Doyle says OSFI isn’t planning a Solvency
II-style complete reform.

“OSFI’s idea is to get regulatory capital to
be more risk-based so that it is a better reflection of an
individual life insurer’s risks,” he says.

“A key reason for OSFI’s larger focus on
updating the capital requirement calculation is that Canada already
has several regulatory or professional requirements addressing
other aspects of solvency supervision such as stress-testing,
capital projections, and establishments of insurers’ own target
solvency ratios.”

Focus on reserves

“In Canada, we see a regulatory capital ratio
for P&C and life insurers that is around C$2.00 ($1.97) of
capital held for every dol­lar of actual capital – i.e. a ratio of
200%,” says Parkinson.

“There is a technical minimum expected of
150%, but regulators want insurers to deter­mine a higher minimum
ratio, for example 175% or above – known as the target ratio – so
that a shock event won’t reduce the ratio below
150%.”

“If a life insurer’s minimum required capi­tal
falls below 150%, then OSFI won’t allow it to operate,” says
Doyle.

He adds that if the insurer’s target ratio
falls below the amount agreed with OSFI, then the regulator will
expect it to take steps to bring the ratio back up again.

Ordinarily, Canadian insurers’ financial
statements disclose their regulatory capital ratio, similar to
Solvency II’s “transparency” principle, says Parkinson.

“Canada’s capital requirements make insurers
keep different amounts of capital for different classes of assets,”
Parkinson says.

He explains that for example, more capital is
needed for an equity security than for an AAA bond. There are also
different capital requirements for policy liabilities, which are
meant to reflect the relative degree of risk inherent in the
business an insurer writes.

The result is that an insurer sums up all its
capital requirements and compares this figure with the actual
capital it holds.

Solvency II will require insurers to include a
measure for the capital requirement for opera­tional risks such as
trading errors or IT mal­functions that may occur.

“There isn’t an equivalent measure for this in the
Canadian capital requirements regime,” Parkinson says. “However,
Canadian capital rules don’t give any credit for diversification of
risk, which may offset the lack of an opera­tional risk
measure.”

Canada has seen very few insurance com­pany
failures, says Doyle. “This is because the regulator doesn’t let
insurers get that low,” he says. “Canada’s approach to solvency
super­vision for insurers is principles-based. This means that
insurers can’t just follow the basic rules but look for exceptions
or workarounds. OSFI won’t allow such practices, and will close any
loopholes to the rules that insurers might find.”

Canada is moving to implement a guideline for
insurers on filing Own Risk and Solven­cy Assessments (ORSAs), says
Doyle. “We expect a paper from OSFI on ORSA soon,” he says.

OSFI’s move parallels the strategy by reg­ulators in
other jurisdictions such as the US and the EU, which will require
insurers to file ORSA self-assessments of the risks threaten­ing
their solvency.

“Canada already has a lot of the features of ORSA,
but they are all separate,” says Doyle. “What ORSA will do is to
bring all these fea­tures together and put them inside the ORSA
framework.”

Systemically important

Doyle says Canada doesn’t have any regula­tion
designating companies as SIIs (systemi­cally important
institutions).

“OSFI is looking at the question of SIIs,” he
says. “Also, OSFI is very involved in the International Association
of Insurance Supervisors’ (IAIS) work to develop a meth­odology for
designating global companies as G-SIIs. Sun Life, Manulife and
Great West would all be likely SIIs from a Canadian perspective,
and it’s possible Canada could have a life insurer that would be
designated as G-SII.

“But OSFI would rather adopt a preven­tative
approach to make sure these insurers don’t fail, than designate
certain companies as SIIs,” says Doyle.

Market breakdown

Canada’s life insurance industry is highly
consolidated, with the top five life compa­nies holding 85% of the
market, says Par­kinson. The major life insurers in Canada are
Manulife, Great West Life and Sun Life Financial. According to the
CLHIA, 95 life insurers were active in Canada in 2010.

“In Canada, we have very long-term
com­mitments for life policies– 50 years and long­er – whereas
European long-term life policies tend to be for 20 years,” says
Doyle.

He says that because of Canada’s low interest
rate environment, these long-term life commitments mean Canadian
life insur­ers have a lot of interest rate exposure.

Doyle explains: “Because interest rates are
likely to remain low, we’ll see a change in the product types
offered by Canadian life insur­ers. Some life insurers have already
stopped selling individual life policies, and some com­panies are
moving into non-fixed income investments such as commercial
property.”

“Health insurers are not seen as a different
class of insurer in Canada,” says Parkinson. According to the
Canadian Life and Health Insurance Association (CLHIA), in 2010
health insurance protection was provided by 69 life insurers and 43
P&C insurers.

“The P&C market is much less consolidat­ed
than the life insurance market,” says Par­kinson. “The largest
P&C insurer is Intact Financial, which has 15% of the market,
and no-one else has a 10% share.”

Four crown corporations provide car insurance
in Canada under a monopoly basis in their province of operation:
ICBC (Insur­ance Corporation of British Columbia) in British
Columbia, MPI (Manitoba Public Insurance) in Manitoba, SGI
(Saskatchewan Government Insurance) in Saskatchewan, and SAAQ
(Société de l’assurance automo­bile du Québec) in Quebec.

In 1999, the Canadian government intro­duced a
regulatory framework enabling life insurers to demutualise, which
resulted in large firms such as Sun Life and Manulife converting to
shareholder-ownership. Cana­dian finance minister Jim Flaherty MP
said in June 2011 that he intends to create a framework allowing
mutual P&C insurers to demutualise.

“The federal government is working to develop
regulations that provide an orderly and transparent process for
P&C companies that choose to demutualize, while ensuring
policyholders are treated fairly and equita­bly,” a Department of
Finance spokesperson says.

Bancassurance challenge

Canadian banks and other deposit-taking
institutions are allowed to sell credit insur­ance and travel
insurance directly through their branches and their websites.
However, if they want to sell other types of insurance such as life
insurance, they must set up sepa­rate insurance subsidiaries with
their own distribution networks.

Under the federal Bank Act and the Insur­ance
Companies Act, deposit-taking insti­tutions may not use their
branch networks to sell insurance policies on behalf of these
subsidiaries. The regulations also bar them from cross-selling
insurance products from their insurance subsidiaries to their
banking customer base.

Since March 2012, Canadian banks and other
deposit-taking institutions have been barred from selling products
from their insurance subsidiar­ies on their banking websites. The
regulation was introduced in September 2011 by finance minister Jim
Flaherty MP after complaints that banks were selling unauthorised
insurance products on their websites.