## EXECUTIVE SUMMARY — _cr1472 ## Source details **Canonical URL:** [EXECUTIVE SUMMARY — _cr1472](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1472.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1472.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1472.pdf.json) --- ### Insurance sector structure and size - Assets held by federally regulated insurers (FRIs) account for only 21 percent of total financial system assets. - Number of FRIs reduced from 290 in 2008 to 264 as at end-2012. - Life and health (L&H) industry accounted for about 83 percent of the assets held by FRIs. - Three large internationally active insurance groups held just under 76 percent of total life industry assets in 2012. - Number of provincially incorporated insurers: 240 (decreasing); captive insurers: 23 (all based in British Columbia). - Assets held by provincial insurers: Can$75.4 billion (about 11 percent of the assets held by FRIs as at end-2011), of which provincial insurers in Québec accounted for 80 percent (Can$60 billion). - Insurance intermediaries as at end-2012: approximately 154,000 insurance agents and 44,000 to 45,000 brokers. ### Life and health (L&H) industry performance and risks - Total assets held by L&H FRIs: Can$602 billion as at end-2012. - Market share of annuities products: 52 percent in 2012 (Can$4.7 billion gross premiums) down from 61 percent in 2010. - Group business gross premiums: Can$2,646 million (2012) — recorded a 21 percent increase (to Can$2.6 billion); individual business: around Can$1,705 million (2012). - Key trends: repricing of products, removal or weakening of product guarantees, greater transfer of risk to policyholders. - Main exposures: continuing low interest rates, volatile equity markets and slow economic growth. - Profitability: declining in absence of growth and due to protracted low interest rate environment. ### Property and casualty (P&C) industry performance and risks - Total assets of P&C FRIs: Can$124.6 billion as at end-2012. - Premiums rose by 10 percent in 2012 (Can$43.7 billion). - Ontario automobile insurance accounts for about 25 percent of P&C industry premiums. - Mortgage insurance: loans in-force of Can$730 billion with written premium of Can$2.2 billion in 2012; dominated by Canada Mortgage and Housing Corporation (about 70 percent market share). - Main exposures: difficult investment market conditions and increased frequency and severity of natural catastrophes. - Operating results: strong, but declining investment returns have driven focus on improving underwriting discipline. ### Solvency and capital position - Solvency position of the L&H industry has been eroded since 2010; overall solvency of the P&C industry has remained stable. - At the aggregate level, both sectors report solvency ratios that are well above the regulatory minimum. - OSFI’s capital adequacy requirements: - Robust for L&H and P&C business, capturing all material risks and requiring FRIs to hold capital for risks not covered by standard requirements. - Separate capital frameworks apply to L&H and P&C business. - OSFI allows limited use of internal models with a full model approval process and ongoing monitoring. - OSFI applies requirements on a consolidated basis to each operating FRI. - Identified gaps and inconsistencies: - Gaps and inconsistencies in application at both group and solo legal entity levels. - Variation in application of group capital requirements across groups due to limitations on powers over unregulated holding companies. - Scope for strengthening OSFI’s approach in the area of investments. - Own Risk and Solvency Assessment (ORSA): requirements scheduled to be implemented in 2014. - OSFI already requires FRIs to develop internal capital targets. ### Valuation of technical provisions and assets - Requirements provide a comprehensive framework of standards, including: - A consistent economic basis for valuation across the balance sheet. - Margins for adverse deviation. - Liability valuation approach: - Principles-based with significant discretion for the Appointed Actuary (AA). - Underpinned by professional and regulatory requirements, and a framework of oversight, peer review and audit requirements. - Approach adapted where weaknesses were highlighted by the financial crisis and OSFI supervisory work. ### Supervisory framework and practice - Prudential supervision: - OSFI responsible for prudential supervision of FRIs and Canadian branches of foreign insurers. - Insurers incorporated in a province are subject to solvency oversight of that province’s insurance supervisor. - Provincial supervisors responsible for licensing and supervising conduct-of-business (CoB) of insurers, including FRIs, operating in their provinces. - Various supervisory coordination mechanisms exist at federal and provincial levels. - Observance of IAIS Insurance Core Principles (ICPs): - Canadian regulatory regime for FRIs has a high level of observance with the ICPs, supported by robust prudential supervision by OSFI. - OSFI’s risk-based Supervisory Framework facilitates structured and comprehensive supervisory risk assessments. - Supervisory intervention process is transparent and supports timely intervention. - OSFI has adequate supervisory resources and technical capacity. - Minor regulatory gaps addressed by OSFI through guidelines and supervision. - Group-wide supervision: - OSFI conducts active supervision of groups in practice but should improve transparency of its different supervisory approaches to insurance groups. - Recommendation: adopt a transparent and consistent regulatory regime for group-wide supervision, based on a clear definition of the group, including prudential and market conduct requirements at the group level and a consistent approach to group-wide supervisory work. - Advisable that OSFI be empowered to take supervisory measures at the level of the holding company. ### Conduct-of-business (CoB) supervision and provincial regimes - CoB regimes across provinces are being harmonized; harmonization should continue while ensuring adequate supervisory resources. - AMF CoB regime is in line with international best practice and AMF has adequate resources for risk-based CoB supervision. - FSCO constrained by limited resources; adopts reactive and industry-wide targeted approaches to supervise FRIs based in Ontario and large numbers of intermediaries. - Recommendation: FSCO should be equipped with adequate resources and financial capacity to deal with the size and diversity of the Ontario marketplace. ### Legal capacity, operational autonomy, and governance of supervisors - Scope exists for strengthening legal capacity and operational autonomy of supervisors: - OSFI has not been delegated powers to make directly binding rules; relies on guidelines that are treated as authoritative. - Authorities should consider empowering supervisors to issue enforceable rules by administrative means rather than solely through legislation. - For OSFI and AMF, laws should be updated to separate provisions governing prudential decisions of supervisors from national interest considerations that executive authorities must consider (for example, on changes of control). - For FSCO, consider limiting circumstances under which the provincial government can issue a policy statement to FSCO. - Consider exempting supervisors from government fiscal controls and administrative guidance to strengthen financial autonomy. - Legal provisions should require public disclosure of reasons for removal of the President and CEO of AMF and the Superintendent of FSCO. *Source: EXECUTIVE SUMMARY (Assessment of Insurance Core Principles), IMF Financial Sector Assessment Program — Canada, June 2013.* --- ### MARKET STRUCTURE, ASSETS, LIABILITIES, AND PERFORMANCE ### Market structure and concentration - FRIs as at end-2012: 264 (2008: 290; change: (26)). - P&C FRIs share: 57 percent of FRIs as at end-2012. - P&C industry asset share: 17 percent of total industry assets in 2012. - Licensed foreign insurer branches in Canada: 80 as at end-2012. - Captive insurers: 23, all based in British Columbia. - L&H concentration: Manulife Financial Corporation (MFC), Sun Life Financial Inc. (SLF) and The Great West Life Assurance Company (GWL) held just under 76 percent of total life insurance assets in Canada in 2012 (legal entity level). - Top-10 insurance groups: 48 percent of consolidated assets attributable to domestic operations; 69 percent of gross premium generated domestically. ### L&H FRIs — asset composition and technical provisions - Investment allocation (L&H FRIs totals, selected 2012 figures and shares): - Bonds: 165,094 — 27% of total (2012). - Equities: 21,062 — 3% of total (2012). - Real estate and RE related: 49,188 — 8% of total (2012). - Cash and bank balances: 13,517 — 2% of total (2012). - Segregated Funds: 192,432 — 32% of total (2012). - Other assets: 160,724 — 27% of total (2012). - Total: 602,017 — 100% of total (2012). - Observations: - Excluding segregated funds, investments in real estate (direct and through mortgage loans) accounted for 20 percent of assets as at end-2012, down from 25 percent as at end-2008. - Allocation to fixed income securities consistently above 65 percent of investment portfolios (excluding segregated funds) in the last five years. - Alternative assets: some Can$20 billion invested in private placement debts. - Segregated fund guarantees: total segregated fund assets at consolidated level Can$422 billion as at end-2012, a 32 percent increase from 2008 (Can$320 billion); sensitivity to market risks (especially equity risk) from legacy segregated fund guarantees is a concern. - Trend in Technical Provisions — L&H FRIs (Can$ millions): - Participating policies: 2008 44,632; 2009 48,630; 2010 52,372; 2011 54,558; 2012 57,369. - Non-participating policies: 2008 131,904; 2009 142,298; 2010 151,287; 2011 202,379; 2012 209,719. - Sub-total: 2008 176,537; 2009 190,928; 2010 203,659; 2011 256,937; 2012 267,088 — Inc/Dec from previous year (sub-total): 8 % 7 % 26 % 4 %. - Segregated funds: 2008 29,218*; 2009 34,345*; 2010 37,653*; 2011 177,734; 2012 192,025. - Total technical provisions: 2008 226,775; 2009 246,403; 2010 259,858; 2011 465,054; 2012 489,099 — Inc/Dec from previous year (Total): 9 % 5 % 79 % 5 %. - Gross premiums: 2008 51,577; 2009 54,818; 2010 56,343; 2011 59,871; 2012 58,861. - * Prior to 2011, “in Canada” data was not collected for conglomerates. - Gross Premiums by Major Lines — L&H FRIs (Can$ millions; % of total, 2012): - Individual: 2012 1,705 — 19%. - Group: 2012 2,646 — 29%. - Annuities: 2012 4,715 — 52%. - Total: 2012 9,066 — 100%. ### P&C FRIs — asset composition, premiums, and exposures - Investment allocation (P&C FRIs, 2012 figures and shares): - Government securities: 46,551 — 37% of total (2012). - Corporate securities: 26,375 — 21% of total (2012). - Equities: 7,585 — 6% of total (2012). - Cash and bank balances: 2,675 — 2% of total (2012). - Other assets: 41,430 — 33% of total (2012). - Total: 124,623 — 100% of total (2012). - Observations: - P&C investment profile is conservative and heavily weighted in fixed income securities. - Government and corporate bonds constituted more than 85 percent of investments for the last five years. - Almost the entire debt security portfolio invested in Canadian debt securities. - Negligible exposures to the real estate sector. - P&C premiums by major lines — 2012 (Can$ millions; % of total; Net retention): - Automobile: Gross 18,809 — 43%; Net 16,977; Retention 90%. - Property: Gross 15,542 — 36%; Net 12,143; Retention 78%. - Liabilities: Gross 5,202 — 12%; Net 4,048; Retention 78%. - Accident & health: Gross 1,176 — 3%; Net 949; Retention 81%. - Others: Gross 3,018 — 7%; Net 2,254. - Total: Gross 43,746 — 100%; Net 36,370; Retention 83%. - Technical provisions — P&C FRIs (Can$ millions): - Gross premiums: 2008 38,748; 2009 39,236; 2010 40,089; 2011 40,201; 2012 43,040. - Technical provisions: 2008 70,079; 2009 73,362; 2010 76,229; 2011 75,087; 2012 80,682 — Inc/Dec: 5 % 4 % -1 % 7 %. ### Off-balance sheet and securities lending - L&H FRIs: negligible off-balance sheet activities; limited repurchase/reverse repurchase transactions; securities lending where collateral market values generally exceed value of securities lent. - P&C FRIs: 27 P&C FRIs active in securities lending; total Can$2.4 billion of securities lent in 2012. - Derivatives: a small number of P&C FRIs use derivatives in hedging programs. - Insurance linked securities (ILS): Canadian P&C FRIs have not participated in ILS; some parent entities have participated for Canadian perils but Canadian FRIs are not taking credit on the balance sheet for these ILS. --- ### SOLVENCY, CAPITAL ADEQUACY, AND KEY RISKS ### Solvency position and regulatory targets - Solvency regimes differ between L&H and P&C FRIs, including solvency control levels; all L&H and P&C FRIs meet the minimum ratios of 120 percent and 100 percent, respectively. - OSFI has set a supervisory target of 150 percent for both classes of FRIs. - Solvency Ratios — selected (End-period): - L&H - MCCSR: 2010 239 %; 2011 218 %; 2012 212 %. - P&C - MCT: 2010 248 %; 2011 246 %; 2012 247 %. - Fraternal benefit societies - MCCSR: 2010 441 %; 2011 333 %; 2012 439 %. ### Capital framework and model use - OSFI applies capital requirements principally on a consolidated basis, including foreign insurance operations. - Internal models permitted for segregated fund capital and earthquake risk subject to OSFI approval. - Overall target confidence roughly a Conditional Tail Expectation (CTE) of 99 percent; conservatism applied via Supervisory and Internal Targets. - Gaps: variation in application across groups due to limitations over unregulated holding companies; full capital requirements not applied at solo legal entity level. ### Key risks and vulnerabilities - L&H FRIs: - Exposed to protracted low interest rates, volatile equity markets and slow economic growth. - Long-term liabilities create reinvestment risk where asset-liability management is inadequate. - De-risking actions include withdrawal from products and product redesigns; pricing increased, guarantees weakened. - Profitability declining; record low interest rates increased technical provisions. - Wealth management products seen as growth area with shift to fee-based income. - P&C FRIs: - Difficult investment market conditions and exposures to significant natural catastrophe. - 2012 OSFI standardized stress test on earthquake identified insured losses of up to $32 billion depending on the scenario. - Severe weather related claims have grown, approaching or exceeding $1 billion annually since 2009. - Rate increases in property insurance have kept pace and loss ratios have been declining since 2009. - With many foreign-owned P&C FRIs, potential contagion risks exist from related entities and parents. - Mortgage insurers: - Exposed to potential tail events correlated to the housing market and macro-economic risks. - Mortgage insurance market insured loans in-force Can$730 billion with written premium Can$2.2 billion in 2012. - Mortgage insurers generally require gross debt service-to-income ratio lower than 32 percent and total debt service not exceeding 40 percent; government-backed insured mortgages have maximum gross debt service ratio 39 percent and total debt service ratio 44 percent. --- ### SUPERVISORY FRAMEWORK, PRACTICE, AND ICP OBSERVANCE ### Federal and provincial supervisory responsibilities and coordination - Federal supervisors and roles: - Department of Finance (DoF): overall stability and legislation. - Bank of Canada (BoC): liquidity, payment/settlement oversight, assess financial stability risks. - OSFI: prudential regulation and supervision of federally regulated financial institutions (FRFIs), including FRIs. - CDIC: deposit insurance and bank resolution authority. - FCAC: consumer protection oversight and enforcement for FRFIs. - Federal coordination mechanisms: - Financial Institutions Supervisory Committee (FISC): OSFI, CDIC, BoC, FCAC, DoF — chaired by the Superintendent of Financial Institutions. - Senior Advisory Committee: chaired by Deputy Minister of Finance. - Heads of Agencies Committee: chaired by BoC Governor; includes DoF, OSFI and provincial securities regulators. - Provincial roles: - Provincial supervisors: solvency oversight of provincially incorporated insurers and market conduct supervision of all insurers operating in their provinces. - OSFI: prudential supervision of insurers under federal Insurance Companies Act (ICA) — FRIs. - CCIR: inter-jurisdictional association of insurance regulators; OSFI participates as observer. ### Observance of ICPs — summary and areas of partial observance - Observance Level Summary (Table 10): - Observed (O): 14. - Largely observed (LO): 8. - Partly observed (PO): 4. - Not observed (NO): 0. - Total: 26. - Selected ICP assessments and key findings: - ICP 1 Objectives, Powers and Responsibilities — Largely observed: responsibilities shared; supervisors authorized to issue guidance but not empowered to issue directly legally binding rules. - ICP 2 Supervisor — Partly observed (FSCO); OSFI and AMF generally robust but operational autonomy affected by Minister/MFEQ and FSCO policy statements; removal reasons for AMF President/CEO and FSCO Superintendent need public disclosure provisions. - ICP 3 Information Exchange and Confidentiality — Observed: supervisors empowered to obtain and exchange information; OSFI signatory to IAIS Multilateral MoU. - ICP 4 Licensing — Observed: three-stage process for FRIs; pre-commencement on-site reviews standard. - ICP 5 Suitability of Persons — Observed: ICA and OSFI guidance provide eligibility and disqualification framework; OSFI can disqualify/remove unsuitable persons. - ICP 6 Changes in Control and Portfolio Transfers — Observed: clear ownership/control thresholds and Minister/Superintendent approvals; recommendation to require FRIs to notify OSFI of significant decreases in ownership below control level. - ICP 7 Corporate Governance — Observed: ICA requirements and OSFI Corporate Governance Guideline; recommendation for FSCO to issue more extensive guidance. - ICP 9 Supervisory Review and Reporting — Largely observed: OSFI’s risk-based Supervisory Framework; gaps in granular non-consolidated reporting and standardized intra-group transaction reporting. - ICP 13 Reinsurance — Largely observed: collateral and due diligence requirements; need to enhance evaluation of foreign reinsurers’ supervisory regimes. - ICP 14 Valuation — Largely observed: CALM and actuarial oversight; recommended strengthening on credit spreads and non-fixed income investments. - ICP 15 Investment — Largely observed: investment limits and Prudent Person Approach Guideline; recommendation to strengthen explicit requirements for complex instruments. - ICP 16 ERM and ORSA — Largely observed: draft ORSA guideline scheduled 1 January 2014; recommendation to finalise and set early implementation expectations. - ICP 17 Capital Adequacy — Largely observed: MCCSR and MCT frameworks; recommendations on transparency for groups headed by holding companies and developing solo legal entity standard. - ICP 18 Intermediaries — Largely observed: provincial licensing and harmonization efforts; FSCO resource constraints noted. - ICP 19 Conduct of Business — Partly observed: CCIR coordination; recommendation