages to attract applicants.
We may continue to experience this positive outlook and the favourable expectations may indeed be realized. However, the experience at the beginning of this pandemic has shown how quickly expectations and situations may change. Being a prudential regulator, we have to consider the severe but plausible risks of a turn to the downside.
There remains broader economic uncertainty and very uneven impacts across different economic sectors and employment groups. There could be secondary impacts of credit and income dislocations from impacted sectors that could affect insurer balance sheets.
Through the pandemic central banks have kept interest rates low. Low rates have a clear impact on insurers’ investment income levels. Insurers have been and will likely need to continue to manage the low for longer interest rate environment. OSFI will obviously need to remain watchful of the effectiveness of the individual institutions’ actions and the industry’s ability to maintain adequate capital and protect policyholders.
IFRS 17
One of the more significant undertakings for both OSFI and the industry is the transition to International Financial Reporting Standard 17 - Insurance Contracts (IFRS 17). We remain committed to working with the industry and key stakeholders to support a robust IFRS 17 implementation.
We have our specialists here today that will be providing more detailed updates. IFRS 17 implementation progress reports and LICAT capital discussions were the first initiatives to restart after the suspension of policy development at the beginning of the Pandemic. We updated our timeline in
August last year and set out further details
that September. Our plans remain on track and take into consideration the need to allow time for institutions to adapt and prepare their own systems for adoption.
We realize that implementing IFRS 17 accounting standards and the associated actuarial calculations is a huge undertaking – especially for life insurers. The new standards create new complexities for the industry to deal with. It is not a simple exercise. OSFI will continue to monitor the progress of institutions towards their adoption of IFRS 17 and will have the industry submitting
proforma financial statements later this year.
LICAT
It is impossible to talk about accounting changes for insurers in Canada without addressing capital considerations. Our plans have long included making necessary adjustments to our capital guidelines to reflect the new standards while committing, where possible to limiting the capital impact on a sector wide basis. The term we are using is “capital neutrality”.
There will be a further session later this morning to talk in more detail about our plan to issue draft capital adequacy test guidelines. This will mark the continuation of the discussion on finding the right balance. We are planning for more engagement on the drafts over the summer before we finalize our expectations.
To better inform whether any final calibration, phase-in or transitional adjustments are required, we are also launching an industry focussed Quantitative Impact Study (QIS). We are looking forward to having high quality input provided in this QIS. Having reliable information is important for both OSFI and the industry in finding the right balance with the capital test. This will help in meeting our goal to have a meaningful and manageable industry measure.
Speaking of capital, one of the other issues for the internationally active Canadian insurers is the ongoing work to develop a global Insurance Capital Standard (ICS). We support having a robust international capital standard for insurers; however, in its current form, we do not believe it is fit-for-purpose for the Canadian market and may disadvantage those insurers with longer-term business.
I will note that as we continue to work with the IAIS and others to find a solution that works in Canada, we are also investigating potential alternatives that may be a better fit in Canada. For example, the aggregation method, advocated by the U.S., as a possible option for us.
OSFI is active in international insurance standard setting organizations and this is one of the discussions that we engage in with the IAIS and others to help build international expectations and best practices, but with a focus on what works in Canada.
Climate
I would like to thank those institutions and others, who contributed to our discussion paper on Climate-related risks earlier this year.
We received over 70 submissions that will help guide our domestic prudential efforts and inform our contributions to the Sustainable Insurance Forum and other international work.
While there remains debate about the definitions of green vs brown assets, and disclosing the risks associated with them, OSFI is taking the approach of doing its homework within the Canadian and global context. We see this as an essential part of setting the right prudential expectations that will have a positive long-term effect on institutions’ resilience.
We continue to analyze the input and plan to publish key findings this September. While we are still early in the process, we have found a few emerging themes from the consultation including:
- Respondents are supportive of OSFI’s focus on climate-related risks
- Quantifying the impacts of climate-related risks continues to be a topic of interest for many
- It was also noted in the submissions, it is important to take into consideration international developments, as well as the Canadian context when looking at climate-related risks
These themes are not surprising, but the content and quality of the submissions has demonstrated desire for action and for more clarity on both implementing measures to address climate change and to improve the measures and transparency around those actions.
Technology, Digitization and Cyber risk
Technology has enabled many firms to continue operations throughout the disruptions of the pandemic. More broadly, technology and digitization has led to new more efficient processes, information gathering and analysis.
However, this environment comes with greater exposures to cyber threats, system outages and privacy breaches. Combining this environment with antiquated legacy systems can further increase vulnerabilities. These risks can quickly affect confidence in an institution and perhaps its bottom line.
The use of third parties in many aspects of an insurer’s operations has grown to significant levels. These arrangements are numerous and diverse, resulting in increased operational complexity. These arrangements can add complexity when dealing with service interruptions and possible threats. Hence, this operating environment is increasingly a focus for institutions and for OSFI.
The media continues to report on a steady stream of cyber-attacks and privacy breaches. Increasingly these attacks are coming from sophisticated operators, often with diverse motives. The evolution of technology with ever-expanding capabilities brings many benefits, but it is not without the associated risks which has motivated OSFI to publish a discussion paper on technology-related risks in September 2020.
We are seeking to modernize our regulatory and supervisory approach to address this evolving and complex topic. In
May, we released a summary of the feedback received and our plan ahead for developing and refining guidance on technology and cyber risk, third party risk, operational risk and resilience and model risk.
As with any industry, there is a long list of issues for them to manage. The agenda represents the more important issues and the ones that OSFI is focused on for the life insurance industry.
I have covered at a high-level may of today’s sessions. For each of these sessions we have lined up specialists to provide you with an understanding of where OSFI is focusing its attention and our next steps. I hope you will find them informative.