Canadian property and casualty insurance outlook 2014

Regulatory and accounting change

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Regulatory and accounting changes have been moving at a rapid pace for the last few years. The federal regulator OSFI has proposed and issued new regulations concerning corporate governance, ORSA, cybersecurity, solvency and capital. These new regulations and guidelines require insurers to invest in talent and time to keep up with the regulatory burdens. The recent trend has been more regulation rather than less, with a greater focus on self-assessment and board oversight, and insurers shouldn’t expect this to change.

The beginning of 2013 saw OSFI issue its final Corporate Governance Guideline, which applies to all federally regulated financial institutions (FRFIs) except branch operations of foreign banks and foreign insurance companies. The guideline is intended to enhance the effectiveness of boards of directors by providing clarity around board responsibilities and effectiveness, strengthen the risk governance of FRFIs by requiring the development of a “risk appetite framework” to guide institutions’ risk-taking activities, and improve the overall internal control framework of FRFIs by clarifying the roles of the chief risk officer and the audit committee. FRFIs completed and submitted a self-assessment and action plan to OSFI in May 2013. Full implementation of the guideline is expected to be completed in early 2014.

Following OSFI’s issuance in December 2012 of its draft Own Risk and Solvency Assessment (ORSA), with a final version issued November 2013, Canadian insurers examined the impacts of this new guideline and the amount of effort and documentation needed to comply. The requirements are similar to those from Solvency II in the European Union and the National Association of Insurance Commissioners in the US, with one of the differences being that the ORSA’s requirements have to be implemented in 2014. The guideline does allow companies to scale the effort to meet the size and complexity of the organization.

In December 2013, OSFI issued its draft 2015 MCT guideline for public consultation. The MCT guideline has been evolving over the last few years, and insurers have had to move resources to ensure compliance with it. The draft guideline is open for comments until 15 March 2014 and is expected to be issued in September 2014 with an effective date of 1 January 2015. The draft guideline includes many new capital components, such as operational risk, diversification credit within insurance risk and risk of foreign exchange. Insurers should take a close look at the proposed changes early so they can optimally manage capital and make the appropriate decisions beforehand.

In October 2013, OSFI issued the Cyber Security Self-Assessment Guidance, which is applicable to all financial institutions in Canada. The increasing frequency and sophistication of online attacks has raised the risk profiles of key organizations, resulting in a clear increase in scrutiny by the public and other stakeholders. As a result, OSFI required FRFIs to conduct self-assessments.