to empower FSCO for enforceable CoB rules and ensure FSCO resource adequacy. - ICP 20 Public Disclosure — Partly observed: extensive consolidated disclosure but gaps at solo legal entity level; recommendation to ensure solo-level publication of financial/capital information. - ICP 23 Group-wide Supervision — Partly observed: lack of explicit statutory definition of insurance group; OSFI applies consolidated supervision where possible but relies on indirect undertakings for groups headed by non-regulated holding companies; recommendation to formulate clear and consistent group-wide regime and empower supervisor measures at holding company level. - ICP 24 Macroprudential Surveillance — Observed: OSFI has Emerging Risks Committee, market-wide stress tests, and is developing approach for systemically important FRIs; suggested priorities include international liaison and bank–insurer linkages. - ICP 25 Supervisory Cooperation and Coordination — Observed: domestic and international MoUs, supervisory colleges; OSFI often GWS for large internationally-active life insurers. - ICP 26 Cross-border Cooperation and Crisis Management — Observed: crisis exercises conducted; international dimensions remain partially untested; recommendations to continue cross-border crisis testing, share recovery plans, and require contingency planning for FRIs. --- ### RECOMMENDATIONS AND POLICY ACTIONS HIGHLIGHTED ### Legal and supervisory powers - Consider empowering supervisors to issue enforceable rules by administrative means rather than solely through legislation. - Establish explicit supervisory objectives for group-wide supervision under relevant primary legislation, supported by adequate legal powers. - Update primary legislation to separate prudential decisions of OSFI and AMF from executive branch approval processes and specify circumstances for issuance of FSCO policy statements. - Consider exempting supervisors from government fiscal controls and administrative guidance to strengthen financial autonomy. - Establish explicit provisions for public disclosure of reasons for removal of AMF President/CEO and FSCO Superintendent. ### Group-wide supervision and holding companies - Formulate and implement a clear and consistent regulatory regime for group-wide supervision covering scope (including material non-regulated entities), prudential and market conduct requirements at group level. - Empower supervisors to take remedial and enforcement measures at the level of the holding company. - Set out details of OSFI’s approach to groups headed by holding companies until full powers obtained; consider aligning regulated holding companies’ requirements more closely with operating companies. - Finalise and publish proposed standard for application of capital framework on a solo legal entity level; establish policy/review reporting requirements on intra-group transactions for capital management (e.g., capital transferability). ### Reporting, valuation, investments, and risk management - Enhance and standardize regulatory reporting of intra-group transactions, supported by a clear definition of scope. - Strengthen valuation standards on credit spreads and non-fixed income investments; support ASB review of reinvestment assumptions. - Review OSFI’s Prudent Person Approach Guideline to strengthen requirements on investments, including explicit requirements that FRIs invest only in assets whose risks they can properly assess and manage and guidance on complex instruments. - Finalise the draft ORSA guideline (scheduled 2014) and set expectations for early implementation work. ### Conduct-of-business, intermediaries, and consumer protection - Maintain momentum in harmonising provincial CoB regimes and supervisory practices; implement CCIR recommendations related to MGAs. - Ensure FSCO has adequate resources for effective supervision of intermediaries and the Ontario marketplace. - Empower FSCO to issue enforceable rules on product development and promotion and require needs analysis before advice and policy servicing obligations. - Ensure FRIs publish information on financial position of individual legal entities at solo level and capital information, making OSFI guidelines explicitly apply at solo as well as consolidated basis. ### Crisis preparedness, macroprudential work, and recovery planning - Continue crisis management testing and simulations; extend to international groups as appropriate. - Require FRIs to establish and maintain contingency plans and procedures for going- and gone-concern situations as set out in the ICP. - Ensure access to data sources and develop international dimension of macroprudential work via liaison with other regulators; consider sector-based approach complements bank–insurer linkage analysis. --- *Source: IMF staff report (Assessment of Insurance Core Principles), IMF Financial Sector Assessment Program — Canada (excerpts from provided PDF content unit _cr1472).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Insurance sector structure and size - Assets held by federally regulated insurers (FRIs) account for only 21 percent of total financial system assets. - Number of FRIs reduced from 290 in 2008 to 264 as at end-2012. - Life and health (L&H) industry accounted for about 83 percent of the assets held by FRIs. - Three large internationally active insurance groups held just under 76 percent of total life industry assets in 2012. - Number of provincially incorporated insurers: 240 (decreasing); captive insurers: 23 (all based in British Columbia). - Assets held by provincial insurers: Can$75.4 billion (about 11 percent of the assets held by FRIs as at end-2011), of which provincial insurers in Québec accounted for 80 percent (Can$60 billion). - Insurance intermediaries as at end-2012: approximately 154,000 insurance agents and 44,000 to 45,000 brokers. ### Life and health (L&H) industry performance and risks - Total assets held by L&H FRIs: Can$602 billion as at end-2012. - Market share of annuities products fell to 52 percent in 2012 (Can$4.7 billion gross premiums) from 61 percent in 2010. - Group business recorded a 21 percent increase (to Can$2.6 billion) while individual business remained steady (Can$ 1.7 billion). - Key trends: repricing of products, removal or weakening of product guarantees, greater transfer of risk to policyholders. - Main exposures: continuing low interest rates, volatile equity markets and slow economic growth. - Profitability: declining in absence of growth and due to protracted low interest rate environment. ### Property and casualty (P&C) industry performance and risks - Total assets of P&C FRIs: Can$124.6 billion as at end-2012. - Premiums rose by 10 percent in 2012 (Can$43.7 billion). - Ontario automobile insurance accounts for about 25 percent of P&C industry premiums. - Mortgage insurance: loans in-force of Can$730 billion with written premium of Can$2.2 billion in 2012; dominated by Canada Mortgage and Housing Corporation (about 70 percent market share). - Main exposures: difficult investment market conditions and increased frequency and severity of natural catastrophes. - Operating results: strong, but declining investment returns have driven focus on improving underwriting discipline. ### Solvency and capital position - Solvency position of the L&H industry has been eroded since 2010; overall solvency of the P&C industry has remained stable. - At the aggregate level, both sectors report solvency ratios that are well above the regulatory minimum. - OSFI’s capital adequacy requirements: - Robust for L&H and P&C business, capturing all material risks and requiring FRIs to hold capital for risks not covered by standard requirements. - Separate capital frameworks apply to L&H and P&C business. - OSFI allows limited use of internal models with a full model approval process and ongoing monitoring. - OSFI applies requirements on a consolidated basis to each operating FRI. - Identified gaps and inconsistencies: - Gaps and inconsistencies in application at both group and solo legal entity levels. - Variation in application of group capital requirements across groups due to limitations on powers over unregulated holding companies. - Focus on consolidated capital adequacy is not matched by a full framework of capital or disclosure requirements to all Canadian solo legal entity FRIs within groups. - Scope for strengthening OSFI’s approach in the area of investments. - Own Risk and Solvency Assessment (ORSA): requirements to develop an Own Risk and Solvency Assessment are scheduled to be implemented in 2014. - OSFI already requires FRIs to develop internal capital targets. ### Valuation of technical provisions and assets - Requirements provide a comprehensive framework of standards, including: - A consistent economic basis for valuation across the balance sheet. - Margins for adverse deviation. - Liability valuation approach: - Principles-based with significant discretion for the Appointed Actuary (AA). - Underpinned by professional and regulatory requirements, and a framework of oversight, peer review and audit requirements. - Approach has been adapted where weaknesses were highlighted by the financial crisis and OSFI supervisory work. ### Supervisory framework and practice - Prudential supervision: - OSFI responsible for prudential supervision of FRIs and Canadian branches of foreign insurers. - Insurers incorporated in a province are subject to solvency oversight of that province’s insurance supervisor. - Provincial supervisors are responsible for licensing and supervising conduct-of-business (CoB) of insurers, including FRIs, operating in their provinces. - Various supervisory coordination mechanisms exist at federal and provincial levels. - Observance of IAIS Insurance Core Principles (ICPs): - Canadian regulatory regime for FRIs has a high level of observance with the ICPs, supported by robust prudential supervision by OSFI. - OSFI’s risk-based Supervisory Framework facilitates structured and comprehensive supervisory risk assessments. - Industry holds OSFI supervisors in high regard for professionalism. - Supervisory intervention process is transparent and supports timely intervention. - OSFI has adequate supervisory resources and technical capacity. - Minor regulatory gaps addressed by OSFI through guidelines and supervision. - Group-wide supervision: - OSFI conducts active supervision of groups in practice but should improve transparency of its different supervisory approaches to insurance groups. - Recommendation: adopt a transparent and consistent regulatory regime for group-wide supervision, based on a clear definition of the group, including prudential and market conduct requirements at the group level and a consistent approach to group-wide supervisory work. - Advisable that OSFI be empowered to take supervisory measures at the level of the holding company. ### Conduct-of-business (CoB) supervision and provincial regimes - CoB regimes across provinces are being harmonized; harmonization should continue while ensuring adequate supervisory resources. - AMF CoB regime is in line with international best practice and AMF has adequate resources for risk-based CoB supervision. - FSCO constrained by limited resources; adopts reactive and industry-wide targeted approaches to supervise FRIs based in Ontario and large numbers of intermediaries. - Recommendation: FSCO should be equipped with adequate resources and financial capacity to deal with the size and diversity of the Ontario marketplace. ### Legal capacity, operational autonomy, and governance of supervisors - Scope exists for strengthening legal capacity and operational autonomy of supervisors: - OSFI has not been delegated powers to make directly binding rules; relies on guidelines that are treated as authoritative. - Authorities should consider empowering supervisors to issue enforceable rules by administrative means rather than solely through legislation. - For OSFI and AMF, laws should be updated to separate provisions governing prudential decisions of supervisors from national interest considerations that executive authorities must consider (for example, on changes of control). - For FSCO, consider limiting circumstances under which the provincial government can issue a policy statement to FSCO. - Consider exempting supervisors from government fiscal controls and administrative guidance to strengthen financial autonomy. - Legal provisions should require public disclosure of reasons for removal of the President and CEO of AMF and the Superintendent of FSCO, in line with international standards. *Source: EXECUTIVE SUMMARY (Assessment of Insurance Core Principles), IMF Financial Sector Assessment Program — Canada, June 2013.* ### 6. The responsibilities for financial sector supervision in Canada at the federal level are ### 6. The responsibilities for financial sector supervision in Canada at the federal level are ### Federal supervisory responsibilities - Department of Finance (DoF): responsible for the overall stability of the financial system and financial sector legislation at the federal level; supports the Minister of Finance in fulfilling overarching authority over federal financial sector legislation. - Bank of Canada (BoC): provides liquidity to the Canadian financial system, oversees key payment, clearing and settlement systems, and assesses risks to financial system stability. - Office of the Superintendent of Financial Institutions (OSFI): exercises prudential regulation and supervision of federally regulated financial institutions (FRFIs), including federally regulated insurers (FRIs). - Canada Deposit Insurance Corporation (CDIC): insures deposits of member institutions and is the bank resolution authority. - Financial Consumer Agency of Canada (FCAC): mandated to strengthen oversight of consumer protection measures, expand consumer education activities, and enforce consumer-related provisions in statutes covering FRFIs. ### Federal supervisory coordination mechanisms - Financial Institutions Supervisory Committee (FISC): facilitates consultation and exchange of information between OSFI, CDIC, BoC, FCAC and the DoF; chaired by the Superintendent of Financial Institutions. - Senior Advisory Committee: discussion forum for financial sector policy issues, including macroprudential oversight and financial stability issues; chaired by the Deputy Minister of Finance; same membership as FISC with possible additional government agencies. - Heads of Agencies Committee: forum to exchange information, views and coordinate actions on issues of mutual concern (e.g., hedge funds and OTC derivatives); chaired by the BoC Governor and includes the DoF, OSFI, the four largest provincial securities regulators and the Chair of the Canadian Securities Administrators (CSA). ### Federal–provincial responsibilities for insurance supervision - OSFI: responsible for prudential supervision of insurers incorporated under the federal Insurance Companies Act (ICA) — termed federally regulated insurers (FRIs). - Provincial supervisors: responsible for solvency oversight of provincially incorporated insurers and for market conduct supervision of all insurers (including FRIs) operating within their provinces. - OSFI regulates solvency and soundness of licensed Canadian branches of foreign insurers. - Provincial supervisors historically harmonized solvency standards with OSFI; MoUs that delegated prudential supervision to OSFI have expired and OSFI no longer conducts on-site examinations of provincially incorporated life insurers and fraternal benefit societies. - Some provinces retain autonomy in prudential supervision (example: Québec); some provinces are considering other policy options (example: FSCO proposed to cease provincial incorporation of new insurers while continuing to license insurers incorporated in jurisdictions that meet international solvency standards). ### OSFI mandate and liaison - Primary OSFI activities: protect the rights and interests of depositors, policyholders, pension plan members and creditors of financial institutions; contribute to public confidence in a safe and sound financial system. - OSFI’s mandate excludes consumer-related issues and the securities industry. - OSFI works closely with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) on compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. ### Coordination among provincial supervisors - Canadian Council of Insurance Regulators (CCIR): inter-jurisdictional association of insurance regulators (federal, provincial and territorial) promoting an efficient and effective insurance regulatory system; OSFI participates as an observer. - CCIR membership in Joint Forum of Financial Market Regulators (JFFMR) which coordinates harmonization of pension, insurance and securities regulation; other JFFMR members include the Canadian Association of Pension Supervisory Authorities, the CSA and the Canadian Insurance Services Regulatory Organizations (CISRO). ### Market structure and industry performance — overview - Insurers’ assets as share of financial system assets: insurers accounted for 21 percent of financial system assets. - Domestic banks own six life-and-health (L&H) FRIs and 12 property and casualty (P&C) FRIs; insurance subsidiaries are not considered material to banks’ overall business. - One very small P&C FRI was part of a financial conglomerate headed by a securities firm. ### Insurance penetration, density and employment (L&H and P&C) - L&H insurance penetration: increased modestly from 3.1 percent to 3.2 percent over the past 5 years. - L&H insurance density: increased slightly to Can$1,687 (from Can$1,548). - Advanced markets comparable averages (as at end-2011): penetration 3.6 percent and density US$1, 543. - P&C ratios as at end-2012: penetration 2.37 percent and density Can$1,234. - Advanced markets P&C averages (as at end-2011): penetration 5.0 percent and density US$2,168. - Reinsurance penetration and density in 2012: 0.63 percent and Can$330. - Number of domestic employees in Canadian insurance industry: approximately 254,400 as at end-2011. ### Industry composition and consolidation - Number of FRIs: 264 as at end-2012, down from 290 in 2008. - P&C FRIs share: 57 percent of FRIs as at end-2012. - P&C industry asset share: 17 percent of total industry assets in 2012. - Licensed foreign insurer branches in Canada: 80 as at end-2012. - Captive insurers: 23, all based in British Columbia. - Assets held by provincial insurers: Can$75.4 billion representing about 11 percent of assets held by FRIs as at end-2011. - Provincial insurers in Québec: largest provincial asset base at more than Can$60 billion. - Table 1 summary (as at end-2012): - Total FRIs: 264 (2008: 290; change: (26)) - Federal FRIs (2008 vs 2012): 290 -> 264 (Inc/Dec (26)); Federal L&H 74 -> 65 (Inc/Dec (9)); Federal P&C 187 -> 150 (Inc/Dec (37)); Federal fraternal benefit societies 16 -> 13 (Inc/Dec (3)); Federal total 290 -> 264 (Inc/Dec (26)) - Provincial FRIs (2008 vs 2012): 242 -> 240 (Inc/Dec (2)); Provincial L&H 25 -> 20 (Inc/Dec (5)); Provincial P&C 143 -> 137 (Inc/Dec (6)); Provincial captives 16 -> 23 (Inc/Dec 7); Provincial fraternal benefit societies 7 -> 6 (Inc/Dec (1)); Provincial others 48 -> 51 (Inc/Dec 3) - Note: Reinsurers were included under P&C in 2008. ### Market concentration and international operations - L&H industry concentration: three large internationally active