## 1canea2020006 - 2018. It contains technical analysis and detailed ## Source details **Canonical URL:** [1canea2020006 - 2018. It contains technical analysis and detailed](https://www.imf.org/-/media/files/publications/cr/2020/english/1canea2020006.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1canea2020006.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1canea2020006.pdf.json) --- ### Executive summary - Market position and structure - Insurance sector assets: Can$1.7 trillion. - L&H insurers dominated by three groups (Manulife, Sun Life, Great West) that collectively held 90 percent of life insurers’ total assets in 2017; for these groups Canada represents "approximately a third" of their overall business. - P&C sector smaller: P&C assets at end-2017 = Can$173 billion (Can$154 billion in federally regulated insurers). - Three mortgage insurers operate in Canada; largest is CMHC (federal agency). All mortgage insurers benefit from an explicit government guarantee; private insurers’ coverage is subject to "a deductible of 10 percent of the original principal amount of the insured mortgage." - Supervisory quality and approach - OSFI and AMF prudential supervision judged high-quality; both employ a risk-based supervisory approach with escalation commensurate with firms’ risk profiles. - Risk-based solvency frameworks implemented after the 2014 FSAP described as "advanced": LICAT (L&H), MCT (P&C), MICAT (mortgage insurers as of early 2019). - Key concerns and limitations - OSFI lacks authority to issue its own legally enforceable regulations and relies on guidelines and voluntary undertakings — effective in benign environments but potentially ineffective in stress. - Federal-provincial cooperation is informal and relies on interpersonal relationships; Canada-wide surveillance is missing. - Group-wide supervision lacks strong legal foundation and consistent application, especially over unregulated holding companies. - Downstreaming of senior debt into operating entities is facilitated by differences in capital ratio targets between non-operating and operating L&H insurers. ### Market structure and key statistics - Assets and premiums (selected) - Total insurance sector assets: Can$1.7 trillion. - L&H assets (excluding segregated funds) end-2017: Can$858 billion (Can$833 billion federally regulated). - P&C assets end-2017: Can$173 billion (Can$154 billion federally regulated). - Insurance density (2017): US$3,260 per person (US$1,407 L&H; US$1,853 P&C). - Insurance penetration (2017): 7.23 percent of GDP (3.12 percent L&H; 4.11 percent P&C). - Provincial penetration examples: Québec = 8.1 percent of GDP; Ontario = 7.5 percent of GDP. - Number of domestic employees end-2017: approximately 281,400 (L&H: 155,200; P&C: 126,200). - Industry concentration and consolidation - Number of federally regulated insurers: 2012 total = 264; 2018 total = 231. - Federally regulated L&H insurers: 2012 = 65; 2018 = 54. - Federally regulated P&C insurers: 2012 = 150; 2018 = 133. - Top-ten federally regulated P&C insurers accounted for 73 percent of total premiums in 2017 (up from 43 percent in 2012). - Largest P&C insurer: Intact = 16 percent of total P&C premium in 2017; Aviva = 11 percent. - Federally regulated P&C premiums (millions of Canadian dollar) - Auto: 2014 = 19,049; 2015 = 19,530; 2016 = 19,935; 2017 = 20,061 - Property: 2014 = 15,559; 2015 = 16,537; 2016 = 16,948; 2017 = 17,291 - Liability: 2014 = 5,460; 2015 = 5,981; 2016 = 5,794; 2017 = 5,859 - Accident and health: 2014 = 1,179; 2015 = 1,276; 2016 = 1,291; 2017 = 1,403 - Others: 2014 = 2,406; 2015 = 2,547; 2016 = 2,601; 2017 = 2,741 - Total premiums: 2014 = 43,654; 2015 = 45,871; 2016 = 46,569; 2017 = 47,356 ### Regulatory and supervisory framework - Institutional responsibilities - OSFI: federal prudential regulator for federally regulated insurers; accountable to Parliament through the Minister of Finance. - Provincial supervisors: prudential oversight of provincially incorporated insurers and market conduct (CoB) oversight for insurers operating in their jurisdictions; AMF in Québec has extensive prudential responsibilities and was assessed for prudential supervision. - Incorporation choices: insurers may be incorporated under federal or provincial regimes. - Standards and actuarial/accounting guidance - IFRS applied for public and regulatory reporting; Canadian Accounting Standards Board (CAcSB) adopted IFRS. - Appointed actuary required (fellow of the Canadian Institute of Actuaries); appointed actuary deliverables include Appointed Actuary’s Report (AAR) and Dynamic Capital Adequacy Testing (DCAT). - Canadian Actuarial Standards Board (CASB) standards referenced in prudential guidelines. - Supervisory approach and capacity - OSFI and AMF use advanced risk-based approaches with four-stage escalation (from “early warning” to “non-viability/insolvency imminent”). - OSFI conducts more frequent on-site reviews and interactions with large L&H insurers than AMF; OSFI receives quarterly financial reports, AMF biannual. - Both agencies considered adequately resourced with high staff expertise. - Inter-agency coordination - Formal federal coordination via FISC, SAC, and Heads of Agencies Committee. - CCIR: inter-jurisdictional association of provincial regulators; OSFI participates as observer. - Current cooperation between OSFI and provincial supervisors is informal; OSFI has not signed MoUs with CCIR members for formal information sharing. ### Solvency frameworks and capital adequacy - LICAT (Life Insurance Capital Adequacy Test) - Implemented in 2018, replacing MCCSR. - Described as more advanced and risk-sensitive; "compares well with best practice solvency requirements internationally." - Risk coverage: credit risk; market risk (interest rate, equity, index-linked products, currency); insurance risks (mortality, longevity, morbidity, lapse, expense, property and casualty); segregated funds guarantee risk; operational risk. - Confidence target: 99 percent CTE over one year for risk measures; diversification considered within insurance risk and among all risks. - Geography aggregation: base solvency buffers aggregated across six geographies (Canada, Japan, UK, US, other Europe, other locations) with no allowance for diversification across geographies (limited portfolio volume credit exception). - Two ratios: total capital ratio and core capital ratio; numerator = available capital + surplus allowance + eligible deposits; surplus allowance includes certain PfADs under CALM. - MCT and MICAT (P&C and Mortgage insurers) - MCT: Minimum Capital Test for P&C insurers; capital available = Category A/B/C; minimum capital required = sum of 99 percent CTE capital requirements less diversification credit across risk components. - CRMI (advisory, effective January 1, 2017) for mortgage insurers introduced a more risk-sensitive insurance risk calculation incorporating borrower creditworthiness, outstanding loan balance, LTV, remaining amortization. - Quantitative impact: "The new framework resulted in a 48 percent increase in sector-wide Pillar 1 capital required." - MICAT (effective January 1, 2019) replaces the MCT + CRMI for mortgage insurers, combining CRMI and relevant MCT chapters with minor changes; methodological changes include use of borrower credit scores at origination and a 5 percent increase in capital requirements to allow for post-origination credit deterioration. - CALM and PfADs - Canadian Asset Liability Method (CALM) used to value life insurance contract liabilities under IFRS 4; does not rely on an explicit discount curve and allows full rate of return on allocated assets in projections. - PfADs required for multiple risk categories (asset defaults, market risk, interest rate, credit spreads, mortality, morbidity, lapse, expenses); aim to have liabilities valued within a corridor of 60-80 percent CTE. - Treatment of spread risk and IFRS 17 - LICAT does not include a spread risk component; a PfAD for spread risk is calculated within insurance contract liabilities but not included in surplus allowance. - Recommendation: when IFRS 17 is implemented, consider how spread risk is accounted for and whether to disaggregate temporary market liquidity spread movements from long-term credit-risk pricing shifts. ### ORSA and internal capital insights - ORSA implementation and practice - OSFI issued ORSA guideline in 2015; ORSA expectation embedded in E19 and capital guidelines. - OSFI and AMF generally do not receive ORSA reports as routine filings; they request ORSA documentation and key metrics when needed. - Observed patterns - Large insurers’ ORSA-based target capital calculations are "consistently less than regulatory requirements." - Smaller insurers’ ORSA results indicate target capital that would be "higher than regulatory requirements." - Large insurers tend to calculate each risk higher than regulatory tests but apply substantially larger diversification credit in ORSA than in regulatory capital tests. - For L&H insurers, ORSA often factors in loss-sharing with policyholders (e.g., adjustable benefits), affecting target capital. - Rating agency capital requirements are rarely quantified in ORSA documents but likely exceed regulatory targets and should be considered in internal targets. - Recommendation - "OSFI and AMF should work with the insurance industry to ensure that ORSA target capital calculations properly account for diversification of risk, sharing of risks with life insurance policyholders, and insurers’ risk appetite for potential ratings downgrades." ### Mortgage insurance, CMHC, and system-wide capital considerations - Market features - Three mortgage insurers; CMHC is largest and a federal agency that pays fees of 3.25 percent of direct premiums written and 0.1 percent of portfolio insurance contracts; private insurers pay 2.25 percent of direct premiums. - CMHC explicit guarantee: 100 percent coverage of net claims by lenders in the event of CMHC insolvency. - Private insurers benefit from explicit government guarantee but with a 10 percent deductible on lender claims. - Mortgage insurers are not allowed to cede risk into the reinsurance market to qualify for federal guarantee. - Pricing and capital rule impacts - OSFI’s CRMI/CRMI-to-MICAT changes materially increased capital requirements; insurers and CMHC revised premium pricing (notably in 2017Q1 for high-LTV loans). - Portfolio insurance collapsed for many lenders after January 1, 2017 CRMI implementation; 2016Q2 saw a spike in portfolio business ahead of regulatory changes. - Capital distribution and system-wide questions - "Most capital for mortgages with LTV above 80 percent are held in the three mortgage insurers." - It is "not clear that the transfer of risk from deposit-taking institutions to mortgage insurers results in sufficient capital overall within the Canadian financial system." - Industry feedback: for loans with LTV in the range of 65–80 percent, mortgage insurers’ capital exceeds DTIs’ capital, making portfolio insurance uneconomic in that bracket. - Recommendation - "OSFI should carry out a benchmarking exercise" to compare DTIs’ capital if there was no mortgage insurance and current capital requirements across DTIs and mortgage insurers, including deferred profits in unearned premium provisions and considering extension to LTVs below 80 percent. ### P&C, auto insurance, earthquake risk, and macroprudential considerations - Auto insurance (provincial variation) - Auto insurance regulation varies by province (e.g., Alberta, British Columbia, Ontario, Québec), affecting rate approval, affordability, and insurer profitability. - Provincial interventions (e.g., rate caps, model changes) have led to insurer losses in some jurisdictions; example: Alberta rate caps led to insurers making losses "of 10–14 percent of the premiums they can charge." - ICBC (British Columbia crown corporation) MCT capital ratio was 31 percent at end-2018Q1; BC government suspended basic MCT capital ratio requirement until March 21, 2022. - Québec has pure no-fault bodily injury system administered by SAAQ; AMF regulates property damage rates on a "file and use" basis. - Earthquake risk and systemic implications - Two key earthquake zones: British Columbia and Québec corridor (Québec City to Ottawa). - Take-up rates: British Columbia earthquake zone = around 40–70 percent of homeowners; Québec corridor = around 2–4 percent. - Mortgage insurance excludes natural disaster losses (including earthquakes). Low take-up in the Québec corridor combined with this exclusion could transfer substantial earthquake risk to banks and other lenders. - Recommendations and actions: - Former OSFI Superintendent recommended a federal emergency backstop arrangement for P&C insurers and industry/authority education campaigns. - AMF has a project to analyze/mitigate earthquake risk in Québec. - Federal SAC established an Earthquake Working Group (provincial representation limited). - OSFI and AMF moving to require capital at a 1 in 500 years occurrence level by 2022 for P&C insurers. - Policy options identified: transfer tail risk to reinsurance/ILS markets, government backstop/pool, increasing private take-up (balanced against affordability and moral hazard), and coordinated federal-provincial action. - Reinsurance and concentration risks - OSFI concerns: Canadian insurers ceding significant business outside Canada leading to small levels of capital/assets maintained in Canada; large reinsurance recoverables create on-balance-sheet credit risk and single-counterparty concentration. - OSFI consulting on addressing large exposures and concentration; supervisory recognition of reinsurers’ supervisors should be taken into account per ICP 13. ### Inter-agency cooperation, data gaps, and macroprudential surveillance - Coordination mechanisms - Federal committees: FISC, SAC, Heads of Agencies Committee. - CCIR: provincial regulators’ association; AMF administers CCIR Annual Statement on Market Conduct (ASMC). - Data and surveillance gaps - No single source of data covering entire Canadian insurance market; OSFI data covers federally regulated insurers; provincial supervisors maintain jurisdictional data. - No formal Canada-wide surveillance forum exists to discuss market-wide trends and risks; current interactions are informal. - Recommendations - Aggregate market-wide insurance statistics and create a federal-provincial forum to discuss sector risks and market-wide trends. - OSFI and provincial supervisors should address barriers to information sharing and enter into MoUs (OSFI should communicate acceptable protection level for shared information). - Joint OSFI-AMF benchmarking exercise to ensure consistency of supervisory intensity. ### Key supervisory and policy recommendations (selected and prioritized) - Improve cooperation between federal and provincial authorities - "Enhance inter-agency cooperation, particularly between federal and provincial authorities, with additional MoUs. (OSFI, provincial supervisors)" — Priority: ¶4 1; Timeframe: M ST - "Carry out jointly a benchmarking exercise with respect to supervisory intensity. (OSFI, AMF)" — Priority: M MT - "Create a forum to discuss risks to the insurance market and market-wide trends. (federal and provincial authorities)" — Priority: H ST - "Work together to address possible systemic risk from earthquakes in Canada, building on the SAC’s Earthquack Working Group. (SAC, OSFI, provincial authorities)" — Priority: ¶7 2; Timeframe: H MT - Enhance regulatory frameworks and disclosures - "Consider how spread risk is taken into account in the overall solvency framework for life-and-health insurers when IFRS 17 is implemented. (OSFI, AMF)" — Priority: ¶5 5; Timeframe: H MT - "Consider disclosure requirements at the solo level, once ICP 20 is revised in late 2019, and ensure that such disclosures are easily available to stakeholders of Canadian legal entities. (OSFI, AMF)" — Priority: L MT - "Strengthen legal foundation underpinning insurance group-wide supervision; apply the regulatory framework more consistently to group-wide supervision (OSFI, AMF; DOF, Québec government)" — Priority: ¶6 1, 62; Timeframe: H ST - "Ensure that the reinsurance framework reforms take into account the supervision performed by reinsurers’ supervisors. (OSFI)" — Priority: M ST - "Jointly review the possible effectiveness of the new penalty regime introduced in the Insurers Act. (AMF, Québec government)" — Priority: ¶9 1; Timeframe: H I - "Carry out a benchmarking exercise with respect to capital requirements between the deposit-taking and mortgage insurance industries... (OSFI)" — Priority: H ST - Enhance supervisory practices and solo focus - "Consider how their flexible approach to supervision would work in an industry crisis situation. (OSFI, AMF)" — Priority: M MT - "Place more emphasis on solo supervision of life insurers particularly a focus on the level of capital at the solo entity, in addition to its already comprehensive consolidated supervision. (OSFI)" — Priority: H ST - "Cease the practice of applying different total capital ratios and core capital ratios at the non-operating and operating levels of life insurers, which allows the downstreaming of senior debt into the operating entities. (OSFI)" — Priority: H ST - "Work with the insurance industry to ensure that ORSA target capital calculations include appropriate considerations of (i) risk diversification, (ii) risk sharing with life insurance policyholders, and (ii) risk appetite with respect to potential ratings downgrades. (OSFI, AMF)" — Priority: M MT - Improve industry data and macroprudential surveillance - "Develop a single set of market-wide insurance industry data. (OSFI, provincial supervisors, DOF)" — Priority: H ST *Prepared by Peter Windsor (IMF) under guidance of Phakawa Jeasakul (FSAP deputy mission chief); review conducted as part of the 2019 Canada FSAP led by Ghiath Shabsigh (FSAP mission chief). December 20, 2019.* ### 2018. It contains technical analysis and detailed ### 1canea2020006 - 2018. It contains technical analysis and detailed ### Executive summary - Canada has a highly developed insurance market important to Canada’s economy; insurance penetration and density are "as expected for an advanced economy like Canada." - Market structure: - Three large life-and-health (L&H) insurance conglomerates are globally active, with only "approximately a third" of their business within Canada. - The property-and-casualty (P&C) insurance industry is less concentrated; foreign-owned insurance subsidiaries and branches have a significant market share. - Three mortgage insurers operate in Canada. The largest mortgage insurer is the Canada Mortgage and Housing Corporation (CMHC), a federal government agency operating on a commercial basis and with a separate social housing mandate. - All mortgage insurers benefit from an explicit government guarantee; however, "a deductible of 10 percent of the original principal amount of the insured mortgage" applies to a lender’s claim in respect to an insurance contract written by either of the two private mortgage insurers. - Regulatory and supervisory framework: - Federal and provincial authorities share regulation and supervision. Insurers can be incorporated under federal or provincial regimes. - OSFI (Office of the Superintendent of Financial Institutions) is responsible for prudential regulation and supervision of federally regulated insurers. - Provincial supervisors are in charge of prudential oversight of provincially regulated insurers and conduct oversight of all insurers operating in their jurisdictions. Federally regulated insurers are also subject to provincial prudential powers due to provincial responsibilities for licensing of insurance business. - IFRS accounting standards as adopted by the Canadian Accounting Standards Board (CAcSB) and the Canadian Actuarial Standards Board (CASB)’s standards of practice are referenced in prudential guidelines. - Supervisory quality: - Federal insurance supervision at OSFI and Quebec provincial supervision at Autorité des marchés financiers (AMF) is high-quality. AMF has the most extensive prudential supervision responsibilities among Canadian provinces and was the only provincial insurance supervisor where prudential supervision was assessed. - Both OSFI and AMF employ a risk-based supervisory approach able to escalate supervisory intensity commensurate with firms’ risk profiles. - Risk-based solvency frameworks implemented after the 2014 FSAP are described as "advanced." For L&H insurers, these include the Life Insurance Capital Adequacy Test (LICAT) and Adequacy Requirements for Life and Health Insurance (CARLI) in Quebec; for P&C insurers, the Minimum Capital Test (MCT); and as of the beginning of 2019, the Mortgage Insurance Capital Adequacy Test (MICAT). - Limitations and concerns: - OSFI has no authority to issue its own legally enforceable regulations and relies on guidelines backed by enforceable instruments accepted by regulated entities as equivalent — effective in normal times but potentially ineffective in a less benign environment. - Federal-provincial cooperation and coordination should be improved; current cooperation is informal and relies on interpersonal relationships. - Group-wide supervision lacks a strong legal foundation and consistent application, particularly over unregulated holding companies where OSFI and AMF rely on voluntary undertakings. - For federally regulated life insurers, OSFI should discourage holding companies from issuing senior debt and passing proceeds to operating entities to be used as available capital; this issue stems from lack of target capital ratios at non-operating L&H insurers and differences in minimum core capital ratios at non-operating and operating L&H insurers. - Greater emphasis on solo supervision of life insurers would be beneficial; capital and disclosure requirements at the solo level could be useful given market structure. - Canada-wide surveillance is currently missing; there are no formal discussions between federal and provincial authorities. Steps recommended include aggregation of statistics about the whole insurance sector and establishment of a federal-provincial forum to discuss sector risks and market-wide trends. - ORSA: - Implementation of Own Risk and Solvency Assessment (ORSA) is still developing. - Large insurers’ views of their capital requirements are consistently less than regulatory requirements; smaller insurers view their capital requirements as higher than regulatory requirements. - OSFI and AMF should work with industry to ensure ORSA reflects appropriate considerations for risk diversification, risk sharing with life insurance policyholders, and risk appetite with respect to potential ratings downgrades. - Conduct oversight: - Conduct oversight has improved since the 2014 FSAP. Coordination among provincial supervisors on conduct supervision has increased. - Ontario’s creation of the Financial Services Regulatory Authority (FSRA) appears to address