Canadian life insurance outlook 2014

Position the business for regulatory and accounting change

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More stringent regulatory and accounting changes continue in 2014. OSFI issued proposed regulations addressing diverse issues, from governance and risk to cybersecurity. Solvency and capital direction also remain regulatory challenges, while newly emerging financial reporting standards may adversely affect business models, operations and capital levels. On the provincial front, regulators are especially active in areas such as insurance distribution and managing general agent (MGA) licensing and regulation. Securities regulators, on the other hand, continue to scrutinize insurer financial reporting and public disclosure, and they are demanding much less complexity and more transparency in these regards.

At the global level, the Financial Stability Board designated nine international insurers as global systemically important insurers (G-SIIs) during 2013. While no Canadian-based life insurers were included in these designations, this is an area that larger insurance companies in Canada should continue to monitor. Such designations would increase demands on insurer resources and capital requirements. They also may create a competitive advantage for designated insurers, by implying the security of an implicit government backstop.

The International Association of Insurance Supervisors (IAIS) is putting the final touches to its Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), a set of international supervisory requirements focusing on the effective group-wide supervision of internationally active insurance groups (IAIGs). The requirements are expected to be field-tested in 2014 and issued in 2018. IAIS also plans to develop a risk-based global insurance capital standard by the end of 2016. Full implementation is scheduled to begin in 2019, after two years of testing and refinement with supervisors and IAIGs.

In 2013, OSFI issued its final Corporate Governance Guideline, which applies to all federally regulated financial institutions (FRFIs) other than the branch operations of foreign banks and foreign insurance companies. The guideline is predicated on enhancing the effectiveness of boards of directors by providing clarity around board responsibilities. It also seeks to strengthen the risk governance of FRFIs by requiring the development of a “risk appetite framework” to guide the institutions’ risk-taking activities. Another goal is improving the overall internal control framework of FRFIs by clarifying the roles of the chief risk officer and the audit committee. FRFIs must have completed and submitted a selfassessment and action plan to OSFI by May 2013. Full implementation of the guideline is expected no later than the end of January 2014.

That same month is expected to see a final version of OSFI’s Own Risk and Solvency Assessment (ORSA) draft from 2012. The requirements are similar to those seen under Solvency II in the European Union and ORSA requirements issued by the National Association of Insurance Commissioners (NAIC) in the US.

While Solvency II and the NAIC’s requirements are expected to become effective in 2016 and 2015, respectively, insurers in Canada will start reporting to OSFI on the ORSA initiative in 2014. While the new guideline is not predicted to cause a major shift in business focus, it will likely increase insurer understanding of exposures, compelling a range of decisions. If the initiative increases the cost of regulatory compliance, this may compel smaller insurers to consolidate to maintain their competitive edge.

In October 2013, OSFI issued the Cyber Security Self-Assessment Guidance, applicable to all financial institutions in Canada. The increasing frequency and sophistication of online attacks has raised the risk profile of key organizations, resulting in a clear increase in scrutiny by public and other stakeholders.

As such, OSFI required FRFIs to go conduct a self-assessment focusing on six key areas:

  • Organization and resources
  • Cyber risk and control assessment
  • Situational awareness
  • Threat and vulnerability risk management
  • Cybersecurity incident management
  • Cybersecurity governance

The self-assessment is expected to be ongoing, and OSFI has no plan to establish specific guidance.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board both issued revised accounting standards exposure drafts on insurance contracts in 2013. Each involves new approaches to balance sheet and income statement presentation of insurance and insurance-like guarantees, under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles, respectively.

For Canadian life insurers, the valuation model proposed under IFRS shares similarities with the Canadian Asset Liability Method, currently used for the valuation of actuarial liabilities. While IASB made significant changes to the proposed model in its initial 2010 exposure draft, as a result of feedback from the insurance industry, important issues of concern for Canadian life insurers remain. These include discount rates, comprehensive income accounting and complexity of application. The final standard is expected by the end of 2014 or shortly thereafter, with an effective date likely to be in January 2018.

These various regulations generally compel insurers to improve their modeling capabilities, data quality, data governance, and the level of detail provided by their reporting and modeling systems. Canadian life insurers will need to analyze the impact of these changes on profitability and products, making sure that their systems, people and data are prepared and capable of implementing the new requirements.