groups (Manulife Financial Corporation (MFC), Sun Life Financial Inc. (SLF) and The Great West Life Assurance Company (GWL)) held just under 76 percent of total life insurance assets in Canada in 2012 (legal entity level). - MFC: highest asset base at consolidated level and only top-3 group with larger foreign than domestic operations. - Top-10 insurance groups: 48 percent of consolidated assets attributable to domestic operations; 69 percent of gross premium generated domestically. - Top-3 groups’ largest foreign market: United States — 37 percent of assets and 17 percent of premiums in 2012. - Europe: 11 percent of assets and 12 percent of premiums in 2012 for top-3 groups. - Asia: 9 percent of total assets but 19 percent of premiums written in 2012 for top-3 groups. ### P&C market and reinsurance - P&C industry: less concentrated than L&H; foreign-owned insurers have significant market share. - Top-10 P&C FRIs produced 46 percent of total industry premium in 2012. - Reinsurance: dominated by branches or subsidiaries of large global reinsurance groups. - Reinsurers’ assets: Can$29 billion or 3 percent of assets of direct insurers. - Market analysis focus: limited to L&H and P&C industries (reinsurers excluded). ### Distribution and intermediaries - Number of insurance agents: approximately 154,000 as at end-2012 (approximately one agent for every 225 Canadians), up from 133,000 in 2008. - Number of insurance brokers: approximately 45,000 as at end-2012, up from approximately 44,000 in 2008. - Broker business models: from small family-owned brokers to large international brokerage groups. - Managing general agencies (MGAs): gained almost half the market share for L&H distribution channel in recent years. ### Assets and liabilities — L&H FRIs - Investment allocation (L&H FRIs, legal entities, totals and composition as reported): - Bonds: 115,474 (2008), 127,323 (2009), 141,221 (2010), 157,926 (2011), 165,094 (2012) — 27% of total (2012). - Equities: 13,745 (2008), 17,213 (2009), 18,377 (2010), 19,729 (2011), 21,062 (2012) — 3% of total (2012). - Real estate and RE related: 48,425 (2008), 46,170 (2009), 45,936 (2010), 48,768 (2011), 49,188 (2012) — 8% of total (2012). - Cash and bank balances: 12,316 (2008), 14,251 (2009), 11,686 (2010), 13,105 (2011), 13,517 (2012) — 2% of total (2012). - Subtotal (Bonds+Equities+Real estate+Cash): 189,961 (2008), 204,957 (2009), 217,221 (2010), 239,528 (2011), 248,861 (2012) — 41% of total (2012). - Segregated Funds: 29,218* (2008), 34,345* (2009), 37,653* (2010), 178,449 (2011), 192,432 (2012) — 32% of total (2012). (* Prior to 2011, “in Canada” data was not collected for conglomerates.) - Other assets: 87,491 (2008), 112,768 (2009), 110,205 (2010), 153,575 (2011), 160,724 (2012) — 27% of total (2012). - Total: 306,669 (2008), 352,070 (2009), 365,080 (2010), 571,551 (2011), 602,017 (2012) — 100% of total (2012). - Observations: - Excluding segregated funds, investments in real estate (direct and through mortgage loans) accounted for 20 percent of assets as at end-2012, down from 25 percent as at end-2008. - Allocation to fixed income securities consistently above 65 percent of investment portfolios (excluding segregated funds) in the last five years. - Alternative assets: some Can$20 billion invested in private placement debts. - Segregated fund guarantees: total segregated fund assets at consolidated level Can$422 billion as at end-2012, a 32 percent increase from 2008 (Can$320 billion); sensitivity to market risks (especially equity risk) from legacy segregated fund guarantees is a concern. ### Assets and liabilities — P&C FRIs - Investment allocation (P&C FRIs, legal entities, composition): - Government securities: 35,349 (2008), 38,803 (2009), 41,550 (2010), 40,309 (2011), 46,551 (2012) — 37% of total (2012). - Corporate securities: 19,475 (2008), 22,377 (2009), 23,200 (2010), 22,723 (2011), 26,375 (2012) — 21% of total (2012). - Equities: 4,222 (2008), 5,815 (2009), 7,186 (2010), 6,970 (2011), 7,585 (2012) — 6% of total (2012). - Real estate & real estate related: 27 (2008), 53 (2009), 32 (2010), 6 (2011), 6 (2012) — 0% of total (2012). - Cash and bank balances: 3,760 (2008), 2,551 (2009), 2,209 (2010), 2,961 (2011), 2,675 (2012) — 2% of total (2012). - Other assets: 42,720 (2008), 43,197 (2009), 43,987 (2010), 43,382 (2011), 41,430 (2012) — 33% of total (2012). - Total: 105,554 (2008), 112,795 (2009), 118,164 (2010), 116,352 (2011), 124,623 (2012) — 100% of total (2012). - Observations: - P&C investment profile is conservative and heavily weighted in fixed income securities. - Government and corporate bonds constituted more than 85 percent of investments for the last five years. - Almost the entire debt security portfolio invested in Canadian debt securities. - Negligible exposures to the real estate sector. *Source: IMF staff report (text provided).* ### 24. While L&H FRIs have negligible off-balance sheet activities, some P&C FRIs are active ### 24. While L&H FRIs have negligible off-balance sheet activities, some P&C FRIs are active in securities lending ### Off-balance sheet activities and securities lending - L&H FRIs have negligible off-balance sheet activities; some P&C FRIs are active in securities lending. - L&H FRIs engaging in securities lending generally hold collateral with market values that exceed the value of securities lent. - L&H FRIs engage in limited amounts of repurchase and reverse repurchase transactions. - With the bulk of their investments held in securities, 27 P&C FRIs are active in securities lending and a total of Can$2.4 billion of securities were lent in 2012. - A small number of P&C FRIs use derivatives in hedging programs. - Canadian P&C FRIs have not participated in insurance linked securities (ILS); some parent entities have participated in the ILS market for Canadian perils but the Canadian FRIs are not taking credit on the balance sheet for these ILS. ### Asset transfers, intra-group positions, and CMHC-related investments - Asset transfers between parent banks and insurance subsidiaries (both L&H and P&C) are permitted for capital management purposes; OSFI monitors these transactions to ensure consistency with the capital framework. - Some bank-owned FRIs invest in bank parent-originated National Housing Act Mortgage-Backed Securities; this program is overseen by CMHC and the pool of assets is guaranteed by CMHC. - While P&C FRIs reported negligible intra-group balances as at end-2012, the L&H FRIs held Can$85.6 billion in intra-group assets. - CMHC determines issuer eligibility requirements and approves issuers and acceptable custodians; the issuer assigns all rights, title and interest in the pool to CMHC as trustee on behalf of investors. ### Technical provisions, segregated funds, and operating performance (L&H) - L&H FRIs have been increasing their technical provisions, despite the steady decline in premium revenue; technical provisions for P&C FRIs remain stable. - The significant increase in technical provisions (26 percent excluding segregated funds) in 2011 was mainly due to: - the adoption of IFRS requiring technical provisions to be reported on a gross basis, and - a rapid decline in fixed income yields. - Non-participating policies account for the bulk of the technical provisions for traditional policies. - Amounts reported under segregated fund policies reflect the assets deposited in the segregated funds; some Can$10 billion in provisions for the embedded guarantees are included as technical provisions for non-participating policies. - Given recent market volatilities, OSFI has been closely monitoring the adequacy of technical provisions for the segregated fund portfolios. - Table 4. Trend in Technical Provisions—L&H FRIs (In Can$ millions) - Participating policies: 2008 44,632; 2009 48,630; 2010 52,372; 2011 54,558; 2012 57,369 - Non-participating policies: 2008 131,904; 2009 142,298; 2010 151,287; 2011 202,379; 2012 209,719 - Sub-total: 2008 176,537; 2009 190,928; 2010 203,659; 2011 256,937; 2012 267,088 - Inc/Dec from previous year (sub-total): 8 % 7 % 26 % 4 % - Segregated funds: 2008 29,218*; 2009 34,345*; 2010 37,653*; 2011 177,734; 2012 192,025 - Other reserves21: 2008 21,020; 2009 21,131; 2010 18,546; 2011 30,383; 2012 29,986 - Total: 2008 226,775; 2009 246,403; 2010 259,858; 2011 465,054; 2012 489,099 - Inc/Dec from previous year (Total): 9 % 5 % 79 % 5 % - Gross premiums: 2008 51,577; 2009 54,818; 2010 56,343; 2011 59,871; 2012 58,861 - * Prior to 2011, “in Canada” data was not collected for conglomerates. - Source: OSFI - Table 6. Gross Premiums by Major Lines of Business in 2012—L&H FRIs (In Can$ millions; % of total) - Individual: 2010 1,615; 2011 1,739; 2012 1,705; % of total 19 % - Group: 2010 2,237; 2011 2,192; 2012 2,646; % of total 29 % - Annuities: 2010 5,977; 2011 5,497; 2012 4,715; % of total 52 % - Total: 2010 9,828; 2011 9,428; 2012 9,066; 100 % - Operating performance notes: - Market share of annuities products declined from 61 percent in 2010 to 52 percent. - Only group business recorded a 21 percent increase in premium volume (to Can$2.6 billion) while individual business remained steady at around Can$ 1.7 billion. - New product initiatives over the last five years have featured price increases and the removal or weakening of guarantees, transferring investment risks from insurers to policyholders. - Profitability of L&H FRIs has been declining amid a protracted low interest rate climate; record low interest rates increased technical provisions, significantly impacting profitability. - Product re-designs have resulted in some attempts to re-establish participating insurance as a major product line, with limited success. ### P&C industry structure, premiums, and underwriting - The P&C industry writes almost exclusively domestic risks; motor insurance is the dominant line of business. - Growth: gross written premiums rose by 10 percent in 2012 (Can$39.7 billion in 2011) after a slight drop of 3 percent in 2011. - Ontario automobile insurance is the single largest P&C product, accounting for about 25 percent of the premiums of the P&C industry. - Operating results have been favorable, but declining investment returns motivated a refocus on underwriting discipline. - 2011 automobile insurance results improved largely due to reforms in Ontario in September 2010, partly offset by higher third party liability claims. - Extreme weather and natural catastrophes dampened results; the industry experienced its third straight year of catastrophe-related insurance claims above Can$1 billion. - Table 5. Trend in Technical Provisions—P&C FRIs (In Can$ millions) - Gross premiums: 2008 38,748; 2009 39,236; 2010 40,089; 2011 40,201; 2012 43,040 - Technical provisions: 2008 70,079; 2009 73,362; 2010 76,229; 2011 75,087; 2012 80,682 - Inc/Dec: 5 % 4 % -1 % 7 % - Source: OSFI - Table 7. Premiums by Major Lines of Business in 2012—P&C FRIs (In Can$ millions; % of total; Net retention) - Automobile: Gross 18,809; % of total 43 %; Net 16,977; Retention 90 % - Property: Gross 15,542; % of total 36 %; Net 12,143; Retention 78 % - Liabilities: Gross 5,202; % of total 12 %; Net 4,048; Retention 78 % - Accident & health: Gross 1,176; % of total 3 %; Net 949; Retention 81 % - Others: Gross 3,018; % of total 7 %; Net 2,254 - Total: Gross 43,746; 100 %; Net 36,370; Retention 83 % - Source: OSFI ### CMHC, mortgage insurance market, and exposures - CMHC is currently one of the largest FIs in Canada. - Federally regulated lenders are required to insure residential mortgage loans with loan-to-value (LTV) ratio of greater than 80 percent against default by either CMHC or by a private mortgage insurer. - Non-federally regulated lenders may choose to insure residential mortgages through CMHC or other private mortgage insurers to access CMHC securitization programs. - The mortgage insurance market has insured loans in-force of Can$730 billion with a written premium of Can$2.2 billion in 2012 and is dominated by CMHC (about 70 percent market share) and Genworth Financial Mortgage Insurance Company Canada (25 percent). Canada Guaranty Mortgage Insurance Company also underwrites mortgage insurance in Canada. - With the increase in home ownership and rising housing prices, CMHC's assets increased more than twelve-fold between 2000 and 2010. - CMHC is the only insurer permitted to insure commercial mortgages. - The federal government guarantees 90 percent of a private insurer’s residential mortgage loans in the event of insolvency. - The federal government requires CMHC and the two private mortgage insurers to observe specific underwriting parameters. - Private mortgage insurers are subject to OSFI’s prudential regulation. - The National Housing Act establishes authorities for OSFI to examine and report on CMHC’s commercial operations; OSFI does not have legal authorities to take enforcement actions in the case of CMHC but must report examination results and recommendations to CMHC’s responsible Minister, the Minister of Finance and CMHC’s board of directors at least once per year. ### Solvency position and regulatory targets - The solvency position of the L&H industry has been eroded since 2010 while the overall solvency of the P&C industry has remained stable. - Solvency regimes differ between L&H and P&C FRIs, including solvency control levels; all L&H and P&C FRIs meet the minimum ratios of 120 percent and 100 percent, respectively. - OSFI has set a supervisory target of 150 percent for both classes of FRIs. - Capital resources of fraternal benefit societies are well above the supervisory target of OSFI because they have no external access to capital. - The two largest fraternal benefit societies constitute approximately 90 percent of the fraternal industry and both have high capital ratios. - Table 8. Solvency Position of FRIs (End-period) - Solvency Ratios - L&H - Minimum Continuing Capital and Surplus Requirement (MCCSR): 2010 239 %26; 2011 218 %; 2012 212 % - P&C - Minimum Capital Test: 2010 248 %; 2011 246 %; 2012 247 % - Fraternal benefit societies - MCCSR: 2010 441 %; 2011 333 %; 2012 439 % - Source: OSFI ### Key risks and vulnerabilities - L&H FRIs: - Exposed to protracted low interest rates, volatile equity markets and slow economic growth. - Long-term liabilities create reinvestment risk for FRIs with inadequate asset-liability management. - De-risking actions include withdrawal from certain products and product redesigns; increased capital requirements for segregated fund products and enhanced supervisory monitoring influence product design and pricing. - Pricing has been raised to better reflect risks, potentially creating opportunities for new entrants. - Policy surrenders have fallen due to rising premium levels and limited options for alternative investments. - Wealth management products are seen as a growth area as insurers shift investment risks to policyholders, with more focus on fee-based income. - P&C FRIs: - Confront difficult investment market conditions and exposures to significant natural catastrophe. - The 2012 OSFI standardized stress test on earthquake identified insured losses of up to $32 billion depending on the scenario. - As population grows in vulnerable areas, insured exposures have grown. - Severe weather related claims have grown, approaching or exceeding $1 billion annually since 2009. - Rate increases in property insurance have kept pace and loss ratios have been declining since 2009. - With a large number of foreign owned P&C FRIs, potential contagion risks exist from related entities and parents. - Mortgage insurers: - Exposed to potential tail events correlated to the housing market and macro-economic risks; mortgage insurers are more sensitive to mortgage defaults than originating lenders because they bear substantially the losses from loan foreclosures. - As part of credit risk management, mortgage insurers generally require a borrower’s gross debt service-to-income ratio to be lower than 32 percent and total debt service not exceeding 40 percent of gross household income. - Mortgage insurers are also subject to rules for government-backed insured mortgages, including maximum gross debt service ratio (39 percent) and total debt service ratio (44 percent). ### Preconditions for effective insurance supervision - Sound and sustainable macroeconomic and financial sector policies: - The Government of Canada prepares and publishes an annual federal government budget within the context of a medium term fiscal strategy, currently to return to balanced budgets by 2015-6. - The Bank of Canada has a monetary policy strategy based on inflation targeting; the current target is an annual rate of 2 percent. - Well-developed public infrastructure: - Courts, legal infrastructure, insolvency, contractual and property rights frameworks are highly developed; judicial independence is respected. - All legislation must be passed by the Federal Parliament or provincial legislative assembly. - Accounting, auditing, and actuarial frameworks: - Canadian accounting standards draw on International Financial Reporting Standards (IFRS) applied to Canadian “publicly accountable profit-oriented enterprises” since the start of 2011. - The Accounting Standards Board (ASB) and the Canadian Auditing and Assurance Standards Board (AASB) align with international standards; CPAB oversees quality of audit work of larger auditing firms and is a member of the International Forum of Independent Audit Regulators. - Actuarial Standards Board issues technical standards (Standards of Practice); the Canadian Institute of Actuaries (CIA) issues and enforces professional and ethical standards. - The CIA had around 3,900 Fellows and 600 Associate members at June 2013. - Only Fellows of the CIA who meet additional OSFI guideline requirements are qualified to sign actuarial reports required by OSFI. - Since 1992, the CIA received 173 complaints about members, investigated 73, of which 39 gave rise to charges and 23 resulted in Disciplinary Tribunal hearings; all but two cases led to findings of guilt. *Source: IMF staff extract from the referenced IMF document.