many 2014 FSAP ICP assessment recommendations. - Québec’s insurance legislation was updated, giving AMF new powers and penalties; however, effectiveness is unclear given a recent case where AMF’s powers were not sufficient to deter inappropriate market conduct. ### Institutional setting and supervisory approach - Supervisory responsibilities, objectives, and powers: - OSFI is the federal prudential regulator for federally regulated insurers. - Provincial supervisors supervise provincially incorporated insurers and oversee conduct for all insurers operating in their jurisdictions; AMF in Québec has extensive prudential responsibilities and was assessed for prudential supervision. - Risk-based supervisory approach is applied by OSFI and AMF. - Inter-agency cooperation: - Federal-provincial cooperation occurs informally and relies on specific interpersonal relationships. - Recommendation: federal and provincial authorities should address barriers to closer cooperation and enter into Memorandums of Understanding (MoUs) to enhance information exchange and policy coordination. - A joint OSFI-AMF benchmarking exercise is recommended to ensure consistency of supervisory intensity between the two major supervisors. ### Insurance supervision — key observations by sector and issue - L&H insurance: - Consideration needed on how IFRS 17 implementation interacts with regulatory solvency frameworks and risk margins. - Solo-level capital and disclosure requirements could be considered once ICP 20 is revised. - P&C insurance: - Earthquake risk is a significant natural catastrophe scenario potentially creating a financial stability issue if uninsured earthquake losses cause substantial losses to banks and other lenders. - Federal and provincial authorities should address potential systemic risk from earthquakes in Canada. - Auto insurance: need to balance insurance affordability, sufficient compensation to accident victims, and maintaining prudentially sound insurers. - Reinsurance: - OSFI has reviewed the reinsurance framework and should take into account supervision performed by reinsurers’ supervisors. - Mortgage insurance: - Unclear whether risk transfer from deposit-taking institutions to mortgage insurers results in sufficient overall capital in the Canadian financial system, particularly for mortgages with high loan-to-value. - OSFI should carry out a benchmarking exercise comparing capital requirements between deposit-taking and mortgage insurance industries. ### ORSA and capital insights - ORSA implementation findings: - Large insurers’ ORSA-based target capital calculations are consistently less than regulatory requirements. - Smaller insurers’ ORSA results indicate target capital that would be higher than regulatory requirements. - Recommendation: OSFI and AMF should work with industry to ensure ORSA target capital calculations include considerations of (i) risk diversification, (ii) risk sharing with life insurance policyholders, and (iii) risk appetite with respect to potential ratings downgrades. ### Recommendations (summary drawn from Table 1) - Improve cooperation between federal and provincial authorities: - "Enhance inter-agency cooperation, particularly between federal and provincial authorities, with additional MoUs. (OSFI, provincial supervisors)" — Priority: ¶4 1; Timeframe: M ST - "Carry out jointly a benchmarking exercise with respect to supervisory intensity. (OSFI, AMF)" — Priority: M MT - "Create a forum to discuss risks to the insurance market and market-wide trends. (federal and provincial authorities)" — Priority: H ST - "Work together to address possible systemic risk from earthquakes in Canada, building on the SAC’s Earthquack Working Group. (SAC, OSFI, provincial authorities)" — Priority: ¶7 2; Timeframe: H MT - Enhance regulatory frameworks: - "Consider how spread risk is taken into account in the overall solvency framework for life-and-health insurers when IFRS 17 is implemented. (OSFI, AMF)" — Priority: ¶5 5; Timeframe: H MT - "Consider disclosure requirements at the solo level, once ICP 20 is revised in late 2019, and ensure that such disclosures are easily available to stakeholders of Canadian legal entities. (OSFI, AMF)" — Priority: L MT - "Strengthen legal foundation underpinning insurance group-wide supervision; apply the regulatory framework more consistently to group-wide supervision (OSFI, AMF; DOF, Québec government)" — Priority: ¶6 1, 62; Timeframe: H ST - "Ensure that the reinsurance framework reforms take into account the supervision performed by reinsurers’ supervisors. (OSFI)" — Priority: M ST - "Jointly review the possible effectiveness of the new penalty regime introduced in the Insurers Act. (AMF, Québec government)" — Priority: ¶9 1; Timeframe: H I - "Carry out a benchmarking exercise with respect to capital requirements between the deposit-taking and mortgage insurance industries, particularly to understand the amount of deposit-taking institutions’ capital with no mortgage insurance and to compare with the Basel standards. (OSFI)" — Priority: H ST - Enhance supervisory practices: - "Consider how their flexible approach to supervision would work in an industry crisis situation. (OSFI, AMF)" — Priority: M MT - "Place more emphasis on solo supervision of life insurers particularly a focus on the level of capital at the solo entity, in addition to its already comprehensive consolidated supervision. (OSFI)" — Priority: H ST - "Cease the practice of applying different total capital ratios and core capital ratios at the non-operating and operating levels of life insurers, which allows the downstreaming of senior debt into the operating entities. (OSFI)" — Priority: H ST - "Work with the insurance industry to ensure that ORSA target capital calculations include appropriate considerations of (i) risk diversification, (ii) risk sharing with life insurance policyholders, and (ii) risk appetite with respect to potential ratings downgrades. (OSFI, AMF)" — Priority: M MT - Improve insurance industry data: - "Develop a single set of market-wide insurance industry data. (OSFI, provincial supervisors, DOF)" — Priority: H ST ### Introduction — scope and approach (methodology notes) - Review builds on the 2014 Insurance Core Principles (ICP) assessment and focused on changes since then and follow-up on selected recommendations where prior assessments were "partially observed." - The review is based on laws, regulations, and supervisory practices in place at the time of the mission in October–November 2018; ongoing regulatory initiatives are acknowledged. - Authorities provided a full self-assessment against selected ICPs and responses to a questionnaire; documentation of actual supervisory practices was reviewed. - Coverage of the review: - Prudential regulation and supervision under the federal regime and in Québec jurisdiction. - Market conduct oversight in Québec and Ontario (selected aspects for Ontario). - Regulation and supervision in the remaining eight provinces and three territories were not addressed directly; discussions with the Canadian Council of Insurance Regulators (CCIR) and review of some CCIR documents provided insights into provincial coordination on market conduct supervision. - Discussions with government bodies in Alberta and British Columbia covered regulation and provision of auto insurance in those provinces. *Prepared by Peter Windsor (IMF) under guidance of Phakawa Jeasakul (FSAP deputy mission chief); review conducted as part of the 2019 Canada FSAP led by Ghiath Shabsigh (FSAP mission chief). December 20, 2019.* ### 4. The prudential regulation of insurers in Canada has been revamped since the 2014 ### 4. The prudential regulation of insurers in Canada has been revamped since the 2014 ### Regulatory changes since 2014 - The same framework of regulation remains, but guidelines issued by the Office of the Superintendent of Financial Institutions (OSFI) and Autorité des marchés financiers (AMF) have been thoroughly overhauled and updated. - Major changes have been made to capital guidelines for life-and-health (L&H) insurers, property-and-casualty (P&C) insurers, and mortgage insurers. - Guidelines have been issued covering other aspects of regulation, including guidelines implementing Own Risk and Solvency Assessment (ORSA). - This FSAP included a review of these changes. *Key statistic* - The review covers updates and implementation by OSFI and AMF as described in the chapter. ### Market structure — overall size and importance - Total insurance sector assets: Can$1.7 trillion. - P&C insurance sector assets at end-2017: Can$173 billion, of which Can$154 billion was held in federally regulated insurers. - L&H insurance sector (excluding segregated funds) assets at end-2017: Can$858 billion, of which Can$833 billion was held in federally regulated insurers. - Federally regulated P&C insurers’ assets have remained relatively stable over the last three years. - Federally regulated L&H insurers have grown moderately over the last three years, with slightly higher growth in segregated funds business. - Insurance density (2017): US$3,260 per person (US$1,407 L&H premiums per person; US$1,853 P&C premiums per person). - Insurance penetration (2017): 7.23 percent of GDP (3.12 percent L&H; 4.11 percent P&C). - Provincial penetration examples: 8.1 percent of GDP in Québec; 7.5 percent of GDP in Ontario. - Number of domestic employees at end-2017: approximately 281,400 (L&H: 155,200; P&C: 126,200). ### Data coverage and supervisory insights - OSFI maintains data for federally regulated insurers; each provincial supervisor maintains data for insurers chartered in their jurisdictions. - There is no single source of data providing a complete picture of the entire Canadian insurance market. - The lack of a single comprehensive data source is raised later in the chapter under macroprudential oversight. ### Industry consolidation and counts of insurers - Trend: number of federally regulated insurers continues to decline, indicating steady consolidation across all categories. - Table 2 — Number of Federally Regulated Insurers: - 2012 total: 264 - 2018 total: 231 - L&H insurers: 2012 = 65; 2018 = 54 (Includes nine L&H insurers in run-off; the 2012 figure includes 34 in run-off or inactive.) - P&C insurers: 2012 = 150; 2018 = 133 (Includes eight P&C insurers in run-off. This does not include Canada Mortgage and Housing Corporation (CMHC).) - Reinsurance companies: 2012 = 36; 2018 = 32 - Fraternal benefit societies: 2012 = 13; 2018 = 12 - Table 3 — Number of Québec Chartered Insurers: - 2013 total: 74 - 2017 total: 62 - L&H insurers: 2013 = 13; 2017 = 12 - P&C insurers: 2013 = 49; 2017 = 36 - Multi-branch entities: 2013 = 2; 2017 = 4 - Reinsurers: 2013 = 2; 2017 = 2 - Others (Fonds and Fraternal): 2013 = 8; 2017 = 8 ### Life-and-Health (L&H) insurance — market structure and trends - The L&H industry is highly concentrated and dominated by three Canada-based internationally focused companies: Manulife Financial Corporation, Sun Life Financial Inc., and the Great West Life Assurance Company, which collectively held 90 percent of life insurers’ total assets in 2017. - For these groups, Canada represents approximately a third of their overall business. - The three large L&H insurers have focused on cost control and de-risking balance sheets, but retain legacy business in higher risk lines such as variable annuities and long-term care products. - Product strategy: shift toward profitable but capital-efficient products; many segregated