* ### 39. A wide range of statistics is available to support insurance business and effective ### A wide range of statistics is available to support insurance business and effective ### Statistics and market data - Social and economic statistics and data on the markets are issued by the Statistics of Canada and the BoC. - Statistics on insurance risks such as mortality/longevity are issued by the CIA. - OSFI makes available through its website and by arrangements with a third party database service extensive information based on the regulatory reporting of financial institutions that it regulates. ### Effective market discipline in financial markets - Canada has well-developed arrangements promoting market discipline. - General corporate governance requirements are set out in Canadian federal and provincial corporate statutes, including the Canada Business Corporations Act. - Statutes prescribe requirements in respect of the structure of the board of directors, basic qualifications of directors and requirements for a minimum number of independent directors. - Securities laws set out requirements for companies issuing securities, including requirements for disclosure of governance arrangements. - The Toronto Stock Exchange sets governance and disclosure requirements as conditions of listing. - Financial analysis is widely available from media, rating agencies, brokers etc. - OSFI sets disclosure requirements on FRIs (ICP20). ### Mechanisms for consumer protection - CoB regulation is undertaken by provincial authorities. - Policyholder protection is effected through: - market conduct requirements, - complaints adjudication services, - the availability of policyholder compensation. - There are national services for adjudicating on complaints against insurance companies (General Insurance OmbudService and the OmbudService for L&H insurance). - There are provincial mechanisms; some are outlined in this report in the assessment of ICP 19. ### Policyholder compensation schemes - Policyholder compensation schemes cover all relevant policyholders of companies incorporated federally or by a provincial authority. - For L&H insurance, the private not for profit body Assuris provides compensation in case of failure (defined as the issuance of a winding-up order). - OSFI and provincial regulators require all insurers (excluding fraternal benefit societies) to be members of Assuris. - Assuris may levy assessments on the membership in case of a failure; it is also prefunded with $115 million. - Assuris has powers to support a failing company ahead of failure and, with certain constraints, to transfer business to other insurers. - Benefits are capped, for example at the greater of 85 percent or $200,000 for death benefits. - In the P&C sector, membership of the compensation body Property and Casualty Insurance Compensation Corporation (PACICC) is required by provincial supervisory authorities rather than by OSFI as a condition of licensing. - Compensation is subject to limits (for example, $300,000 for personal property). - Federal Government powers to provide financial support to institutions in order to preserve financial stability apply to insurers. ### Efficient financial markets - Canadian markets offer a broad range of instruments to facilitate insurers’ asset-liability management. - The Toronto stock exchange is the largest of several exchanges in Canada, and ranks amongst the top 10 global exchanges by daily turnover and total; market capitalization (US$2,010 billion at end-May 2013). - There are liquid money and bond markets, with a range of instruments and maturities and active markets in derivatives. - Insurers also have access to investments issued outside Canada. - The payment and settlement systems infrastructure is comprehensive and are subject to oversight by the Minister, the BoC (in the case of the five systems designated as systemic) and provincial regulatory authorities (securities and derivatives). *Source: IMF staff report text excerpt.* ### Section 60.2 of the Financial Administration Act. ### _cr1472 - Section 60.2 of the Financial Administration Act ### Summary of Compliance with the ICPs - Table 9: Summary of Compliance with the ICPs — Insurance Core Principle Level and Overall Comments (selected highlights): - 1 - Objectives, Powers and Responsibilities of the Supervisor — LO - Responsibilities shared between federal and provincial authorities; OSFI, AMF and FSCO recommend legislative amendments when conflicts identified. - Supervisors authorized to issue guidance but not empowered to issue directly legally binding rules; OSFI has not been delegated powers to make binding rules. - Insurance legislation does not explicitly address objectives and authority for supervision of insurance groups. - 2 - Supervisor — PO - OSFI, AMF and FSCO have robust accountability frameworks and are generally transparent. - Operational autonomy affected by statutory roles of the Minister (OSFI) and MFEQ (AMF), and policy statements (FSCO). - Removal processes: no requirement to publish reasons for removal of President and CEO of AMF and Superintendent of FSCO. - 3 - Information Exchange and Confidentiality Requirements — O - Supervisors empowered to obtain and exchange information subject to confidentiality, purpose and use requirements. - OSFI signatory to the IAIS Multilateral MoU; policy limits sharing of written confidential information unless formal arrangement in place. - 4 - Licensing — O - FRIs licensing: three-stage process (Minister approval under the ICA; OSFI Order to commence and carry on business; provincial licensing). - OSFI typically conducts pre-commencement on-site review for FRIs/branches. - 5 - Suitability of Persons — O - ICA provides for eligibility of Responsible Persons; OSFI guidelines supplement expectations for assessment policies and procedures. - OSFI empowered to disqualify or remove unsuitable persons. - 6 - Changes in Control and Portfolio Transfers — O - ICA sets clear ownership/control thresholds requiring approval; Minister approves significant acquisitions; Superintendent approves less substantial portfolio transfers. - FRIs not explicitly required to notify OSFI of significant decreases in ownership below control level. - 7 - Corporate Governance — O - ICA and OSFI Corporate Governance Guideline provide extensive standards; requirement to establish an audit committee with prescribed responsibilities. - OSFI monitors both compliance with minimum standards and effectiveness in practice; resources devoted to oversight of large insurance groups. - 8 - Risk Management and Internal Controls — O - Extensive OSFI framework; emphasis on CRO at major institutions and appropriate stature/authority; AA role and oversight emphasized. - 9 - Supervisory Review and Reporting — LO - OSFI’s risk-based Supervisory Framework facilitates structured assessment and actions. - Some information collected is less granular on a non-consolidated basis; no standardized reporting of intra-group transactions. - Scope of related party transactions reported to OSFI by FRIs’ Conduct Committees narrower than intra-group transactions with broad exemptions including reinsurance transactions (ICP 23). - 10 - Preventive and Corrective Measures — O - Supervisors empowered to act against persons conducting insurance business without necessary orders/licenses. - OSFI published guidance on progressive escalation of actions and has powers for timely preventive and corrective measures. - 11 - Enforcement — O - Adequate legal authority and tools; progressive approach to enforcement and sanctions. - OSFI rarely takes enforcement actions in practice; FSCO and AMF have taken enforcement actions on market conduct breaches. - 12 - Winding-up and Exit from the Market — O - Extensive legislative provisions for orderly exit; policyholders rank above general unsecured creditors. - L&H provisions substantially untested for many years; P&C arrangements tested more often (mostly smaller provincially regulated failures). - 13 - Reinsurance and Other Forms of Risk Transfer — LO - OSFI guidelines set extensive standards; policy to require collateral from foreign reinsurers as condition of credit. - Need for FRIs to evaluate residual risks and for OSFI to systematically evaluate supervision arrangements for foreign reinsurers. - 14 - Valuation — LO - Comprehensive framework for valuation including consistent economic basis and margins for adverse deviation. - Principles-based approach gives significant discretion to AA; aspects needing strengthening include allowances for credit spreads and discretion for non-fixed income investments. - 15 - Investment — LO - Legislation and guidelines include restrictions and hard limits on asset classes with exemptions for largest insurers. - Valuation and capital requirements incentivize asset-liability matching but create incentives to invest in higher yielding assets; need more robust requirements for higher risk/complex assets. - 16 - Enterprise Risk Management for Solvency Purposes — LO - OSFI guidelines require identification, measurement and management of all material risks and stress testing; draft ORSA guideline scheduled to be implemented in 2014. - 17 - Capital Adequacy — LO - Comprehensive capital requirements capturing all material risks; risk-sensitive and includes operational risk via additional buffers. - Distinguishing feature: consolidated application to each operating FRI, including foreign operations; limitations in powers over unregulated companies within a group cause variation in approach across groups. - Full capital requirements not applied at solo legal entity level. - 18 - Intermediaries — LO - Provincial supervisors collaborating to harmonize regimes; CISRO proactive. - Differences between Ontario and Québec in key areas (e.g., use of SROs). AMF conducts routine inspections; FSCO supervisory approach more reactive. - 19 - Conduct of Business — PO - CCIR coordinates harmonization and developed a risk-based approach adopted by FSCO and influenced AMF. - JFFMR reviewed product-development processes to protect different consumers; industry associations have voluntary codes; Complaint Reporting System nationwide except British Columbia. - FSCO and RIBO limited ability to consistently monitor point of sale material due to resource constraints. - 20 - Public Disclosure — PO - Extensive group consolidated disclosure requirements but not fully matched at solo entity level, especially on capital disclosure. - IFRS application to all FRIs ensures consistency but may create disclosure gaps relative to regulatory objectives; OSFI and Actuarial Standards Board have filled many gaps via guidelines. - 21 - Countering Fraud in Insurance — O - Well-developed legislative framework and cooperation; notable anti-fraud initiatives in Ontario for motor fraud; supervisors include fraud controls in risk-based supervision. - 22 - Anti-Money Laundering and Combating the Financing of Terrorism — O - OSFI, AMF and FSCO not designated AML/CFT competent authorities but have arrangements with FINTRAC; information exchange with foreign authorities mainly through FINTRAC. - OSFI and AMF set specific guidelines for insurers and build AML/CFT compliance into supervisory work; OSFI has a specialist unit. - 23 - Group-wide Supervision — PO - ICA, IA and OIA do not explicitly define insurance group or scope for group-wide supervision. - OSFI applies consolidated supervision to L&H FRIs headed by regulated entity; indirect approaches via contracts/undertakings used for groups headed by non-regulated entities. - Only five of 17 groups headed by unregulated holding companies have executed undertakings; terms vary. - AMF exercises consolidated supervision for insurance groups; FSCO supervises on a legal entity basis. - 24 - Macroprudential Surveillance and Insurance Supervision — O - OSFI has a well-developed macroprudential surveillance framework integrating individual FRI supervision with market-wide risk view and capacity to escalate issues. - 25 - Supervisory Cooperation and Coordination — O - OSFI has coordination arrangements domestically and internationally; OSFI chairs FISC and is GWS for large internationally-active life insurers; initiates and contributes to supervisory colleges. - 26 - Cross-border Cooperation and Coordination on Crisis Management — O - OSFI’s approach to cross-border crisis management is untested but has information-sharing arrangements and supervisory colleges; advanced in applying recovery planning frameworks to major insurance groups though not yet shared with foreign supervisors. ### Observance Level Summary (Table 10) - Observed (O): 14 - Largely observed (LO): 8 - Partly observed (PO): 4 - Not observed (NO): 0 - Total: 26 ### Recommendations to Improve Observance of the ICPs (Table 11) - 1 - Objectives, Powers and Responsibilities of the Supervisor - a) Consider the scope to strengthen regulation by providing delegated powers ... to issue enforceable rules by administrative means rather than through legislation; - b) Establish explicit supervisory objectives for group-wide supervision under the relevant primary legislation, supported by adequate legal powers to conduct group-wide supervision. - 2 - Supervisor - a) Update the relevant primary legislations to adopt separate legal processes for the prudential decisions of OSFI and AMF from the approval from the executive branch and specify circumstances for issuance of policy statements to FSCO; - b) Consider exempting the supervisors from the government’s fiscal controls and administrative guidance, as in the case of the BoC; - c) Review adequacy of supervisory resources of FSCO and whether FSCO should continue to be subject to hiring controls set by the Ontario Public Service; - d) Enhance transparency of OSFI’s different approaches to supervising insurance groups; - e) Establish explicit provisions on public disclosure of the reasons for removal of the President and CEO of AMF and the Superintendent of FSCO. - 6 - Changes in Control and Portfolio Transfers - Require FRIs to notify OSFI of a significant decrease in the ownership by a person(s) below the pre-determined control level. - 7 - Corporate Governance - Set out more extensive guidance on FSCO’s own expectations in relation to corporate governance and market conduct. - 9 - Supervisory Review and Reporting - Enhance and standardize regulatory reporting of intra-group transactions, supported by a clear definition of the scope of intra-group transactions. - Review level of detail of reporting requirements applying to solo FRIs. - Equip FSCO with adequate supervisory resources to deal with the size and diversity of the Ontario marketplace. - 10 - Preventive and Corrective Measures - Strike a good balance between timely staging as a result of persistent concerns and maintaining pressure on the institution to make meaningful progress over a credible and situation-specific appropriate timeline to exit staging. - 12 - Winding-up and Exit from the Market - a) Examine whether designation of PACICC by approval of the Minister under the ICA in the same way as Assuris would help promote increased cooperation and early exchange of information between OSFI and the PACICC. - b) Continue testing procedures for handling failure of a FRI by further simulation exercises and development of recovery plans already underway for large L&H companies. - 13 - Reinsurance and Other Forms of Risk Transfer - a) Consider adding material on importance of FRIs assessing and managing liquidity risks arising from reinsurance cessions when revising OSFI guidelines; - b) Enhance OSFI’s process for evaluating supervisory regimes applying to major unregistered foreign reinsurers so it explicitly addresses supervision of reinsurance in their home jurisdictions. - 14 - Valuation - Strengthen valuation standards on credit spreads and non-fixed income investments, recognizing the current ASB review of reinvestment assumptions for life insurance valuation is addressing issues. - 15 - Investment - Undertake a review of OSFI’s Prudent Person Approach Guideline to strengthen requirements on investments, including explicit requirements that FRIs invest only in assets whose risks they can properly assess and manage and on investments in complex or less transparent instruments. - 16 - Enterprise Risk Management for Solvency Purposes - Finalise OSFI guideline on ORSA requirements (currently a draft) and set expectations for early phase of implementation work as soon as possible. - 17 - Capital Adequacy - a) Set out details of OSFI’s approach to groups headed by holding companies in the interests of transparency until OSFI obtains full powers to apply its regulatory framework to holding companies. - b) Consider aligning OSFI’s requirements for regulated holding companies more closely to those for regulated operating companies. - c) Finalise OSFI’s proposed standard for application of capital framework on a solo legal entity level and develop plan for publication of full approach; establish policy requirements to address and review reporting requirements on intra-group transactions for capital management purposes (for example, capital transferability within the group). - 18 - Intermediaries - a) Maintain momentum in promoting harmonisation of regulatory regimes and supervisory practices across provinces (e.g., regulatory treatment of client monies); - b) Consider establishing proportionate expectations tailored for intermediaries, focusing on fair treatment outcomes for policyholders; - c) Implement CCIR recommendations related to regulatory treatment of MGAs across provinces; - d) Ensure FSCO has adequate resources for effective supervision of intermediaries. - 19 - Conduct of Business - Strengthen CoB regimes by: - a) Continuing proactive initiatives by CCIR and JFFMR to enhance consistency across provinces; - b) Empowering FSCO to issue enforceable rules on product development and promotion and require needs analysis before advice and policy servicing obligations; - c) Reviewing adequacy of supervisory resources of FSCO for regulatory policy formulation and more proactive CoB supervision. - 20 - Public Disclosure - a) Ensure FRIs publish information on financial position of individual legal entities at the solo level as well as group consolidated requirements, and information about the FRI’s capital; ensure OSFI’s guidelines clearly extend to FRIs on individual as well as consolidated basis. - b) Maintain process for monitoring IFRS developments to ensure timely and appropriate responses affecting disclosure and financial soundness requirements. - 21 - Countering Fraud in Insurance - Consider merits of setting out both AMF and FSCO expectations of intermediaries in the area of fraud controls more clearly. - 22 - Anti-Money Laundering and Combating the Financing of Terrorism - In relation to intermediaries, consider how AMF and FSCO should set out their AML/CFT expectations in more detail, drawing on supervisory work and experience. - 23 - Group-wide Supervision - Formulate and implement a clear and consistent regulatory regime for group-wide supervision under relevant insurance laws covering scope of group-wide supervision (including material non-regulated entities), and prudential and market conduct requirements at group level. - Empower supervisors to take remedial and enforcement measures at the level of the holding company, in line with emerging international best practices. - 24 - Macroprudential Surveillance and Insurance Supervision - Priorities for OSFI to consider in addition to finalizing approach to potentially systemically important FRIs: - a) Ensure access to data sources and develop international dimension of macroprudential work via liaison with other regulators. - b) Consider whether sector-based approach adequately complements consideration of linkages between banks and insurers. - c) Extend consideration of risks from system-wide market conduct issues, including reputational risks from non-compliance by FRIs and potential conflict between prudential and market conduct regulation. - 26 - Cross-border Cooperation and Coordination on Crisis Management - In developing its approach OSFI should: - a) Continue crisis management testing and simulations; extend to international groups as appropriate. - b) Consider potential needs in a crisis of supervisors in jurisdictions where the Canadian company is material and anticipate these needs. - c) Review need for supplementing existing stress testing requirements by explicitly requiring FRIs to establish and maintain contingency plans and procedures for going- and gone-concern situations as set out in the ICP. *International Monetary Fund — Section 60.2 of the Financial Administration Act (extracts as provided in the source content).* ### 44. The Canadian authorities wish to express their appreciation to the IMF and its ### 44. The Canadian authorities wish to express their appreciation to the IMF and its assessment team for their assessment of the Canadian insurance sector. ### Appreciation and high observance - The Canadian authorities "wish to express their appreciation to the IMF and its assessment team for their assessment of the Canadian insurance sector." (paragraph 44) - The Canadian authorities "share the view that Canada has a high level of observance with the Insurance Core Principles (ICPs)." (paragraph 44) ### Commitment to FSAP and continued improvement - "Canada is highly committed to the FSAP process and the insights that the IMF can provide with respect to a country‘s financial sector through this process." (paragraph 45) - "Canada fully agrees that it is important to continually review and seek to improve the regulatory framework and supervision practices." (paragraph 45) ### IMF observations and domestic consideration - "The IMF has made a number of observations and recommendations, which could further enhance the high degree of compliance with the ICPs." (paragraph 46) - "These recommendations will be given consideration by the relevant federal and provincial authorities, having due regard to the various initiatives currently planned or underway, and taking into account the features of the Canadian regime that contributed to the performance of the Canadian insurance system during and post-crisis." (paragraph 47) - It is noted that "some recommendations are within the scope and mandate of regulators and others are subject to decisions by different levels of government." (paragraph 47) ### Principle 23 — group-wide supervision - Of note are "the recommendations from the IMF on Principle 23 (but carried throughout the assessment) related to group-wide supervision." (paragraph 48) - IMF advice highlighted: there should be "a legislated definition of the scope of group-wide supervision, and that authorities empower supervisors to take necessary remedial and enforcement measures at the level of the holding company, in line with emerging best practices." (paragraph 48) - The Canadian authorities suggest that "for future assessments, the IMF may wish to consider bringing more clarity to the basis on which this principle is assessed, given that the ICP and the related standards appear to accept indirect authority over insurance groups, as opposed to direct legislated authority, as the current international standard." (paragraph 48) - They also note that "the principle itself is under review internationally." (paragraph 48) *Source: Excerpt from paragraphs 44–48 of the provided IMF content unit.* ### 49. The introduction of ICPs dealing with market conduct issues is relatively new. As a ### _cr1472 - 49. The introduction of ICPs dealing with market conduct issues is relatively new. As a ### Introduction and context - The introduction of ICPs dealing with market conduct issues is relatively new and there is a learning curve to understand how the IMF contemplates implementation of specific standards. - As the ICPs and assessment techniques evolve, balancing consideration of process with outcomes achieved will be important. - Past experience has not demonstrated a history of significant unaddressed market conduct problems in Canada. ### ICP 1 — Objectives, Powers and Responsibilities of the Supervisor Findings - The division of responsibilities for prudential and conduct-of-business (CoB) regulation and supervision at the federal and provincial levels is outlined (see Section C of report). - Prudential regulation and supervision primarily rests with OSFI under the Insurance Companies Act (ICA) and the Office of the Superintendent of Financial Institutions Act (OSFI Act). - OSFI was established in 1987 pursuant to the OSFI Act. - OSFI’s objectives with respect to the insurance sector include: - a) Supervise FRIs to determine whether they are in sound financial condition and are complying with their governing law and supervisory requirements; - b) Promptly advise FRIs in the event of material deficiencies; and take, or require management or boards to take, necessary corrective measures expeditiously; - c) Promote the adoption of policies and procedures by FRIs to control and manage risk; - d) Monitor and evaluate system-wide or sectoral issues that may impact FRIs negatively. - The law recognizes that management and boards are ultimately responsible and that FRIs can fail notwithstanding OSFI’s supervision. (s 4(2) and s4(3) of OSFI Act) - Since 1999, increasing competition in the Canadian financial sector has been a key principle guiding government financial services policy. - Since 1992, the ICA has been subject to a sunset clause that requires a review every five years. (s21 of ICA) - OSFI issues administrative guidance: Guidelines, Advisories, Rulings, Discussion papers. OSFI’s guidance does not have the force of law. - The ICA explicitly empowers the Superintendent to issue an Order notwithstanding compliance with capital adequacy requirements. (s515(3) of ICA) - International best practice preference: supervisors empowered to issue directly legally enforceable rules/standards via administrative means. Current OSFI guidance power has not been fully tested; a non-cooperative FRI might challenge OSFI’s guidance as not legally binding. - OSFI has authority to take immediate critical supervisory measures to protect policyholders’ interests which will not be suspended by an appeal (ICP 2). Exception: OSFI lacks legal enforcement authority over CMHC as CMHC is a Crown corporation. CoB regulation and supervision (provincial) - AMF (Québec): established in 2004 under An Act respecting the Autorité des marchés financiers (AMF Act). Legal framework includes the Civil Code of Québec, An Act respecting Insurance (IA) and IA-Reg, An Act respecting the Distribution of Financial Products and Services (DA) and DA-Reg, and the AMF Act. - AMF’s CoB mission: a) provide assistance to consumers (financial literacy, complaints, dispute resolution); b) supervise distribution activities; c) implement protection and compensation programs. (s4 of AMF Act) - AMF cannot issue enforceable rules but can enforce established regulatory requirements via written instructions; AMF’s guidelines are not legally binding. - Proposed that adoption of most regulations be entrusted to AMF; preferable that AMF be empowered to issue enforceable rules/standards. - AMF proposed significant changes to IA tabled April 30, 2013. - In 2012, AMF allocated 30 full-time-equivalent supervisory resources for CoB supervision of 285 insurers and 30,839 certified representatives; AMF completed all planned supervisory activities in the last two years. - FSCO (Ontario): established under the Financial Services Commission of Ontario Act, 1997 (FSCO Act). - Primary legislation includes The Insurance Act (OIA), Registered Insurance Brokers Act (RIB Act), and FSCO Act. - FSCO does not have general administrative rule making authority; limited rule/guideline authority in specific areas. Lieutenant Governor in Council issues regulations under the OIA. - FSCO advised to be empowered to issue enforceable rules by administrative means. (s16(3), s268.3, s121, s28 and s15 of OIA) - In 2012 FSCO allocated 22.5 full-time-equivalent supervisory resources to supervise: 350 insurers (mainly FRIs); 46,222 insurance agents; 4,632 corporate insurance agencies; 1,657 insurance adjusters (as at June 8, 2012). FSCO does not have adequate resources for proactive CoB supervision. Group-wide supervision - Objectives and legal authorities for group supervision for OSFI, AMF and FSCO are not explicitly provided under applicable primary legislation. Assessment and comments (ICP 1) - Assessment: Largely observed. - Comments: - Responsibilities are shared between federal and provincial authorities with clearly defined mandates. - Supervisors are authorized to issue guidance but are not empowered to issue directly legally enforceable rules; OSFI has not been delegated powers to make binding rules. - Insurance legislation does not explicitly address objectives and authority for supervision of insurance groups. - Authorities are advised to: - a) Consider how best to empower supervisors to issue enforceable rules by administrative means, in accordance with specified legal parameters in primary legislation; - b) Establish explicit supervisory objectives for group-wide supervision under relevant primary legislation, supported by adequate legal powers to conduct group-wide supervision. ### ICP 2 — Supervisor: independence, accountability, confidentiality, resources, standards OSFI — governance, accountability and independence Findings - Minister responsible for OSFI; Superintendent solely responsible for exercising authorities and accountable to Minister (s4 and s6 of OSFI Act). - Superintendent appointed by Governor General for a term of seven years, eligible for re-appointment; removal only for cause and removal documents tabled in Parliament within 15 days (s5 of OSFI Act). A Superintendent has never been removed since 1987. - OSFI has an Executive Committee (Superintendent + three Assistant Superintendents). - OSFI has a Framework for Exercising the Superintendent’s Powers (FESP) and a Business Recovery Plan (last tested October 2009). - OSFI introduced Enterprise Risk Management (ERM) in 2005–2006; identified external and internal risks (example risk noted for 2011/12: persistent low interest rate level). Accountability mechanisms - a) Annual Reports published (s40 of OSFI Act); - b) Annual reporting to Parliament—Report on Plans and Priorities and Departmental Performance Report (s40 of OSFI Act); - c) Reporting to Minister and to House/Senate Committees; - d) Consultations with stakeholders; - e) Independent Audit Committee with majority independent members serving three-year terms (max two terms); - f) Internal assurance audits with reports posted on OSFI’s website; - g) Annual external audits by the Auditor General of Canada; - h) Regular anonymous surveys of knowledgeable observers—results published on OSFI’s web site. Operational and legal safeguards - OSFI subject to “Policy on Service Standards for External Fees”; Service Standard example: process 90 percent of “Superintendent deemed approvals” within 30 days. - Supervisory decisions may be challenged via processes under OSFI Act, ICA or general Canadian law. Certain appeals do not stay administrative decisions to avoid impeding timely intervention (ICP 5). - Some institution-specific transactions require Minister approval (incorporation, acquisition of significant interest, mutualization, amalgamations, substantial portfolio transfers, limiting average total assets of a FRI, public interest veto over OSFI taking control >16 days, approving voluntary liquidation/dissolution). (e.g., s420 of ICA) Funding and resources - OSFI funded mainly through assessments on FRFIs and a user-pay program (s13 and s23 of OSFI Act). - Base assessments for P&C and L&H industries increased by about 65 percent and 50 percent, respectively, since 2007. - Federal government fiscal restraints (e.g., Expenditure Restraint Act in 2009) can constrain OSFI’s budget. - Treasury Board guidance imposes approval requirements (e.g., hospitality over Can$10,000; costs not related to core mandate over Can$25,000 per event). - OSFI targets 75th percentile of base salary of financial services market for executive compensation (s13 and s15 of OSFI Act). Staffing and training - Between 2008 and 2012 OSFI staff complement increased by approximately 120 persons or 24 percent. - In 2012, 164 staff (full-time equivalent) allocated for supervision of 248 FRIs; about 90 supervisors have supervisory experience of 10 years or more. - OSFI allocates about two per cent of its human resources budget towards training ($1.5 million in 2011-12); targets an average of five days of training per year per employee. Transparency and confidentiality - OSFI publishes balance sheet, income statement, capital adequacy, impaired assets, summary of off-balance sheet items on a quarterly or yearly basis (s22(3) of OSFI Act and s673 of ICA). - All supervisory information is confidential; legal gateways and safeguards outlined in ICP 3 (Section 22 of OSFI Act and section 672 of ICA). - Conflict of Interest Policy prohibits owning shares of FRFIs, requires disclosure of borrowings from FRFIs, restricts post-employment activity for former executives (one year non-acceptance of certain roles). - Legal protection for employees acting in good faith; government covers defense costs (s39 of OSFI Act). AMF and FSCO summaries (governance, resources, confidentiality) - AMF: - President and CEO appointed by Québec government; removal requires valid reason though reasons need not be publicly disclosed. - AMF subject to government approval of activity plan and budget; financially self-sufficient funded by fees and dues; may ask government for financial assistance (s38.2, s40 and s57 of AMF Act). - In 2012 AMF allocated 30 FTE supervisory resources for 285 insurers and 30,839 certified representatives. - At least 1 percent of AMF payroll invested in staff training annually. - AMF has >30 MoUs for information exchange; practices to protect confidential information; bound by codes of ethics and legal protections (s28 s32 & 32.1 of AMF Act). - FSCO: - Governance: Commission (five members), Superintendent (may delegate), Financial Services Tribunal (9–15 members). - Superintendent appointed under PSOA; reasons for removal need not be publicly disclosed. - Minister may issue policy statements with broad scope; 2003 policy statement on automobile insurance rates is an example and raises autonomy concerns. - FSCO reviews and updates regulatory requirements; publishes legislative and regulatory updates; may publish information it considers in public interest (s11(3) of FSCO Act). - FSCO funded through assessments on regulated entities; also granted annual spending authority by government; subject to Ontario Public Service hiring controls. - FSCO lacks adequate resources for proactive CoB supervision: 22.5 FTE supervisory resources in 2012 for a large regulated population. Assessment and comments (ICP 2) - Assessment: Partly observed for FSCO; OSFI and AMF generally robust. - Comments: - Supervisors have robust accountability frameworks and transparency but operational autonomy affected by Minister (OSFI) and MFEQ (AMF) roles and FSCO policy statements. - Legal frameworks and safeguards for confidentiality are strong. - Recommendations to authorities: - a) Update primary legislation to separate prudential decisions of OSFI and AMF from executive branch approvals and specify circumstances for issuance of FSCO policy statements; - b) Consider exempting supervisors from government fiscal controls and administrative guidance to strengthen financial autonomy; - c) Review adequacy of supervisory resources of FSCO and whether FSCO should remain subject to Ontario Public Service hiring controls; - d) Enhance transparency of OSFI’s approaches to supervising insurance groups; - e) Establish explicit provisions for public disclosure of reasons for removal of AMF President/CEO and FSCO Superintendent. ### ICP 3 — Information Exchange and Confidentiality Requirements Findings - OSFI, AMF and FSCO have legal authority to obtain any information relevant to supervisory functions, including from unregulated persons and entities (ICP 9). - All three adopt strict policies and operational requirements to safeguard confidentiality (ICP 2). - Access to information regimes: - Federal: Access to Information Act (AI Act) with statutory exclusions. - Québec: Access Act. - Ontario: Freedom of Information and Protection of Privacy Act (FIPPA). - Intergovernmental Agreement on Information Sharing on Financial Institutions (1989) does not cover OSFI (scope limited to provincial statutes). - CCIR proposed (April 2013) establishment of a supervisory college of Canadian supervisors with a protocol on cooperation and information exchange. AMF, OSFI and other regulators working on a draft MoU for information sharing and preservation of financial stability expected to be signed by end-2013. OSFI specifics - OSFI Act legal gateways for disclosure: to government/regulatory agencies, CDIC/compensation associations, Deputy Minister/DoF and Governor of the BoC for policy analysis; disclosure subject to Superintendent being satisfied confidentiality will be safeguarded (s22(2) of OSFI Act). - ICA contains similar provisions; Minister may determine OSFI should disclose information for analysis of a FRI after consulting OSFI (s672(2) and s673 of ICA). - OSFI has >30 MoUs with foreign counterparts and is signatory to IAIS Multilateral MoU. - OSFI limits sharing of written confidential information absent formal MoU; generally responds to requests within two weeks. - OSFI requires supervisory college participants to sign college-specific confidentiality agreements. AMF specifics - Access Act empowers AMF to disclose information for crime prevention/prosecution or for application of an Act in Québec (s41.2 & s67 of Access Act; s9 of Chartered Professional Accountants Act). - AMF has >30 MoUs and discretion to communicate information regardless of existence of a MOU; willing to become signatory to IAIS Multilateral MoU (s16 of AMF Act; s. 16 of IA). - AMF obliged to designate a person responsible for protecting personal information (currently General Secretary). FSCO specifics - FSCO’s authority to share information implied from FSCO Act and OIA subject to FIPPA; FIPPA requests must come through Ministry of Finance. - FSCO has MoUs with RIBO, AMF, Statistics Canada, Ontario Minister of Revenue and OSFI. - Information sharing coordinated through CCIR, CISRO and JFFMR. Assessment and comments (ICP 3) - Assessment: Observed. - Comments: - All three supervisors empowered to obtain and exchange information subject to confidentiality, purpose and use constraints. - Wide network of bilateral MoUs; OSFI signatory to IAIS Multilateral MoU. - Existence of MoU not prerequisite; strict reciprocity not required. ### ICP 4 — Licensing (incorporation, Orders, provincial licensing, branches, cross-border) Findings — incorporation and Orders - Incorporation/continuance of a FRI: letters patent issued by Minister based on OSFI recommendation; upon Minister’s approval OSFI issues an Order to Commence and Carry on Business. New insurer must be licensed in each province/territory it will operate. (Instruction Guide for Incorporating Federal Insurance Companies) - Notice of intention to apply for incorporation must be published in Canada Gazette and a relevant newspaper; objections may be filed within 30 days. - Application requirements include ownership and financial strength; three-year business plan with pro-forma financials; management team; appointed actuary and external auditor; risk management and control processes; capital management policy; board composition, governance and conflict of interest policies; internal audit role; compliance management; IT governance; systems and business continuity plan. - Any person intending to own >10 percent of any class of shares must seek Minister approval; controlling shareholder must provide Support Principle