fund products are offered at the minimum guarantee level allowed under taxation rules. - Trend: reductions in return on equity in recent years due to low interest rates and legacy businesses (some legacy business is capital-intensive). - Investment portfolios of federally regulated L&H insurers: - General accounts: dominated by government bonds and investment-grade corporate bonds, with a sizable allocation to mortgage loans (mainly commercial mortgage loans). - Segregated funds (subject to guarantees): dominant asset class is mutual funds; information about allocations within these mutual funds was not available. - Recommendation: OSFI should improve granularity of data on asset allocations. - Segregated funds guarantees: - Federally regulated L&H insurers have reduced the share of segregated funds subject to significant guarantees. - Amount of segregated funds with minimal guarantees has increased, while segregated funds with more significant guarantees has been steady. - Non-participating business within general account is increasing as a relative proportion of premiums. - Potential implication: declining ability to share potential gains and losses with policyholders may affect capital requirements where sharing losses with policyholders is taken into account. - Definition note on minimal guarantees: - Minimal guarantees: guarantee of capital on 75 percent of the portfolio for death benefits or investments held for a long period (e.g., 10 years or more). Can be increased to 100 percent and reset periodically (more significant guarantees are examples of the latter). *Selected L&H indicators (2015–2017) from figures and text* - Actuarial liabilities and segregated fund liabilities shown in regional figures (values presented in the chapter figures in billions of Canadian dollar for 2015–2017). - General account and segregated fund premium breakdowns and return on equity trends are presented in the chapter figures (2015–2017). ### Property-and-Casualty (P&C) insurance — market structure and trends - P&C industry is less concentrated than L&H; foreign-owned insurers have significant market share. - Industry composition: Canada-based companies (including subsidiaries of large Canadian banks and mutual/cooperative organizations), local subsidiaries of global groups, and licensed Canadian branches of foreign insurers. - Top-ten federally regulated P&C insurers accounted for 73 percent of total premiums in 2017, up from 43 percent in 2012. - Largest federally regulated P&C insurer: Intact, with 16 percent of total P&C premium in 2017. - Second largest: Aviva, with 11 percent of total premiums in 2017. - Dominant product: auto insurance — accounts for over 42 percent of the P&C insurance sector. Table 4 — Federally Regulated P&C Insurers’ Premiums (In millions of Canadian dollar) - Auto: 2014 = 19,049; 2015 = 19,530; 2016 = 19,935; 2017 = 20,061 - Property: 2014 = 15,559; 2015 = 16,537; 2016 = 16,948; 2017 = 17,291 - Liability: 2014 = 5,460; 2015 = 5,981; 2016 = 5,794; 2017 = 5,859 - Accident and health: 2014 = 1,179; 2015 = 1,276; 2016 = 1,291; 2017 = 1,403 - Others: 2014 = 2,406; 2015 = 2,547; 2016 = 2,601; 2017 = 2,741 - Total premiums: 2014 = 43,654; 2015 = 45,871; 2016 = 46,569; 2017 = 47,356 - Investment profile: conservative and heavily weighted in fixed-income securities. - Trend: reduction in bond investments and increase in "other loans" — likely related to reduced bond yields and difficulty in consistently making an underwriting profit. - Combined ratios: close to 100 percent, although exceeded 100 percent in two out of the last five years (figure-based). ### Auto insurance — market and regulatory landscape (provincial variation) - Each province regulates auto insurance differently, affecting premium rate restrictions and the nature of claims, particularly personal injury. - P&C insurers face rising claims costs due to increasing bodily injury expenses, higher vehicle damage costs (modern car technology), and higher accident rates in some provinces. Provincial highlights: - Alberta: - The Automobile Insurance Rate Board (AIRB) regulates rate programs for automobile insurance (basic and additional coverage). - AIRB created in 2004; reforms included a cap on minor injury claims; regulations clarified in May 2018. - Two ministerial orders: December 4, 2017 (November 1, 2017–November 30, 2018) and October 31, 2018 (December 1, 2018–August 31, 2019) required AIRB not to approve filings where cumulated rate increases were greater than 5 percent. - AIRB capped rate increases at 10 percent in mid-2017; that cap remains in force. - Consequence: insurers making losses of 10–14 percent of the premiums they can charge. - Alberta undertaking a review of automobile insurance claims and costs due to be completed in December 2019. - British Columbia: - Insurance Corporation of British Columbia (ICBC) is a provincial crown corporation providing mandatory basic auto insurance plus optional additional coverage. - ICBC is the sole provider of basic auto insurance coverage; optional coverage provided competitively. - ICBC’s MCT capital ratio was 31 percent at end-2018Q1 (ICBC required to use OSFI’s Minimum Capital Test (MCT) framework to set capital targets; OSFI’s minimum requirement for federally regulated P&C insurers is 150 percent). - British Columbia government temporarily suspended the requirement to maintain basic MCT capital ratio at 100 percent until March 21, 2022. - The British Columbia auto insurance market is undergoing significant change; revised framework to be implemented on April 1, 2019, aimed at controlling costs and moving away from a litigation-based model for bodily injury claims. - Ontario: - All forms of auto insurance provided by private insurers; Ontario has a partial 'no-fault' regime for bodily injury. - Financial Services Commission of Ontario (FSCO) must approve rates based on comprehensive filings certified by an actuary; simplified filing allowed for rate reductions only. - FSCO takes into account prudential supervision objectives when considering rate change proposals. - The Marshall report (April 2017) reviewed Ontario’s auto insurance system and found high premiums and inappropriate care for victims; it recommended increasing the proportion of claims payments and expenses that go to caring for victims rather than legal fees and other non-care expenses. *Regulatory and market consequences noted in the chapter* - Provincial regulatory approaches and rate approvals materially affect insurer profitability and market structure. - Public policy actions (e.g., rate caps, structural reforms) have led to insurer losses in some jurisdictions and significant changes in market frameworks. *Figures and sources cited within the chapter* - Figures and charts in the chapter use OSFI and IMF staff calculations; specific figure data for 2015–2017 (assets, liabilities, premiums, return on equity, asset allocations) are presented in those figures. *International Monetary Fund.* ### Box 1. Auto Insurance—Market and Regulatory Landscape (concluded) ### Box 1. Auto Insurance—Market and Regulatory Landscape (concluded) ### Québec: auto insurance design and regulation - Bodily injury claims: covered by a public automobile insurance plan administered by Société de l’assurance automobile du Québec (SAAQ). - Property damage: private insurers provide additional coverage. - Mandatory minimum coverage: drivers in Québec must hold a minimum amount of coverage for damage to third-party property. - Optional coverages: additional coverage for the driver’s own car for accidents and other perils such as fire and theft. - Fault system: Québec has a pure no-fault system for all road accidents involving bodily injuries; injured parties cannot resort to tort law to sue for damages due to injury. - Rate regulation: for mandatory third-party property and optional property damage coverage, rates are regulated by AMF on a “file and use” basis (insurers can amend premium rates without prior AMF approval). - AMF supervisory note: AMF may require from insurer explanations about its rate changes or new criteria implemented in the rating process. ### Government intervention and market implications - Tradeoff: no easy solution to ensure both affordable auto insurance and appropriate compensation to victims. - Policy intervention: can be effective in reducing claims costs and maintaining affordable premiums, but stakeholders argue it may limit injury claims for victims. - Regulatory risk: premium rate regulation that does not account for insurers needing a required return on capital can create unsustainable loss-making situations for P&C insurers. - Ongoing challenge: comprehensive reviews in Alberta, British Columbia and Ontario demonstrate that developing and maintaining the right policy settings is an ongoing, challenging task. ### Federally regulated P&C insurers — profitability and asset allocation (selected observations) - Combined ratios: usually about 100 percent, exceeding 100 percent in 2013 and 2016. - Sensitivities: Return on equity is very sensitive to the combined ratio and to a lesser extent on return on investments. - 2018 preliminary: evidence of another difficult year for P&C insurers in 2018; a number of events just below reinsurance attachment meant aggregate multiple smaller events likely resulted in an underwriting loss in 2018. - Investment search-for-yield: asset allocation shows a reduced allocation to bonds and an increased allocation to “other loans.” ### Mortgage insurance: market structure, guarantees, and recent regulatory effects - Number of mortgage insurers: three operating in Canada. - Largest insurer: Canada Mortgage and Housing Corporation (CMHC), a federal government agency operating commercial mortgage insurance and with a separate social housing mandate. - Government guarantee (CMHC): explicit guarantee providing 100 percent coverage of net claims by lenders in the event of CMHC’s insolvency. - Fees to government (CMHC): pays fees in an amount of 3.25 percent of direct premiums written on all mortgage insurance contracts, and an additional 0.1 percent of portfolio insurance contracts written. - Private mortgage insurers: two private mortgage insurers are designated as approved mortgage insurers; they equally benefit from an explicit government guarantee but coverage is subject to a deductible of 10 percent. - Fees by private insurers: private mortgage insurers pay fees to the federal government in an amount of 2.25 percent of direct premiums written. - Reinsurance restriction: mortgage insurers are not allowed to cede risk into the reinsurance market according to requirements for the federal government guarantee. ### CMHC broader roles and oversight - Additional CMHC roles: funding social housing; managing the National Housing Act (NHA) mortgage-backed securities program with a guarantee of timely payment; administering the Canada Housing Trust issuing Canada Mortgage Bonds backed by NHA MBS. - OSFI oversight: OSFI does not supervise CMHC under the Insurance Companies Act (ICA) but has a formal oversight role limited to CMHC’s commercial functions; OSFI does not oversee CMHC’s social housing funding role. ### Market pricing, capital rules, and business trends - Pricing influence: CMHC is dominant and private insurers follow CMHC pricing for high loan-to-value (LTV) loans (LTV above 80 percent). - Capital rule impact: when OSFI’s Capital Requirement for Federally Regulated Mortgage Insurers (CRMI) became effective, capital requirements for mortgage