acknowledgement. - Foreign-owned applicants must provide additional information (home regulator supervision, exam reports). - Minister considers factors including financial resources, soundness and feasibility of business plan, business record and experience, character and integrity, competence of management, integration issues, best interests of Canadian financial system, and national security. (s27 and s1016.1 and s28 of ICA) Findings — licensing by provinces - Licensing by provincial supervisors required for insurers conducting business in provinces; CCIR-developed standardized Application for Insurer's License harmonized across provinces. AMF licensing specifics - Only legal persons authorized and licensed by AMF may act as insurers in Québec; IA and IA-Reg specify licensing criteria (s201, s19(a), s205, s207, s210 and s211 of IA and s30 to s33 of IA-Reg). - AMF issues guides on licensing process; insurers without head offices in Québec must appoint a chief representative. P&C insurers with no establishment may issue certain contracts without a license subject to conditions (s206, s207, s204 of IA and s42 of DA). FSCO licensing specifics - OIA prohibits unlicensed insurance activities; FSCO licenses insurers in Ontario. - FSCO proposed ceasing incorporation of new insurers in Ontario but would license insurers incorporated in jurisdictions meeting international solvency standards. - For FRIs FSCO ensures licensing consistent with primary supervisor classes; FSCO practice: decide on complete application within 30 to 60 business days. Branches of foreign insurers and cross-border activities - Foreign insurer must apply to OSFI for an Order approving the “insuring in Canada of risks” subject to Minister approval. Foreign insurers insuring in Canada must maintain assets in Canada to support liabilities; assets are under OSFI oversight. (s573 and s581 of ICA; A No. 4) - Before making an Order OSFI must be satisfied applicant has: vested at least Can$5 million in trust in a Canadian FI, securities of or guaranteed by Canada/province or other admissible assets; appointed an actuary and an auditor; appointed a resident chief agent in Canada. (s574, s579, s581 to 583, s591, s611 and 612 of ICA) - Applicants generally required consolidated assets of at least Can$1 billion for L&H insurer or Can$200 million for P&C insurer; capital and surplus targets: between 5 to 10 percent of liabilities for L&H; at least 20 percent of assets for P&C. (Index A No. 4) - From January 1, 2010 foreign insurers required to include a statement in all documents related to their insuring in Canada of risks that the document was issued or made in the course of their insurance business in Canada. (s578(5) of ICA) - Determination of “insuring in Canada risks” may apply without physical presence (e.g., via agent). Provincial licensing may be required even if federal “insuring in Canada risks” not triggered. Permitted activities and restrictions - Orders must specify classes of insurance permitted (Schedule to the ICA). - ICA prohibits authorization of new composite FRIs/branches (both L&H and P&C). Foreign insurer branches restricted to reinsurance unless permitted to write direct insurance in home jurisdiction. (s445 and s589, s443 and s23(2) of ICA) Supervisory practices and timelines - OSFI provides detailed administrative guidance and enhanced due diligence for new entrants. Internal Risk Tolerance Framework for New Entrants requires capital/assets to cover losses during either first three years or until profitable. - OSFI encourages pre-application discussions; Service Standard 4: 80 percent of applications for letters patent of incorporation and Orders approving insuring in Canada of risks processed in less than 90 days after receipt of complete application. - OSFI typically conducts an on-site pre-commencement review before issuing Orders. - AMF informs applicants and typically decides within 90 days of complete application. - FSCO practice: decide on complete application within 30 to 60 business days. Assessment and comments (ICP 4) - Assessment: Observed. - Comments: - Licensing process involves three-stage process for FRIs: Minister approval to incorporate/continue; OSFI Order to commence/carry on business; provincial licensing in provinces where business will be conducted. - Criteria and procedures are clear and transparent; pre-commencement on-site reviews are standard; CCIR harmonized application forms support consistency. ### ICP 5 — Suitability of Persons Findings - ICA and OSFI guidance set out suitability requirements for: - Significant owners (assessed during licensing and upon changes in significant interest). - Responsible Persons (directors, senior management, chief agent). - Eligibility and restrictions under ICA include: - At least half the directors of an FRI or majority of supreme governing body of a society must be residents in Canada (s167 and s543 of ICA). - Persons disqualified from being directors (e.g., bankrupts) (s168 of ICA). - No more than two thirds of directors affiliated with FRI and no more than 15 percent of directors may be employees of FRI or subsidiary (s171 and s172 of ICA). - Directors who failed to abstain at meetings due to conflicts are ineligible to serve as director in any FRI for five years (s212(2) of ICA). - Majority of audit committee and conduct review committee must not be affiliated or employees (s203 and s204 of ICA). - CEO and, for branches, chief agent must be resident in Canada (s205 and s579 of ICA). - OSFI expects FRIs/branches to have written policies for assessing suitability and integrity of Responsible Persons (Guideline E-17). - Responsible Persons must complete Security Information Form for law enforcement/security assessments; FRIs/branches expected to verify criminal records at least every seven years. - Appointed Actuaries must be Fellows of CIA and subject to peer review at least once every three years (Guideline E-15). - CEO/COO/CFO or chief agent may not be appointed actuary unless authorized by OSFI (s359.1 and s 624.1 of ICA). - FRIs/branches required to file annual return listing board, senior management and certain key control function persons; Notice on Change of Corporate Information within 15 days of any change. - OSFI may disqualify appointments or order removal of persons based on competence, business record, experience, conduct or character; removal order is not stayed by appeal (s678.2 of ICA). Supervisory practices - OSFI assesses competence and experience at incorporation and through supervision; generally relies on FRIs’ internal processes for ongoing suitability monitoring but may require evidence and exchange information when warranted (s674 of ICA). Assessment and comments (ICP 5) - Assessment: Observed. - Comments: - ICA provides eligibility framework and OSFI guidelines clarify expectations for assessment policies and procedures. - OSFI empowered to disqualify or remove unsuitable persons; notifications required for changes in Responsible Persons. ### ICP 6 — Changes in Control and Portfolio Transfers Findings (control definitions and approval requirements) - Control defined in ICA as: - a) Control in law: >50 percent of votes or ownership sufficient to elect majority of directors (s3(1)(a), s3(1)(b), s3(1)(c)); - b) Control in fact: through direct or indirect influence (s3(1)(c)); - c) Deemed control: control of entities controlled by the controlling entity; beneficial ownership by entities controlled by person considered (s3(2) and s3(3)). - Approvals by the Minister (and notifications to Superintendent) generally required for: - a) Acquisition of shares causing a person to have a significant interest in a class of shares (s407(1) of ICA); - b) Acquisition of control of an entity causing significant interest (s407(1) of ICA); - c) Acquisition of control in fact of a FRI (s407.1(1) of ICA); - d) Deemed acquisitions via amalgamation/merger/reorganization resulting in significant interest or control in fact (s407(2) and 407.1(2) of ICA). - Significant interest defined as >10 percent of total outstanding shares of a class (s8 of ICA). - Increases in significant interests have additional approval requirements (text continues beyond supplied excerpt). Assessment and comments (ICP 6) - (Assessment details not fully contained in supplied content up to this excerpt.) *Source: _cr1472 - 49. The introduction of ICPs dealing with market conduct issues is relatively new. As a — Detailed Assessment (selected excerpts).* ### 1. An acquisition of shares that will increase, by at least 5 percent in a significant ### 1. An acquisition of shares that will increase, by at least 5 percent in a significant interest in a FRI (s407(1) ands409 of ICA); ### Transaction types described - An acquisition of shares that will increase, by at least 5 percent in a significant interest in a FRI (s407(1) ands409 of ICA); - An acquisition of control of an entity that will increase, by at least 5 percent a significant interest in a FRI (s407(1) and s409 of ICA); ### Legal references and thresholds - Threshold for increase: "by at least 5 percent" (appears verbatim in both transaction types). - Subject entity: "a FRI" (as stated in both items). - Statutory citations: "s407(1)" and "s409 of ICA" (both cited for each acquisition type; second item lists "s407(1) and s409 of ICA" with spacing as provided). *Source: _cr1472 - 1. An acquisition of shares that will increase, by at least 5 percent in a significant interest in a FRI (s407(1) ands409 of ICA);* ### 3. An acquisition of control in fact of a FRI by acquiring additional shares ( s407.1(1) of ### _cr1472 - 3. An acquisition of control in fact of a FRI by acquiring additional shares ( s407.1(1) of ICA) ### Acquisition of additional shares and control thresholds - Where a person has control in law over a FRI, acquisitions of additional shares of the FRI by that person are not subject to any further approval or notification (s410(1)(b) of ICA). - FRIs file annual returns including shareholder information: - For L&H insurers, returns cover persons with significant interests and their shareholdings. - For P&C insurers, shareholder information is not limited to persons with significant interests. - OSFI supervisors request FRIs to notify it of any material changes in their businesses and affairs; insurers have notified OSFI in advance or forthwith after learning of significant decreases below predetermined control levels (s665(1) of ICA). - All approval requirements apply regardless of the jurisdiction of the prospective or actual owner. - Transaction Instruction A No. 23 requires information on intended beneficial owners and, where the acquirer is subject to supervision, the following to facilitate coordination with relevant supervisors: - name, address and telephone number of the foreign regulatory contact; - confirmation that the home supervisor is aware of its intention to acquire or increase a significant interest in, and/or to acquire control of a FRI; - confirmation that approval from home supervisor has been obtained (if required). ### Ministerial factors, special restrictions, and listing requirement - Factors considered by the Minister in approving an application for control in law include: - nature and sufficiency of the financial resources of the applicant(s); - soundness and feasibility of the business plans; - business record and experience of the applicant(s); - character and integrity of the applicant(s); - whether the management team comprises persons with suitable competence and experience; - integration of the operations of the applicant(s) with the insurer’s businesses; - whether the resulting corporate structure hinders supervision; - the best interests of the financial system in Canada; - national security; and - Canada’s international relations and its international legal obligations. (Section 420, paragraph 1016.1(1)(a) and paragraph 1016.1(1)(b) of ICA) - Restrictions for demutualized FRIs and their widely-held holding companies (Manulife and Sun Life): - no person may exercise de facto control over these demutualized FRIs other than their current widely-held holding companies; - they cannot have a major shareholder; - their widely-held holding companies cannot be subject to de facto control or have a major shareholder; - the Minister has the discretion to remove these restrictions. (s407(4) to (9) and s407.2 of ICA) - Listing requirement: - Unless exempted by the Minister, a FRI that has more than Can$2 billion in equity must have at least 35 percent of its voting shares listed on a recognized Canadian stock exchange; - those listed shares must not be beneficially owned by a person who holds beneficial ownership of 20 percent or more of a class of the FRI’s voting shares; - if the FRI fails to comply, the Minister may issue an order to limit its average total asset. (s411, s2 (3), s412 and s414 of ICA) ### Superintendent / OSFI supervisory expectations for controlling shareholders - If a proposed controlling shareholder would be prejudicial to policyholders, the Superintendent would not recommend Ministerial approval. - Where group structure may affect effective supervision by OSFI, the Superintendent has routinely obtained legally binding undertakings from a controlling shareholder (e.g., providing the Superintendent with notices of prospective acquisitions by the shareholder). - For unregulated controlling shareholders, the Superintendent has obtained undertakings to comply with certain capital/leverage ratios. - OSFI expects the ultimate owner to provide a support principle letter acknowledging responsibility to support the operations and capital needs of the FRI. ### Mutualization, conversion, amalgamation and portfolio transfer rules - Mutualization and conversion: - The Minister may approve a mutualization proposal from an insurance company only after approval by shareholders and policyholders via a special resolution. - In determining approval the Minister must be satisfied that: - the proposal was approved by the shareholders and policyholders; - the conversion may reasonably be expected to be achieved; - there are no reasonable grounds for believing that the conversion would cause contravention of capital adequacy and liquidity requirements; - the stated capital of the company has ceased to be an important factor in safeguarding the interests of the policyholders; - the purchase price for the shares is fair and reasonable; and - the proposal is in the best interests of the financial system in Canada. (s226 to s236 of ICA) - The Superintendent’s approval of share purchases requires that: - the purchase would not cause contravention of capital adequacy and liquidity requirements; and - the stated capital of the shares has ceased to be an important factor in safeguarding policyholders. (s226 to s236 of ICA) - Conversion proposals from mutual companies require prior notice and information to eligible policyholders and Superintendent recommendations (s237 of ICA and Mutual Company (Life Insurance) Conversion Regulations). - On June 30, 2011, the Minister launched public consultations to develop a framework for demutualization of Canadian P&C insurers and will wait for this framework before approving/denying demutualization requests. - Amalgamations: - The Minister issues letters patent to effect amalgamations. Applicants must enter into an amalgamation agreement approved by the Superintendent and accompanied by a report from an Independent Actuary; the agreement must be approved by eligible shareholders and policyholders via a special resolution. Criteria used by the Minister are essentially the same as those for incorporation of FRIs. (s245 to s248 and s250 of ICA) - Special considerations if applicant involves a converted company with aggregate surplus and minority interests of Can$5 billion or more, a widely-held FRI, or an insurance holding company that controls such a converted company: the Minister may not issue letters patent unless the amalgamated company is widely held or controlled by a widely-held company/holding company. (s250(6) of ICA) - Portfolio Transfer: - A proposed transfer agreement must be available for inspection by policyholders, shareholders and members; transfers of all or substantially all assets or policies/liabilities must be approved by special resolution. - An insurer must submit an application to the Minister within three months of the passing of the special resolution. - At least 30 days before the application, an insurer must publish a notice of the proposed transfer in the Canada Gazette and in a newspaper. - A transfer of all or substantially all of the risks undertaken by an insurer or the sale of all or substantially all of an insurer’s assets is subject to Ministerial approval; less substantial portfolio transfers are approved by the Superintendent. In both cases, a report by an Independent Actuary may be required. (s254 and s257 of ICA and OSFI Transaction Instruction A No. 10) - Where the insurer is insolvent, approval from a court is required to effect a portfolio transfer either in whole or in part (s162 of WURA). - OSFI would generally consider “substantially all” to mean 75 percent or more of assets, liabilities or policies. ### Independent Actuary report - Purpose: ensure an independent party assesses the effects of the proposed transaction on policyholders’ interests; identify effects on policyholders and opine on fairness of the transaction to policyholders. - OSFI guidelines on scope and content: report should address overall assessment of effect on reasonable expectations of policyholders and whether transaction is equitable to all classes and existing generations of policyholders. (OSFI Guideline E-14: Role of the Independent Actuary). - Independence requirement: The Independent Actuary should not have done any work for the companies involved and does not work for a company that provided services to these companies, over the past two years. ### Observations and recommendations (ownership/control) - Assessment: Observed. - Comments: - The ICA sets clear ownership and control thresholds above which approval is required. - The Minister approves proposals to acquire or increase significant ownership or interest in a FRI based on essentially the same criteria as incorporation. - FRIs are not explicitly required to notify OSFI for significant decreases in ownership below predetermined control levels, though such cases may be identified through OSFI’s supervisory process. - FRIs need Ministerial approvals to transfer all or substantially all of their business; the Superintendent approves less substantial portfolio transfers. - Recommendation: - It is recommended that OSFI requires FRIs to notify OSFI of a significant decrease in the ownership by a person(s) below the pre-determined control level. ### ICP 7 — Corporate governance: legal and supervisory framework - Legal and guideline basis: - FRIs are incorporated under the ICA and are not subject to corporate governance requirements in general company law; some are subject to securities laws for issuance and listing. - The ICA requires: - directors shall manage or supervise the management of the business and affairs of the company (s165(2) of ICA); - every director and officer must act honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances (s166(1) of ICA); - directors must establish an audit committee with responsibilities in financial reporting and control, and a conduct review committee to manage conflicts of interest in related-party dealings (s165(2) of ICA). - OSFI’s Corporate Governance Guideline applies to all FRIs except branches of foreign insurers and sets expectations on board stewardship, strategy and risk appetite approval, oversight functions, and proportionality of supervisory expectations. - Board composition and committees: - ICA requirements: minimum number of directors (at least seven), residency (at least one-half resident Canadians), disqualified persons, and affiliated persons; requirements for Committees of the board (s165, 202 and 265 of ICA). - Guideline expectations: - board should collectively bring a balance of expertise, skills, experience and perspectives aligned to strategy, risk profile and operations; - financial industry and risk management expertise are key; - boards should have an evaluation process reviewed annually by the appropriate committee; - boards should put in place succession plans for board, CEO and, where appropriate, senior management including heads of oversight functions. - OSFI regards separation of Chair and CEO as critical (Corporate Governance Guideline, page 6). - Audit Committee duties (ICA): - reviewing the annual financial statements of the FRI; - evaluating and approving internal control procedures of the FRI; - meeting with the Chief Internal Auditor and/or the Appointed Actuary to discuss effectiveness of internal controls and adequacy of reserving and reporting practices; - approving audit plans (internal and external) and discussing audit results with management and the external auditor. ### Provincial supervisors: AMF and FSCO governance expectations - AMF: - Published 2009 Governance Guideline amplifying Insurance Act requirements; frames requirements as broad principles and calls for a “culture of governance” and ethics/professional conduct. - Assesses governance in supervision and has taken enforcement action for inadequate governance. - FSCO: - Has not issued its own corporate governance requirements; applies OIA provisions and looks to OSFI guidelines as the basis for expectations. - Will focus closely on governance in industry-wide conduct reviews of targeted risk areas. - Assessment: Observed. - Recommendation: - It is recommended that the FSCO set out more extensive guidance on its own expectations in relation to corporate governance and market conduct. ### ICP 8 — Risk management and internal controls - OSFI approach: - Relies on ICA powers to issue guidelines and assesses risk management in the Supervisory Framework (Quality of Risk Management component – ICP 9). - Uses supervisory reviews, quarterly meetings with senior management for larger FRIs, cross-firm work and industry seminars. - Expectations are transparent via Corporate Governance Guidelines and Supervisory Framework. - Oversight functions: - OSFI identifies seven oversight functions (financial; compliance; actuarial; risk management; internal audit; senior management; and the board). - For the CRO OSFI sets expectations on stature, authority and reporting; detailed requirements exist for the Appointed Actuary (AA). - Supervisors assess effectiveness of oversight functions through reports, meetings and on-site reviews; OSFI has occasionally required removal of holders of oversight functions via informal requests. - Risk management function: - Corporate Governance Guideline requires a senior officer (CRO or equivalent) responsible for oversight of all relevant risks; CRO should have unfettered access and reporting line to the board/Risk Committee. - For small firms, CRO role may be held by another executive; all FRIs must identify an individual accountable for risk to the board and senior management. - Compliance function: - Set out in the Supervisory Framework and OSFI E-13 Legislative Compliance Management (LCM) Guideline: set policies/procedures, monitor compliance, report to Senior Management and Board. - Actuarial function and Appointed Actuary (AA): - AA responsibilities and qualifications: required to value actuarial and other policy liabilities at year-end; AA must be a Fellow of the CIA; AA cannot be a board member; CEO/COO/chief agent of a foreign company may not be AA unless authorized in writing by OSFI (s359.1(1), 624.1(1) of ICA). - Actuarial function responsibilities include design/pricing/valuation evaluation, assessing reasonableness of provisions, reviewing models and reinsurance adequacy, analyzing stress testing and capital planning, and reporting to Senior Management and the Board. - OSFI meets with heads of actuarial functions at major L&H groups quarterly. - Concern: emphasis on actuarial function (which need not be headed by the AA) could diminish the AA’s role; OSFI oversight of AAR and peer review processes aims to identify concerns. - Internal audit: - OSFI does not require FRIs to have an internal audit function but expects oversight functions including internal audit to be established and independent from operational management (Corporate Governance Guideline, page 7). - Audit Committee has primary responsibility to oversee effectiveness of controls and agree on audit plans. - Supervisory Framework defines internal audit responsibilities and reporting to Senior Management and the Board. - Outsourcing: - OSFI’s B-10 Outsourcing Guideline: FRIs retain ultimate accountability for outsourced activities; OSFI’s supervisory powers should not be constrained by outsourcing. - For small FRIs, OSFI expects compensating controls or independent enterprise-wide oversight when specific oversight functions are not established. - Assessment: Observed. ### ICP 9 — Supervisory review and reporting (OSFI prudential supervision) - Legal basis: - ICA empowers OSFI to conduct prudential supervision through information requirements, regulatory reporting, on-site examinations and inquiries (Part XV, s664, s671, s674 and s675 of ICA). - Supervisory approach and scope: - OSFI supervises on a consolidated basis and assesses material entities domestically and internationally. - Supervision is principles-based and proportionate to nature, scale, complexity and risk profile. - OSFI developed a risk-based Supervisory Framework to facilitate timely intervention. - Supervisory Framework methodology requires supervisors to: a) Understand a FRI’s environment, industry and business profile to ascertain its Significant Activities and the materiality/importance of each activity (both qualitative and quantitative factors). b) Assess the level of risk inherent in these activities and the quality of risk management to determine the Net Risk and the Direction of Risk for each activity; quality of risk management considers operational management and independent oversight functions. c) Determine a FRI’s Overall Net Risk rating as the weighted aggregation of Significant Activities. d) Decide on the Composite Risk Rating (CRR), combining Overall Net Risk with explicit consideration of adequacy of earnings, liquidity and capital. - CRR statistics: - As at end-March 2012, OSFI had assigned a low or moderate CRR to 92 percent of all rated FRFIs, while the remaining 8 percent were rated as either above average or high risk. - March 2011: 90 percent low or moderate and 10 percent above average or high risk. - Use of oversight functions work: - Methodology requires assessment of effectiveness of oversight functions to determine the extent OSFI can rely on their work. - OSFI relies on FRFIs’ external auditors for fairness of financial statements but notes merits for independent assessment (e.g., sampling verification). - Supervisory process: a) Planning: supervisory strategy prepared annually outlining three-year work with fuller upcoming year plan; priorities set by net risk assessment and updated for emerging issues. b) Execution and updating risk profiles: - Monitoring: regular review of information on FRI and industry; may require specific stress tests. - Reviews: more extensive work such as business process reviews; scope and location determined in planning. - Updating risk profiles: relationship manager (RM) updates assessments and maintains Section Notes, Risk Assessment Document and Risk Matrix. c) Reporting and intervention: - Supervisory Letter: primary written communication by RM summarizing key findings/recommendations and indicating current CRR (issued annually or as appropriate). - Interim Letters: issued during the year to provide timely feedback. - Findings/recommendations discussed before letters issued; responses tracked in a Follow-up Document by RM. - Supervisory powers and reporting: - OSFI can require regular and ad-hoc information; details and frequency of financial and non-financial reporting are published on OSFI’s website; FRIs are subject to penalties for late or erroneous filings. - FRIs must submit a report by the Conduct Review Committee identifying transactions with related parties that may materially affect stability or solvency (s204, s331(4) and s664 to s669 and s671 of ICA). - FRIs required to report off-balance sheet transactions and exposures including securities lending and derivatives; Outsourcing Guideline sets reporting on outsourced activities. - OSFI is required to conduct an examination or risk assessment of FRIs/branches (except fraternal benefit societies) at least once every three years (section 674 of ICA). - Intervention ratings and staging: - Intervention ratings: normal (stage 0); early warning (stage 1); risk to financial viability or solvency (stage 2); future financial viability in serious doubt (stage 3); non-viable/insolvency imminent (stage 4). - As at March 31, 2012, there were 38 staged institutions; majority in stage 1. - OSFI’s Guides to Intervention summarizes supervisory measures and escalation circumstances (ICP 10). - Review of returns and group supervision: - OSFI chairs the CCIR Forms Committee to coordinate information requirements with provincial supervisors; Committee meets quarterly. - OSFI inspects regulated entities and heads of group domestically and overseas; dedicated supervisory teams exist for three large conglomerate insurance groups (ICP 23). - Quality assurance and internal audit of OSFI supervision: - Extensive supervisory guidance, templates, and line-management review support quality and consistency. - OSFI’s planning includes resourcing determination; supervisory staff supported by specialists (credit, market, actuarial, corporate governance) and IT systems including Tri-Agency Database System (shared with BoC and CDIC). - Regulatory returns submitted via Automated Data Transfer with validation rules; OSFI Business Intelligence data warehouse has data validation routines. - OSFI’s supervisory activities are subject to internal auditing. In 2012 Internal Audit examined OSFI’s supervision of L&H conglomerate groups and, in response, OSFI Management: - initiated an internal training program in 2012 on Supervisory Framework application for conglomerate teams; - strengthened sign-offs on supervisory documentation; - formalized processes to ensure appropriate oversight. - Internal Audit planned to review progress of these measures in August 2013. ### Provincial market conduct supervision (CoB) — AMF and FSCO - CCIR risk-based approach: - CCIR defines risk-based market conduct regulation and each provincial supervisor has discretion to implement it; FSCO adopted CCIR approach; AMF used risk-based approach in framework development. - AMF supervisory framework: - AMF empowered to require regulatory information and conduct on-site examinations (s9 & s10 of AMF Act and Chapter V, s10 & s317 of IA). - Adopted a risk-based Supervisory Framework in March 2009, updated at least every three years; last revised in October 2011. - Three phases: a) Phase A—Risk profile: identify Significant Activities; analyze inherent risks and quality of risk management and financial condition. b) Phase B—Supervisory plan: three-year plan allocating resources; RM assesses reliance on third parties (external auditor, appointed actuary, other supervisors). c) Phase C—Supervision activities: uses CCH TeamMate to record off-site/on-site activities; standardized supervisory programs; follow-up via TeamCentral. - AMF examines outsourcing strategies/policies and inspects service providers (Outsourcing Risk Management Guideline). - CAD authorized by AMF to inspect small-scale P&C intermediaries and claims adjustment firms (24 representatives or less) per AMF-approved inspection program. - FSCO: - FSCO can require insurers/intermediaries to provide information and conduct on-site inspections (s30 to s32 and s102 of OIA). - FSCO has no explicit authority to supervise insurance groups/non-regulated entities or service providers for outsourced activities but may use indirect means (outsourcing agreements). - FSCO’s risk-based CoB supervision supported by documented procedures and performance standards; uses industry-wide assessment questionnaires and targeted field examinations. - Assessment: Observed. *Source: _cr1472 - 3. An acquisition of control in fact of a FRI by acquiring additional shares ( s407.1(1) of ICA).* ### conclusion of reviews. It also relies on other supervisors and industry associations for ### _cr1472 - conclusion of reviews. It also relies on other supervisors and industry associations for ### Supervisory approaches and market conduct (FSCO, OSFI, AMF) - FSCO: supervisory activities typically triggered by industry intelligence, complaints, or reports of contraventions; adopts risk-based approach to scope, nature, form and frequency of information requests; constrained by limited resources and large number of insurers/intermediaries. - FSCO market conduct work types: - surveys and self-assessment questionnaires (e.g., CCIR Principles of Managing Conflict of Interest); - on-site reviews to validate questionnaire responses or assess controls (e.g., supervision of agents selling segregated funds); - on-site reviews of six insurers dominant in the title insurance market. - For thematic reviews (claims handling, antifraud, approved premium rates) FSCO sets a multi-year program and in 2012: - FSCO conducted a total of 8 examinations of insurers, six of which were related to anti-fraud measures in 14 insurers. - FSCO plans to conduct assurance examinations on a four-year cycle. - OSFI: risk-based Supervisory Framework; collects extensive regulatory, statistical, capital information at consolidated and solo FRI levels, but: - some information less granular on a non-consolidated basis; - no standardized reporting of intra-group transactions; - scope of related party transactions reported by FRIs’ Conduct Committees is narrower than intra-group transactions, with broad exemptions including reinsurance transactions (ICP 23). - AMF’s Supervisory Framework closely aligned with international best practices; CAD authorized to conduct inspections of small-scale P&C intermediaries and claims adjustment firms, subject to AMF oversight. - Recommendation: enhance and standardize regulatory reporting of intra-group transactions with a clear definition; review detail of OSFI reporting requirements for solo FRIs; equip FSCO with adequate supervisory resources for Ontario marketplace. *Assessment: Largely observed.* ### ICP 10 Preventive and Corrective Measures - Legal and administrative measures available: - OSFI: wide range including moral suasion; Supervisory Letters; meetings; increased monitoring; enhanced supervisory reviews; directing specialists; requiring contingency plans. - OSFI Guides to Intervention for Federally Regulated Life and P&C Companies set intervention stages and progressive escalation. - OSFI empowered interventions (selected statutory powers): execute prudential agreement (s675.1 of ICA), amend/revoke authorization (s59 and s586), issue direction of compliance (s676), require external auditor to enlarge audit scope (s348), order amendments re security interests (s470), order increase capital/liquidity or assets maintained in Canada (s515, s608, s609). - AMF: intervention stages 1–5; Stage 3 “Watch Condition” may demand additional information, independent actuarial valuation, or order external audit work. - FSCO: tools include cease and desist orders, compliance orders for unfair/deceptive acts; failure to comply may lead to enforcement action. - OSFI may apply for court orders to compel compliance (s678 of ICA). - Recommendation: ensure timely staging and maintain supervisory pressure to achieve remediation over credible, situation-specific timelines. *Assessment: Observed.* ### ICP 11 Enforcement - Ministerial enforcement powers include limits on assets of converted company (s59.1), direction of disposition of shares (s432), public interest veto where Superintendent control >16 days (s679). - OSFI enforcement powers include: repatriation of management functions (s528), removal of directors/senior officers (s678.2), revoke auditor appointment (s340), order divestment (s510), revoke/suspend/amend approvals (s1016.4), direct transfer/reinsurance (s678.5, s678.6), assume control of assets/FRI, request winding-up under WURA (s684.1), apply for court orders restraining breaches (s1031). - Criminal and administrative penalties under ICA: - Natural person summary conviction: fine up to Can$100,000 or imprisonment up to 12 months, or both; indictment conviction: fine up to Can$1,000,000 or imprisonment up to five years, or both. - Entity summary conviction: fine up to Can$500,000; indictment conviction: fine up to Can$5,000,000. - Court may impose additional fine equal to three times estimated monetary benefits (s1023–s1027). - Administrative Monetary Penalties under OSFI Act (maximums): - Natural person: Can$10,000 (minor), Can$50,000 (serious), Can$100,000 (very serious). - Entity: Can$25,000 (minor), Can$100,000 (serious), Can$500,000 (very serious). - OSFI rarely uses enforcement powers, preferring moral suasion; has not removed any Responsible Person in recent practice. - Assessment: Observed. Comments note adequacy of legal authority across OSFI, AMF, FSCO; OSFI’s staging process significant for influencing FRI behaviour. *Assessment: Observed.* ### ICP 12 Winding-up and Exit from the Market - ICA and WURA provide exit mechanisms including: - “simple liquidation” at request of a solvent company; - discontinuance via assumption reassurance to transfer risks to another insurer. - WURA governs insolvency; winding-up can be initiated by insurer, creditor or Attorney General at Superintendent’s request; court may wind-up where insurer insolvent and just/equitable. - OSFI expects to exercise powers to take control of company/assets ahead of seeking winding-up to secure assets. - Priority of claims: policyholders rank ahead of general unsecured creditors; segregated fund policyholders rank ahead of general creditors in respect of guaranteed amounts over non-segregated fund assets (post-2012 change). - Compensation organizations: - Assuris: all L&H companies must be members; protects minimum of 85 percent of all benefits; offers 100 percent protection for smaller sums such as Can$200,000 for life insurance; holds minimum fund of Can$100 million (Can$115 million at end-2012); capacity to levy assessments; may provide financial assistance pre-winding-up. - PACICC: P&C insurers generally required by provincial regulators to be members; maximum recoveries: Can$300,000 for personal property, $250,000 for other lines; unearned premiums refunded to maximum of Can$700 per policy. - Recommendations: - Consider designating PACICC under ICA like Assuris to promote cooperation and early information exchange. - Continue testing failure-handling procedures through simulation exercises and develop recovery planning for large L&H companies. *Assessment: Observed.