insurers substantially increased; CMHC revised premium rates accordingly. - Premium change timing: in 2017Q1, premiums increased substantially for high-LTV loans to reflect higher capital needs. - Lender behavior: with equivalent pricing, lenders implemented random allocation of mortgage insurance across the three mortgage insurers to ensure diversification. - Portfolio versus transactional insurance: - All mortgage loans with LTV above 80 percent by federally regulated financial institutions are required to be insured transactionally (loan-by-loan). - Portfolio insurance (for LTV lower than or equal to 80 percent) collapsed after OSFI’s revised capital guideline implementation on January 1, 2017. - 2016 spike: pronounced spike in portfolio business in 2016Q2 ahead of two regulatory changes: DOF’s “purpose test” for portfolio insurance effective July 2016, and anticipated CRMI repricing; lenders rushed to obtain portfolio insurance before these changes. - Sandbox criteria and effects: - The ‘sandbox’ defines criteria for mortgage loans eligible for the federal government guarantee. - Key criteria include borrower debt-servicing capacity (including stress tests), maximum property value of Can$1 million, and maximum amortization period of 25 years. - After sandbox tightening in 2016Q3, there has been a declining level of high-LTV loans. - Seasonality: most property transactions occur in the second and third quarters of each year; comparison of peaks in 2014–15 with 2016–17 shows a decline in transactional mortgage insurance for high-LTV loans. ### Institutional setting: supervisory responsibilities and standards - Incorporation regimes: insurers incorporated under federal or provincial regimes. - Federally regulated insurers: incorporated under the ICA or licensed Canadian branches of foreign insurers; subject to OSFI prudential regulation and supervision. - Provincial roles: each province has an agency in charge of insurance supervision; provincial prudential powers derive from licensing responsibilities and in most circumstances are not exercised independently for federally regulated insurers, with cooperation with OSFI. - Québec practice: all insurers operating in Québec must submit to AMF’s prudential framework; provincial supervisors largely follow OSFI’s prudential guidelines, but AMF issues guidance and sometimes variances. - OSFI mandate: protect rights and interests of policyholders and creditors of insurers and contribute to public confidence in a safe and sound financial system; OSFI is accountable to Parliament through the Minister of Finance. - Minister of Finance approvals: the ICA requires Ministerial approval for changes in ownership, amalgamations, continuances and other transactions with potential policy implications; Minister receives Superintendent’s recommendation. - Conduct of business (CoB) supervision: provincial supervisors are responsible for CoB; scope and approach vary by province; some provinces delegate supervision of intermediaries to SROs. - Actuarial standards: - OSFI and AMF refer to Canadian Institute of Actuaries (CIA) Rules of Professional Conduct and Canadian Actuarial Standards Board (CASB) standards. - The ICA requires each insurer to have an appointed actuary (must be a fellow of the CIA). - Appointed actuary deliverables to OSFI: Appointed Actuary’s Report (AAR) and Dynamic Capital Adequacy Testing (DCAT) annually. - AMF provides guidance in addition to CASB standards. - Accounting standards: - All insurers in Canada must apply IFRS to public financial reporting and regulatory reporting. - Canadian Accounting Standards Board (CAcSB) has adopted IFRS as the framework for publicly accountable enterprises; the ICA requires federally regulated insurers to apply Canadian GAAP. ### Box 2. On IFRS 17 — implementation and implications - Timeline and standards: - May 18, 2017: IASB issued IFRS 17. - 14 November 2018: IASB proposed a deferral of one year to the implementation of IFRS 17. - As proposed at time of writing, for the year beginning January 1, 2022 accounting for insurance contracts will undergo significant change in Canada. - Expected impacts: - Complete overhaul of insurers’ financial statements. - Fundamental changes affecting actuarial functions, finance functions and IT systems within insurers. - Ramifications for liabilities and capital recorded on balance sheets and for income recorded in statements of comprehensive income due to changes in how revenue and expenses emerge. - Industry concerns: - All insurers and industry associations consulted in the FSAP raised implementation challenges. - IFRS 17 will require significant systems development. - CLHIA and IBC were among associations calling for a delay to implementation; this led to IASB’s proposed one-year delay. - Canada-specific challenges: - IFRS is applied to all insurers in Canada, and prudential regulators tie reporting and capital tests to Canadian GAAP — meaning even small insurers must implement IFRS 17. - Changes in Canadian GAAP affect available capital in Life Insurance Capital Adequacy Test (LICAT) and provisions for adverse deviations (PfADs) used for surplus allowance in LICAT numerator. - Potential impact on how risks are measured for the base solvency buffer (denominator) in LICAT ratios. - For P&C insurers, the MCT capital ratio may be affected by changes to available capital and possibly by changes in capital required for various risks. - Regulatory coordination and schedule: - OSFI and AMF have begun working with industry on necessary changes to LICAT and MCT, and AMF equivalents. - OSFI guidance: federally regulated insurers should not adopt IFRS 17 early; insurers should account for financial guarantee contracts in accordance with IFRS 17 and should not use the option to apply IFRS 9. - AMF statement (June 2010): early adoption of standards is not permitted at the time of publication; after further analysis AMF will notify institutions when early adoption is permitted. - September 2018: OSFI and AMF distributed draft LICAT and MCT guidelines to the industry for comment. - June 2019: intention to distribute close to final guidelines, including changes to LICAT and MCT with respect to IFRS 17, and to conduct a quantitative impact study. - June 2020: planned publication of a final package of guidelines and regulatory capital forms. *Source: IMF staff summary of the content unit "Box 1. Auto Insurance—Market and Regulatory Landscape (concluded)".* ### Box 2. On IFRS 17 (concluded) ### Box 2. On IFRS 17 (concluded) ### IFRS 17 implementation: uncertainties and convergence - Implementation timelines and plans referenced the original January 2021 effective date for IFRS 17; it is not yet clear whether project plans will be adjusted in light of the proposed new effective date. - At the time of writing this Technical Note, neither prudential regulators nor insurers know the impact of implementing IFRS 17 in Canada because a number of material interpretations of IFRS 17 are required. - IFRS 17 prescribes principles for key inputs such as the discount rate and techniques to determine risk margins; a range of possible practices exists and the industry has not converged on where practices will fall within that spectrum. - Observed behaviours and dynamics: - There appears to be “first mover” reluctance among industry participants. - Multiple groups in the accounting, actuarial, and auditing professions are formed to consider interpretation and implementation issues. - There is a natural pull towards convergence within Canada and possibly internationally, but the extent of convergence is unknown. - A smaller range of possible practices across key judgements seems more likely than a single definitive answer for each judgement. - Vigilance by prudential regulators, appointed actuaries, and auditors will be required to ensure an accumulation of judgements in a particular direction does not produce very different outcomes. - Conservatism in all judgements may lead to very different outcomes compared to an accumulation of less prudent judgements. - International convergence is an open question and important for the three large Canadian life insurers with significant operations abroad; differing starting points across jurisdictions will complicate achieving convergence in necessary judgements. - Implementation is described as a journey that: - Began with the publication of the standard in May 2017. - Has a next major milestone of the first financial reports after January 1, 2022. - Is likely to continue thereafter as companies, stakeholders, auditors, and actuaries assess implementation across Canada and internationally. ### Inter-Agency Cooperation: federal and provincial structures - Formal federal coordination facilitated by three committees: - Financial Institutions Supervisory Committee (FISC), chaired by the OSFI Superintendent, exchanges information related to supervision of federally regulated financial institutions and addresses institution-specific issues. - Senior Advisory Committee (SAC), chaired by the Deputy Minister of Finance, focuses on financial sector policy issues and systemic matters, including crisis preparedness. - Heads of Agencies Committee, chaired by the BOC Governor, exchanges information and facilitates coordinated action on securities-market related issues; membership includes DOF, OSFI and the four provincial securities regulators in Alberta, British Columbia, Ontario, and Québec. - Membership overlap: SAC and FISC share the same membership, including Bank of Canada (BOC), Canada Deposit Insurance Corporation (CDIC), DOF, Financial Consumer Agency of Canada (FCAC), and OSFI; other government agencies may be invited. - CCIR (Council of Canadian Insurance Regulators): - An inter-jurisdictional association of insurance regulators mandated to promote an efficient and effective insurance regulatory system in Canada. - Membership includes all provincial insurance regulators; OSFI participates as an observer. - Strengthened since the 2014 FSAP: launched initiatives to improve harmonization of CoB supervision across provinces; in 2016 began cooperative supervisory activities including on-site inspections and thematic reviews. - Introduced the CCIR Annual Statement on Market Conduct (ASMC) in April 2017 as a harmonized regulatory return collecting marketplace data related to insurers’ governance practices and fair treatment of consumers; AMF administers the information collection via service agreements with each of the other nine provincial supervisors and three territories individually. - FCAC role: - Not covered in this review given its limited role in supervising the insurance sector. - FCAC is an agency of the federal government; its role with respect to insurance is limited and largely relates to consumer education. ### Supervisory approach: OSFI and AMF practices and escalation - Consolidated supervision: - OSFI conducts supervision on a consolidated basis covering material entities in Canada and internationally. - AMF also conducts consolidated supervision but supervises groups that substantively operate in Canada only. - Risk-based supervision: - Both OSFI and AMF use an advanced risk-based approach with structured escalation of supervisory intensity as an insurer’s risk profile increases. - Annual supervisory strategy formulated for each insurer based on a risk assessment updated regularly after each supervisory activity. - Aggregate risk assessment derives net risk and importance for each significant activity by assessing inherent risk and quality of risk management. - Consistency, quality and quantity of earnings, level of capital and liquidity risk, and liquidity risk management are assessed and combined in a risk matrix to derive a composite risk rating that informs level of intervention. - Staging framework with four stages of enhanced intervention from “early warning” to “non-viability/insolvency imminent.” - When a federally regulated L&H insurer is ‘staged’, Assuris is informed and works cooperatively with OSFI; when a federally regulated P&C insurer is “staged,” PACICC is informed and works cooperatively with OSFI. - Capacity and effectiveness: - OSFI and AMF have high-standard prudential guidelines highly compliant with international standards. - Staff demonstrate excellent industry knowledge and high levels of expertise; both agencies appear adequately resourced. AMF has a dual mandate of prudential and CoB oversight and appears adequately resourced to perform both. - Issuing guidelines and using moral suasion has worked well in benign environments; both agencies are highly respected. - Consideration needed on how the guidelines-and-moral-suasion approach would function in an industry crisis. - Québec’s Insurers Act (S.Q. 2018, c. 23, s. 3) introduced by Bill 141, enacted on June 13, 2018, will grant AMF powers to issue regulations once the Insurers Act comes into force in June 2019; AMF’s intended use of these powers is not yet clear. ### Cooperation and coordination: information sharing and MoUs - Current state: - Cooperation between OSFI and provincial supervisors occurs informally and relies on interpersonal relationships. - OSFI has not signed a memorandum of understanding (MoU) allowing formal information sharing with CCIR members or other provincial supervisors. - Provincial supervisors (CCIR members) have signed an MoU to enable them to share information with one another. - OSFI has 18 bilateral MoUs with international counterparts and is a signatory of the International Association of Insurance Supervisors’ Multilateral MoU (as is AMF). - OSFI has a Cooperation Framework with AMF and exchanges information on matters of mutual interest, but this does not extend to formally sharing information on federally regulated insurers. - OSFI routinely engages in informal bilateral liaison with other provincial supervisors such as British Columbia’s Financial Institutions Commission and Ontario’s Financial Services Commission (FSCO). - Informal channels depend on interpersonal relationships and are not a robust platform for information sharing. - Recommendations and benefits: - OSFI and provincial supervisors should work together to address OSFI’s concerns regarding information sharing and ultimately enter into MoUs to share information. - OSFI should clearly communicate the level of protection of shared information that would be satisfactory; international Multilateral MoUs could serve as a benchmark. - Better sharing of information would benefit both sides: - OSFI’s prudential supervision would benefit from input on market conduct issues indicative of cultural or governance problems. - Provincial supervisors would benefit from prudential perspectives on governance, culture, and risk management within federally regulated insurers to assess market conduct risks. ### Differences in supervisory intensity: OSFI vs AMF - Observed differences with regard to significant L&H insurers: - Major federally regulated L&H insurers under OSFI are significant in the Canadian market and globally active, limiting direct comparability. - AMF’s dual mandate allows combining resources (e.g., on-site reviews) to cover prudential and market conduct oversight. - OSFI has a more intense program of on-site inspections and more touch points with major L&H insurers throughout the year than AMF. - OSFI usually conducts more than one on-site review activity per year for a large L&H insurer; on-site reviews are targeted to specific operational aspects. - AMF usually conducts an on-site inspection approximately once every two years with broader coverage including market conduct; frequency can increase with risk profile but this was not observed during the review. - Interaction frequency: - OSFI has significant monthly and quarterly interactions with large L&H insurers; AMF can have months without interaction with a supervised life insurer. - AMF receives biannual financial reports; OSFI receives quarterly financial reports. - Recommendation: - OSFI and AMF should undertake a benchmarking exercise to ensure similar intensity of supervision across Canadian insurance companies regardless of supervisor. - It would be useful to assess intensity of supervision, including supervisory activities taken, of the top-ten insurers in L&H and P&C sectors, accounting for different risk profiles. ### Macroprudential oversight and sector surveillance - OSFI activities: - Scans the external environment and insurance industry to identify emerging issues; primarily a microprudential supervisor. - Risks, Surveillance and Analytics Division conducts market surveillance and environmental scanning and coordinates Emerging Risk Committee (ERC) meetings. - The ERC has representation across OSFI and meets at least quarterly with the Superintendent; it supports prioritization and strategic responses to evolving and emerging risks and identifies gaps in OSFI’s approach. - AMF activities: - Monitors emerging and systemic issues on an ongoing basis via the Chief Economist Office within the International Affairs and Strategic Oversight Department. - Coordinates the Integrated Oversight Committee, including staff from regulatory departments covering all financial institutions and markets regulated by AMF, enabling a comprehensive view of Québec’s financial system. - Gap in Canada-wide surveillance: - No government body at the federal or provincial level has a complete statistical picture of the Canadian insurance sector. - OSFI and federal coordinating bodies (FISC and SAC) only consider federally regulated insurers, which represent a large market share but omit some material provincially regulated insurers. - Provincial supervisors are not involved in formal discussions with federal bodies about market-wide issues, though informal communication exists. - Recommendation: - Complete Canada-wide surveillance of the insurance sector should be conducted, requiring aggregation of complete statistics and a forum for federal and provincial authorities to discuss market-wide trends and risks. - Existing regulatory returns for microprudential supervision should be enhanced to allow macroprudential monitoring (for example, addressing granularity issues referenced in paragraph 12). ### Life-and-Health insurance: solvency requirements and CALM - Canadian Asset Liability Method (CALM): - Required for valuation of life insurance contract liabilities under IFRS 4, which continues to apply until introduction of IFRS 17. - CALM produces liabilities valued consistently with assets by projecting cash flows from insurance policies and allocated supporting assets; liability values move in tandem with asset values unless underlying experience or assumptions change. - If underlying experience or assumptions change, the present value of that change based on projected future cash flows is taken into account. - Characteristics of CALM vs international approaches: - CALM is very different in that it does not rely on an explicit discount curve; for comparison one can consider a notional discounting approach derived from CALM analysis. - CALM allows insurers to take into account the full rate of return (i.e., all contractual cash flows) on all fixed-income assets as well as non-fixed income assets such as equities and real estate (subject to some limiting assumptions). - On the surface, CALM’s approach looks much less prudent than other international discounting approaches. - Offsetting factor: CALM requires the appointed actuary to determine provisions for adverse deviations (PfADs) for: - fixed-income asset defaults, - non-fixed income assets’ market risk, - risk-free interest rate risk, - credit spreads, - mortality, - mortality improvement, - morbidity, - morbidity improvement, - lapse, and - expenses. - PfADs are determined using a variety of scenarios with the worst outcome from scenario application taken as the PfAD. - The aim is to have insurance contract liabilities valued within a corridor of 60-80 percent conditional tail expectation (CTE). - Implication: - Direct comparison of CALM to other international approaches is impossible, but impending IFRS 17 implementation will require adoption of an internationally comparable approach to valuing insurance contract liabilities. *Source: Box 2. On IFRS 17 (concluded), 1canea2020006 - Technical Note content* ### 51. OSFI and AMF implemented the Life Insurance Capital Adequacy Test (LICAT) in 2018. ### 1canea2020006 - 51. OSFI and AMF implemented the Life Insurance Capital Adequacy Test (LICAT) in 2018. ### Implementation and international comparison - OSFI and AMF implemented the Life Insurance Capital Adequacy Test (LICAT) in 2018. - The LICAT replaced the Minimum Continuing Capital and Surplus Requirements (MCCSR), which was in place at the time of the 2014 assessment. - The LICAT is described as a more advanced and risk-sensitive approach to capital and "compares well with best practice solvency requirements internationally." ### LICAT design and risks covered - The LICAT utilizes a mix of factor-based approaches and prescribes shock assumptions to measure a base solvency buffer. - Risks covered include: - Credit risk - Market risk: interest rate risk, equity risk, index-linked products risk, currency risk - Insurance risk: mortality risk, longevity risk, morbidity risk, lapse risk, expense risk, property and casualty risk - Segregated funds guarantee risk - Operational risk - All risk measures are targeted at a consistent level of confidence: 99 percent CTE over the one-year horizon. - Diversification is taken into account within insurance risk and among all risks. ### Geography aggregation and treatment of liabilities/assets - LICAT aggregates base solvency buffers across six geographies: Canada, Japan, the United Kingdom, the United States, other Europe (outside the United Kingdom), and other locations. - Liabilities are allocated to geographies based on the location where the business policy was written directly. - Assets are allocated to the same geography as the liabilities that they back. - The geography of the entity holding assets backing surplus determines the geography of those assets. - Aggregation across up to six base solvency buffers means there is no allowance for diversification across these geographies. - Footnote: An exception is a limited portfolio volume credit applicable to a component of the mortality and morbidity requirements. ### LICAT solvency ratios and capital composition - Two LICAT solvency ratios: total capital ratio and core capital ratio. - The base solvency buffer (denominator) is compared to the sum of available capital, surplus allowance and eligible deposits (numerator). - Definitions and composition: - Available capital consists of tier-1 and tier-2 capital subject to composition limits. - Deductions from tier-1 capital (e.g., goodwill and intangibles) — some deducted assets can be partially included as tier-2 capital (e.g., 50 percent of the deducted asset). - Surplus allowance consists of certain PfADs calculated under CALM—risk-free interest rate risk PfADs and insurance risk PfADs. - Eligible deposits are excess deposits placed by unregistered reinsurers and claims fluctuation reserves. ### IFRS 17 implementation and spread risk considerations - When IFRS 17 is implemented, consideration should be given to how spread risk is taken into account in the overall solvency framework. - Spread risk: changes in the level or volatility of spreads between market asset returns/applicable discount rates on liabilities and the risk-free interest rate, and how such spreads on asset returns and liability discount rates may vary. - Current treatment: - A PfAD for spread risk is calculated within the insurance contract liabilities, and this is not included in the surplus allowance. - Therefore, some allowance for spread risk exists within the Canadian life insurance solvency framework, although it may not be at the same level as other risks calculated at 99 percent CTE within the LICAT. - The LICAT does not include a spread risk component. - Concerns with IFRS 17: - It is not clear if any component of the risk margin under IFRS 17 will relate to spread risk. - With a ‘top-down’ approach to discounting, asset and liability values may move independently if spreads over risk-free asset returns increase due to market repricing of risk. - There may be rationale to disaggregate spread risk related to temporary market liquidity conditions versus long-term changes in market pricing of credit risk, so that spread risk measures focus on the latter. ### Qualitative requirements, ORSA, and governance - OSFI and AMF have a comprehensive set of guidelines covering sound business and financial practices addressing governance and risk management issues. - Some guidelines are life-insurance specific and others are cross-sectoral. - A notable guideline introduced since the 2014 assessment is E19: Own Risk and Solvency Assessment (ORSA). ### Group supervision, disclosures, and solo focus - Consolidated group supervision is the supervisory focus for L&H insurers by both OSFI and AMF; for the three large L&H insurers this means a focus on global group supervision. - Supervisory approach: - Supervision is applied congruent with how life insurance groups are managed, focusing on significant activities of the group regardless of legal or geographic location. - OSFI expects insurers to hold capital within the consolidated group consistent with level and location of risk, but there is less focus on Canadian activities than is ideal. - Disclosures: - Disclosure requirements apply at the group level with little disclosure at the solo entity level. - Recommendation: OSFI and AMF should consider ICP 20 revisions and ensure solo-level disclosures are available to relevant stakeholders of Canadian legal entities; solo level disclosures should be required proportionately. - Solo supervision: - More emphasis on solo supervision would be desirable to complement group-wide supervision and better capture Canada-specific risks. - Reliance on voluntary undertakings: - Both OSFI and AMF rely on voluntary undertakings from holding companies to apply prudential requirements and obtain information on holding companies and group-wide activities that may create risks. - In some cases, no such undertakings exist for OSFI in relation to group supervision; approaches vary across groups. - Supervisors must wait for approval of a change of ownership or similar transaction to have an opportunity to negotiate an undertaking for group-wide supervision. - Uneven application of guidelines to group-wide activities persists; addressing this requires legislative changes at the federal level and in Québec. - Recommendation: Both OSFI and AMF should be given necessary powers to apply group-wide supervision consistently regardless of legal structure; AMF should be able to impose guidelines on holding companies irrespective of group structure or legal basis. ### Downstreaming of senior debt and capital ratio differentials - Issue: Absence of target capital ratios at non-operating L&H insurers and differences in minimum core capital ratios at non-operating L&H and operating insurers allow non-operating insurers to raise senior debt and downstream that into operating insurers as qualifying available capital. - OSFI Guideline A4: Regulatory Capital and Internal Capital Targets sets target and minimum capital ratios: - Operating L&H insurers: - Minimum total capital ratio: 90 percent - Target total capital ratio: 100 percent - Minimum core capital ratio: 55 percent - Target core capital ratio: 70 percent - Non-operating L&H insurers: - No target capital ratios - Minimum total capital ratio: 90 percent - Minimum core capital ratio: 50 percent - Concern: Differences (non-operating core minimum 50 percent vs operating core minimum 55 percent) enable raising senior debt and downstreaming it as qualifying capital without breaching the non-operating company target. - Policy stance: - Issuance of senior debt by non-operating insurers or holding companies is not inherently a concern; the concern is its treatment in the capital framework. - Senior debt is generally less expensive than subordinated debt that meets available capital requirements. - Downstreaming of senior debt and conversion into allowable capital instruments should be discouraged. - OSFI’s LICAT definition of available capital does not include senior debt and this should not be undermined by differing capital ratio requirements. - OSFI requires regulated entities to set internal targets and operating levels above minimums and disclose total and core capital ratios quarterly. ### Property-and-casualty (P&C) insurance: solvency and reinsurance - Valuation and PfADs: - Policy liabilities cover expected losses plus expected deviations from the best estimate via PfADs. - For P&C insurers, PfADs are included for claims development, recovery from reinsurance ceded, and investment return rates. - Capital requirements are determined as an excess amount above the PfAD. - Minimum Capital Test (MCT): - MCT ratio = capital available / minimum capital required. - Capital available: Category A, B, and C capital with B and C subject to composition limits. Category A largely maps to tier-1 available capital in LICAT. - Minimum capital required: sum of capital requirements at the target level—99 percent CTE—for each risk component, less the diversification credit. - Risks covered: insurance risk (unpaid claims, premium liabilities, reserves for ceded reinsurance to unregistered reinsurers, catastrophe risk), market risk (interest rate, foreign exchange, equity, real estate, other market exposures), credit risk (counterparty default related to on-balance sheet and off-balance sheet exposures and collateral held for reinsurance exposures with unregistered reinsurers), and operational risk. - Reinsurance framework concerns: - OSFI reviewed reinsurance framework for federally regulated insurers; concerns about insurers writing more business in Canada then ceding significant portions outside Canada, leading to small amounts of capital or vested assets maintained in Canada. - In commercial P&C insurance, policy limits have increased while net retentions remain similar — described as a "leveraged business model." - Large reinsurance recoverables create on-balance sheet credit risk, potentially concentrated at a single counterparty. - OSFI is consulting on proposals to address large exposures and concentration risk; adjustments to capital framework and maximum policy limits linked to capital or assets held in Canada are being considered. - Supervisory recognition: - OSFI’s discussion paper on reinsurance does not mention supervisory recognition of reinsurers’ supervisors; ICP 13 requires supervisors to consider supervision performed by reinsurers’ supervisors. ### Earthquake risk and financial stability - Two key earthquake zones: British Columbia and Québec. - Take-up rates: - British Columbia earthquake zone: around 40–70 percent of homeowners. - Québec earthquake zone (corridor from Québec City to Ottawa): around 2–4 percent. - Mortgage insurance excludes losses due to natural disasters, including earthquakes. - Low take-up in Québec corridor combined with mortgage insurance exclusion means significant earthquake risk could transfer to banks and other lenders via mortgage defaults. - Recommendations and actions: - Former OSFI Superintendent Nicholas Le Pan recommended: - Set up a federal emergency backstop arrangement for P&C insurers to minimize systemic financial impact from a catastrophic earthquake. - Industry and authorities should undertake an education campaign to encourage disaster insurance coverage, particularly in the Québec City-Ottawa corridor. - AMF has a project to analyze and mitigate major financial risks of a moderate or major earthquake in Québec. - Federal authorities established an Earthquake Working Group within the SAC; provincial authorities from British Columbia, Ontario and Québec are not represented. - OSFI and AMF are strengthening resilience by requiring capital at a 1 in 500 years occurrence level by 2022 for P&C insurers. - Policy observations: - Increasing insurance coverage requires affordable and available coverage, which in turn requires insurers to economically transfer tail risk to reinsurance markets, alternative risk transfer to capital markets (e.g., insurance-linked securities), or a government backstop/reinsurance pool. - Mandating earthquake coverage (e.g., for homeowners or residential mortgage borrowers) could be a tool but must be balanced against availability and affordability of private coverage and moral hazard concerns. - Addressing this complex issue requires coordinated federal and provincial action with industry input; SAC working group is a first step. ### Mortgage insurance solvency - Mortgage insurers are treated as P&C insurers; solvency requirements are based on the MCT with modifications: - Two key changes: - Insurance risk calculation is entirely different and based on risks borne by mortgage insurers. - The diversification credit between the sum of credit and market risk requirements and insurance risk requirements does not apply. - Balance sheet and capital: - Key insurance liability: unearned premium, subject to a test of adequacy (profit can be deferred but not losses). - Balance sheet liability usually includes deferred expected profit in excess of the best estimate liability and PfAD. - Capital requirements are in addition to the unearned premiums. *Source: 1canea2020006 - 51. OSFI and AMF implemented the Life Insurance Capital Adequacy Test (LICAT) in 2018.* ### 74. The advisory CRMI, which came into effect on January 1, 2017, represented a ### The advisory CRMI and related supervisory assessments ### CRMI / MICAT: capital framework changes for mortgage insurers - The advisory CRMI came into effect on January 1, 2017 and "represented a significant change to how the insurance risk component is calculated in the MCT for mortgage insurers." - CRMI design features: - More risk sensitive; incorporates borrower creditworthiness, outstanding loan balance, LTV ratio, and remaining amortization. - Introduces a greater level of prudence in the protection provided to policyholders and other creditors of the mortgage insurers. - Quantitative impact: - "The new framework resulted in a 48 percent increase in sector-wide Pillar 1 capital required." - "Some of the increase in capital requirements represents a shift from Pillar 2 to Pillar 1 requirements." - MICAT introduction and timing: - "The CRMI is being updated in 2019, and a new separate guideline—Mortgage Insurer Capital Adequacy Test (MICAT)—has been issued." - "Once the MICAT guideline is effective, on January 1, 2019, it replaces the MCT and the CRMI so that mortgage insurers have just one guideline for capital adequacy." - MICAT "essentially combine[s] the CRMI and relevant chapters of the MCT, along with some minor changes." - Specific MICAT methodological changes: - Formula for premium liabilities risk refers to borrower credit scores at origination and removes references to credit score updating. - Formula accounts for property values at origination and does take into account amortization of the loan balance so that LTVs are only updated with respect to outstanding loan balance. - "Capital requirements are increased by 5 percent to allow for deterioration in borrower credit scores after origination." ### Distribution of mortgage-related capital and comparative uncertainty - Concentration of capital: - "Most capital for mortgages with LTV above 80 percent are held in the three mortgage insurers." - Banks' capital treatment: - Banks hold capital to varying degrees depending on use of the standardized approach (which provides for a zero risk-weight for such loans) or the Internal Ratings-Based approach (IRB). - Scope limitations and data needs: - A comparison of capital required by mortgage insurers and deposit-taking institutions (DTIs) for insured mortgage loans "are not within the scope of this review." - Such an exercise "would require access to sufficient data to calculate the amount of capital that deposit taking institutions (DTIs) are required to hold for insured mortgage loans and the capital that mortgage insurers are required to hold for the same insured mortgage loans (along with deferred profits related to those loans)." - Observations on overall capital sufficiency and market effects: - "It is not clear that the transfer of risk from deposit-taking institutions to mortgage insurers results in sufficient capital overall within the Canadian financial system." - Mortgage insurers hold loss-absorbing deferred profits in unearned premium provisions. - Industry feedback (at time of writing) indicates that for loans with LTV in the range of 65–80 percent, "the amount of mortgage insurers’ capital ... exceeds deposit-taking institutions’ capital for these loans, making portfolio insurance uneconomic and therefore changing the profile of risks insured by mortgage insurers." - "There is evidence that the market for ‘portfolio insurance’ in that LTV bracket has reduced significantly due to the premium that needs to be charged to deliver a return on capital," indicating mortgage insurers’ capital requirements are more stringent at that LTV bracket. - Conclusion: "capital requirements can be quite different between the two industries." ### Recommendation: benchmarking exercise - OSFI should carry out a benchmarking exercise with these objectives: - Compare "deposit-taking institutions’ capital if there was no mortgage insurance and current capital requirements across the deposit-taking and mortgage insurance industries." - The analysis "should be more comprehensive than previous studies that have only involved a few banks using IRB." - Seek to answer whether "the use of mortgage insurance reduces the financial system’s overall loss absorbing capacity." - Include "the loss absorbing deferred profits within the unearned premium provision of mortgage insurers" in the assessment. - Consider extending the exercise to loans with LTV below 80 percent where mortgage insurers may offer "portfolio insurance" to lenders. ### Market conduct supervision: structure and coordination - Institutional arrangements: - Market conduct supervision is undertaken by provincial supervisors; each province has a supervisory agency. - Review focused on AMF in Québec and, to a more limited extent, FSCO in Ontario; CCIR activities assessed to a limited degree. - Improved cooperation since the 2014 FSAP: - Sharing of results of on-site reviews conducted individually by provincial supervisors. - The initial joint on-site review conducted with respect to a large L&H insurer. - Collection of common market conduct data to a central point, administered on behalf of other provinces by AMF. - These cooperative activities address recommendations from the 2014 assessment aimed at increasing consistency of market conduct oversight across Canada. ### Market conduct supervision in Ontario - Supervisory responsibilities: - FSCO and the Registered Insurance Brokers of Ontario (RIBO) perform market conduct supervision in Ontario; RIBO supervises insurance brokers (intermediaries out of scope for this note). - FSCO’s main role is market conduct supervision and prudential supervision for a limited number of Ontario-chartered insurers. - Institutional change: - "The Financial Services Regulatory Authority of Ontario (FSRA) was established by legislation in December 2016 as an independent regulatory agency." - FSRA will assume FSCO functions and prudential oversight for cooperative deposit-taking institutions; transition plan aims for FSRA to be fully operational by Spring 2019, pending approvals. - FSRA is an independent, self-funded supervisory authority; oversight by a board of directors with appointments by the Lieutenant Governor-in-Council on the advice of the Minister of Finance. - Governance and ministerial control: - Unlike FSCO’s single Superintendent model, FSRA will be overseen by a board and the CEO is appointed by the board. - The FSRA Act does not appear to require public disclosure of reasons for appointment/removal of chair and directors; ministerial control remains strong via requirement for Minister approval of FSRA by-laws. ### Market conduct supervision in Québec and enforcement tools - AMF’s mandate and recent law: - AMF is market conduct supervisor and prudential supervisor for Québec-chartered insurers; derives mandate from the Act Respecting Insurance, to be replaced by the Insurers Act on June 13, 2019. - Current enforcement powers: - Under the Act Respecting Insurance, AMF "can impose administrative penalties for any breach of the Act" (Section 405.1). - AMF has used this power to impose administrative monetary penalties, contestable before the Administrative Tribunal of Québec. - Changes under the Insurers Act and concerns: - The Insurers Act narrows circumstances for administrative monetary penalties to objectively observable facts (e.g., failure to file documents) and reduces availability/effectiveness of penalties. - Quasi-criminal offence prosecution powers under the Insurance Act (Section 406 p)) were not carried forward; the Insurers Act limits the right to sue to a list of identified offences (Sections 513 to 516). - AMF may issue orders to cease misconduct; only failure to comply with such an order allows imposition of an administrative penalty of "Can$10,000 per day" — the initial breach prior to issuance of an order is not directly penalized. - Recommendation: - "The Québec government and AMF should jointly review the possible effectiveness of the new penalty regime based on the Insurers Act." - "Substantial weakening of AMF’s ability to take action should be addressed through amendments to the Insurers Act." ### AMF enforcement case study: car-dealer-distributed insurance products - Case background: - Between 2009 and 2017, AMF addressed deficiencies in commercial practices for vehicle replacement-value gap insurance sold by car dealers ("Complementary Insurance for Damage Caused to Insured Vehicle"). - Consumer complaints cited incomplete/inadequate explanations, disclosures, and sales tactics. - AMF actions and outcomes: - Published notices, reviewed main insurers’ practices, and imposed penalties on some entities. - Despite actions, deficiencies persisted at time of writing, indicating AMF’s penalty regime and moral suasion have been insufficient to deter unsound practices. - Lessons learned: - "Moral suasion has not worked in this case." - Penalties and enforcement actions taken have "not constituted an adequate deterrent." - AMF did not escalate enforcement sufficiently over a long period. ### Own Risk and Solvency Assessment (ORSA): implementation and findings - Regulatory milestones: - "OSFI issued its ORSA guideline in 2015." ORSA cross-refers to OSFI’s Stress Testing Guideline. - OSFI guidelines for capital tests (LICAT, MCT, MICAT) require insurers to set internal capital targets effectively via ORSA. - AMF’s ORSA implementation is expressed in Principle 5 of the Capital Management Guideline, Integrated Risk Management Guideline, and complemented by the Stress Testing Guideline; DCAT by appointed actuaries is seen as part of ORSA implementation. - Reporting practice: - OSFI and AMF "do not receive ORSA reports as a matter of usual reporting" to emphasize ORSA as a management tool rather than a compliance filing. - Both supervisors have requested ORSA documentation and receive ORSA key metrics; on-site inspections and management discussions review ORSA. - Observed patterns in ORSA outcomes: - Larger insurers’ own views of capital requirements are "consistently less than the regulatory target capital." - Smaller insurers’ own views "tend to be much higher than the regulatory target capital." - Sample review: large insurers calculate each risk higher than industry regulatory capital tests, but count substantially larger diversification credit in ORSA than in regulatory requirements. - For L&H insurers, sharing of losses with policyholders (via ability to adjust policyholder benefits) is more significant in ORSA than in LICAT. - Caution flagged regarding diversification benefits at "99 percent CTE" because correlation of tail risks differs in stress scenarios. - Distributional evidence: - "The trend of smaller insurers with internal target capital well above regulatory target capital and larger insurers with internal targets floored by the regulatory target capital ... can be clearly seen for both the P&C and L&H insurance sectors." - For L&H insurers, the largest companies (70–100th percentile of asset size) have internal target capital ratios very close to LICAT target ratios with a narrow distribution, suggesting regulatory target capital is binding for largest firms. - Rating agency capital requirements: - ORSA documents reviewed "did not include quantification of rating agency capital requirements"; these were occasionally mentioned but rarely quantified. - It is likely rating agency requirements would be higher than regulatory targets if insurers target "a high-quality ratings well above minimum investment grade." These requirements are likely to be above "99 percent CTE" and should be factored into internal target capital. - Recommendation on ORSA practice: - "OSFI and AMF should work with the insurance industry to ensure that ORSA target capital calculations properly account for diversification of risk, sharing of risks with life insurance policyholders, and insurers’ risk appetite for potential ratings downgrades." - This aligns with guidelines expecting internal targets to take into account external or third-party capital expectations and for internal targets to exceed supervisory targets. - Guidelines also require validation and calibration of diversification benefits on a regular basis and consideration of whether such benefits exist in a stress situation. *Source: International Monetary Fund (excerpt from the Technical Note).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1canea2020006.pdf_