* ### ICP 13 Reinsurance and Other Forms of Risk Transfer - OSFI coverage: - Reinsurance obligations are set out in Guideline Sound Reinsurance Practices and Procedures (B-3). - Ceding companies must have board-approved Reinsurance Risk Management Policy (RRMP); systems/controls to oversee reinsurance; provide RRMP and full description of reinsurance arrangements to OSFI on request; inform OSFI of material reinsurance issues promptly. - Distinctions: - “Registered” reinsurers: FRIs, including Canadian branches, and provincial reinsurers approved by OSFI. - “Unregistered” reinsurers: all others (including non-Canadian business of global reinsurers and Lloyd’s). - Collateral requirements: unregistered reinsurers require collateral as condition of taking credit for reinsurance in regulatory calculations; collateral guidance includes Reinsurance Security Agreements (RSA Guidance) and Letters of Credit. - Related-party reinsurance: OSFI approval required before reinsuring with an unregistered related party; collateral applies. - Contractual expectations: comprehensive, written, binding reinsurance contracts prior to effective date; where only interim documents exist, OSFI sets mitigation expectations. - OSFI requires FRIs to undertake due diligence on reinsurers rather than rely solely on third parties. - Liquidity: OSFI examines ceding company liquidity risk; example response required increased collateral where unpaid reinsurance recoverables exceeded 164 percent of capital. - Capital market risk transfers/SPEs: reporting required in annual regulatory return for P&C FRIs; OSFI may permit capital credit where collateral is provided in Canada or arrangement is recognized by an OECD regulator. - Recommendations: - Add material on importance of FRIs assessing and managing liquidity risks arising from reinsurance cessions when revising guidelines. - Enhance process for evaluating supervisory regimes applying to unregistered foreign reinsurers. *Assessment: Largely Observed.* ### ICP 14 Valuation - Valuation framework: - OSFI works with accounting and actuarial standard setters; regulatory requirements closely based on IFRS adopted from 2011 for all FRIs. - IFRS requires use of Actuarial Standards Board (ASB) Standards of Practice for insurance contract liabilities (IFRS4 interim). - ICA requires financial statements in accordance with GAAP and valuation of actuarial and policy liabilities by appointed actuary (AA) per ASB (s331(4), s365(1)). - Actuarial methods: - L&H: Canadian Asset Liability Method (CALM) projecting prospective future cash flows of policies and supporting assets, using nine prescribed interest rate scenarios (least favorable outcome used); margins for adverse deviations applied to future investment income on fixed income assets. - AA responsible for selection of realistic best estimate assumptions and margins for adverse deviations; peer review and annual Appointed Actuary Report (AAR) required (s667(2) of ICA). - Oversight and challenge: - ASB and Canadian Institute of Actuaries (CIA) oversight; OSFI E-15 Guideline on Appointed Actuary duties; peer review submissions to OSFI; OSFI Actuarial Division supervisory work including cross-firm examinations; auditors (CPAB oversight). - Issues noted: - Shortcomings in actuarial work: mispricing due to underestimation of policyholder behavior; discretionary flexibility exploited in rare cases; concerns over valuation practices for non-fixed interest assets and reinvestment assumptions. - CALM does not explicitly require actuaries to consider credit rating migration; treatment of spreads addressed by ASB review. - Recommendations: - Strengthen valuation standards on credit spreads and non-fixed income investments; support ASB work on reinvestment assumptions. *Assessment: Largely Observed.* ### ICP 15 Investment - Legislative and guideline framework: - ICA prohibits certain acquisitions except permitted entities, regulated subsidiaries, limited period holdings, or Specialized Financing Regulations exceptions. - Investment limits (real estate, equities, aggregate) by institution type are set with exemptions for largest companies (table provided in source). - OSFI guidelines: Large Exposure Limits Guideline (L&H: exposure to any entity ≤ 25 percent of total capital); Investment Concentration Limit Guideline (P&C: investments in any entity/group ≤ 5 percent of consolidated assets). - Prudent Person Guideline: expectations on investment/lending policies, due diligence, liquidity considerations, diversification, limits on geographic access, derivative use (Derivatives Best Practices Guideline). - Gaps and observations: - No explicit requirement that FRI invest only in assets whose risks it can properly assess and manage (page 2 of Prudent Person Approach guideline). - No explicit qualitative requirements for complex/less transparent investments beyond general governance and risk management. - Capital adequacy guidelines (MCCSR and MCT) require capital against asset and derivative risks. - Recommendation: - OSFI should review and strengthen the Prudent Person Approach Guideline to add explicit requirements that FRIs invest only in assets whose risks they can properly assess and manage and guidance on complex or less transparent instruments. *Assessment: Largely observed.* ### ICP 16 Enterprise Risk Management for Solvency Purposes (ERM and ORSA) - OSFI guidance comprises: Corporate Governance Guideline, Stress Testing Guideline, Internal Target Capital Guideline, and draft Own Risk and Solvency Assessment (ORSA) Guideline scheduled to take effect 1 January 2014. - DCAT requirements (ASB Section 2500) require annual Dynamic Capital Adequacy Testing by AA; OSFI requires DCAT reports filed under ICA authority. - Current frameworks require FRIs to: - identify significant risks and have policies/controls (Corporate Governance Guideline); - use stress testing addressing institution-wide risks and interactions (Stress Testing Guideline); - establish an Internal Target Capital Ratio reflecting capital needed with high confidence (Internal Target Guideline). - Draft ORSA Guideline will: - require comprehensive identification and assessment of all reasonably foreseeable material risks (insurance, market, credit, operational, regulatory compliance, strategic, plus examples of reputation and liquidity); - require documented process relating capital to current and foreseeable risks and determination whether explicit capital amounts or types should be held. - Recommendation: - OSFI should finalise the draft ORSA guideline and set expectations for early implementation work promptly. *Assessment: Largely observed.* ### ICP 17 Capital Adequacy - Capital framework: - ICA requires adequate capital; OSFI guidelines specify MCCSR (Life) and MCT (P&C) (s515(1) of ICA). - Minimum requirements: P&C must maintain capital at 100 percent of requirement; L&H minimum 120 percent. - Supervisory Target: P&C currently set at 150 percent of minimum requirement; L&H Supervisory Target set above minimum to capture risks not explicitly included. - Internal Target: FRIs must establish Internal Target Capital Ratio reviewed by OSFI and expected to exceed Supervisory Target significantly. - Consolidation and solo scope: - OSFI applies capital requirements principally on a consolidated basis, including foreign insurance operations. - Variations for non-operating L&H holding companies under Guideline A2; holding companies unregulated are not formally subject to MCCSR/MCT on consolidated basis—OSFI relies on supervisory relationships and letters of undertaking. - Solo legal entity capital framework less developed; OSFI developing leverage-based standard for material solo FRIs. - Model use and calibration: - Internal models permitted for segregated fund capital and earthquake risk subject to OSFI approval (e.g., earthquake based on 1-in-500-year event). - Overall target confidence roughly a CTE of 99 percent; conservatism applied via Supervisory and Internal Targets. - Recommendations: - OSFI should, unless full powers over holding companies obtained, set out details of its approach to groups headed by holding companies. - Consider aligning requirements for regulated holding companies more closely to those for regulated operating companies. - Finalise proposed standard for capital framework application at solo legal entity level, publish full approach, and establish policy/review reporting requirements on intra-group transactions for capital management (e.g., capital transferability). *Assessment: Largely observed.* ### ICP 18 Intermediaries - Licensing and harmonization: - Intermediaries licensed by provincial supervisor where they operate; Agreement on Internal Trade and CCIR/CISRO have harmonized standards and a reliance model (effective July 4, 2006). - MGAs: - Managing General Agents (MGAs) dominant distribution channel; MGAs engaging in agent activities must be licensed; diversity in insurer practices for outsourcing/monitoring MGAs. - CCIR concluded no specific consumer protection goal for MGA-specific licensing but supervisors need better understanding of MGAs and insurers must have effective systems to manage MGA-agent relationships. - Québec (AMF) specifics: - Two categories: Representative’s certificate (annual renewable) and registration of firm/independent partnership/independent representative. - As of November 2012: 30,839 certified representatives; 14 independent partnerships; 3,135 independent representatives; 3,632 firms. - Training, examinations, probationary periods, mandatory continuing education; disclosure and conduct rules; intermediaries handling client money must use separate account; contribution to Financial Services Compensation Fund. - AMF off-site monitoring based on annual maintenance/renewal forms, third-party notifications, and risk-based inspection program; cyber-surveillance team established. - Ontario (FSCO/RIBO) specifics: - FSCO and RIBO licensing: as of June 8, 2012 FSCO regulated 46,222 insurance agents; 4,632 corporate insurance agencies; 1,657 insurance adjusters. As of July 31, 2012 RIBO regulated 17,526 individuals and 1,204 active businesses. - Licensing requires examinations, police background checks, insurer sponsoring certificate for agent applications; Licensing Link online system used. - FSCO publishes lists of licensed intermediaries and disciplinary actions; RIBO publishes disciplinary notifications. - Insurer obligation to screen/monitor agents and report unsuitable agents; FSCO conducts periodic audits and RIBO conducts on-site inspections every 3–5 years. - Agents handling premiums (except life) deemed to hold monies in trust; errors & omissions insurance required for life agents; RIBO Professional Indemnification Fund for broker insolvency. - Observations and recommendations: - Provincial supervisors collaborating on harmonization; differences remain (use of SROs, supervisory approach). - FSCO more reactive due to resource constraints while AMF conducts routine risk-based inspections. - Authorities advised to: maintain harmonization momentum; consider proportionate governance expectations tailored for intermediaries focusing on fair treatment of policyholders; implement CCIR recommendations on MGAs across provinces; ensure FSCO has adequate resources. *Assessment: Largely observed.* ### ICP 19 Conduct of Business (CoB) - National coordination: - CCIR coordinates harmonization of CoB regimes and developed risk-based supervision approach; CCIR/CISRO principles on intermediaries’ obligations: priority of client interest, disclosure of (potential) conflict, and product suitability. - JFFMR reviewed product design/marketing processes for insurers and mutual funds to consider consumer interests. - Complaint Reporting System (web-based) by FSCO and AMF extended to all provinces except British Columbia; biannual regulatory reports accessible to supervisors. - Québec (AMF) CoB highlights: - IA requires insurers to act with honesty and loyalty; DA requires intermediaries to act with due skill, care and diligence. - Advertising and disclosure rules, representative qualifications, product suitability, complaint handling and reporting; May 2013 Commercial Practices Guideline sets supervisory expectations for fair treatment of consumers. - Privacy protections under Act Respecting the Protection of Personal Information in the Private Sector. - Ontario (FSCO/RIBO) CoB highlights: - OIA, RIB Act set CoB requirements: education, suitability, professional conduct, disclosure; prohibitions on unfair/deceptive acts. - FSCO lacks explicit requirement for insurers to take interests of different customer types into account in product development. - FSCO created Market Intelligence and Analysis Unit (2012) and Market Intelligence project on life insurance suitability. - Complaint/dispute mechanisms: insurers must have complaints officer and refer unresolved complaints to independent third parties; FSCO Dispute Resolution Services arbitration used; backlog of mediation files addressed by private sector mediation engagement and process changes. - Privacy governed by Personal Information Protection and Electronic Documents Act; Office of the Privacy Commissioner enforces. - Gaps and recommendations: - FSCO and RIBO limited ability to consistently monitor point of sale materials due to market scale and resources. - Authorities advised to: continue CCIR/JFFMR initiatives for CoB consistency; empower FSCO to issue enforceable rules on product development/promotion and require needs analysis and policy servicing obligations; review FSCO supervisory resource adequacy. *Assessment: Partly observed.* ### ICP 20 Public Disclosure - Disclosure framework: - FRIs subject to IFRS-based financial reporting and OSFI disclosure guidelines (D-1A, D-1B, D-9, E-16), plus ASB Standards of Practice for actuarial disclosures. - OSFI required all FRIs to apply IFRS (letter April 2008), and ICA requires directors present audited financial statements and reports to shareholders/policyholders (s331, s349). - OSFI posts quarterly consolidated financial data on all FRIs on its website. - Gap: Disclosure applies in full at consolidated level; solo legal entity (individual FRI) disclosures are prepared and presented to annual meetings and filed with OSFI but are not required to be made available to policyholders or market participants routinely. - Recommendations: - Authorities should ensure FRIs publish information on financial position of individual legal entities at solo level in formats available to policyholders and market participants, including capital information; extend application of OSFI guidelines to cover FRIs at individual as well as consolidated basis. - Maintain monitoring of IFRS developments to ensure regulatory/disclosure alignment. *Assessment: Partly observed.* ### ICP 21 Countering Fraud in Insurance - Legal and regulatory framework: - Criminal offences for fraud and obstruction of justice under federal Criminal Code (section 380); provincial insurance legislation includes regulatory provisions and sanctions for fraud-like misconduct. - Supervisory practices: - OSFI treats fraud under operational risk in supervisory framework; fraud vulnerabilities/controls assessed in significant activity reviews; Operational Risk Division monitors trends. - FSCO prioritizes insurance fraud, especially motor fraud in Ontario; in 2012, 6 of 8 FSCO on-site compliance examinations related to combating fraud measures across 14 companies (46 percent of the automobile market). - High incidence of car insurance fraud in Ontario estimated at between 8 and 18 percent of annual claims costs. - Cooperation among OSFI, FSCO, law enforcement, and industry; Ontario Anti-Fraud Task Force produced recommendations, several implemented in regulatory changes effective 1 June 2013. - AMF actions: - Issued Financial Crime Risk Management Guideline (June 2012) for insurers; has Intelligence and Analysis Centre; investigative support unit. - Recommendations: - AMF and FSCO should consider setting out clearer expectations for intermediaries regarding fraud controls. *Assessment: Observed.* ### ICP 22 Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - Legal framework: - Federal PCMLTFA and regulations apply to L&H insurers and intermediaries (directly if licensed, indirectly if acting as agents), and to branches of foreign L&H insurers. - FINTRAC administers and enforces PCMLTFA for insurers. - Supervisory roles: - OSFI, AMF, FSCO are not designated competent authorities for AML/CFT but interpret mandates to oversee regulated entities’ AML/CFT risk management; issue guidance and incorporate AML/CFT compliance into risk-based supervision. - OSFI specifics: - Guideline B-8 on Deterring and Detecting Money Laundering and Terrorist Financing sets board/senior management oversight, appointment of responsible individual, risk assessment, written policies/procedures, training, assessment/testing; Anti-Money Laundering and Compliance Division leads AML/CFT assessment program. - FRIs categorized into risk groups; highest risk FRIs reviewed approximately every three to four years; others every four to five years; low/minimal risk subject to desk-based examination by FINTRAC. - OSFI-FINTRAC MOU (since 2004) allows information exchange; OSFI passes AML/CFT assessment information to FINTRAC; most direct exchanges with foreign supervisors handled via FINTRAC. - AMF specifics: - MoU with FINTRAC (June 2006); FINTRAC undertakes much supervisory work to avoid duplication; AMF Financial Crime Risk Management guidance issued June 2012. - FSCO specifics: - Applies a risk-based supervisory approach; reminds companies of PCMLTFA obligations; communicates with FINTRAC. - Recommendation: - AMF and FSCO should consider setting out expectations for intermediaries in more detail based on supervisory experience. *Assessment: Observed.* _Italic: Source — IMF FSAP chapter content provided in the supplied PDF excerpt._ ### Part XVII at the time of assessment. Part XVII does not cover the P&C industry such that ### _cr1472 - Part XVII at the time of assessment. Part XVII does not cover the P&C industry such that ### Group identification and scope - OSFI identified 41 insurance groups at the request of the assessors, based on OSFI’s definition of a group as “where there is more than one FRFI with the same ultimate parent”. - In practice OSFI monitors both regulated and non-regulated entities within the group if they are material; downstream non-regulated entities are monitored indirectly. - OSFI monitors the overall consolidated group of the ultimate parent (including non-regulated entities) in the quarterly monitoring process. - Two of the large insurance groups are headed by non-operating insurance companies that do not have policyholders but are federally regulated by OSFI. - Another 17 insurance groups are headed by unregulated holding companies. - Another six are sub-groups, either as part of larger conglomerate groups supervised by OSFI or by other supervisors. - OSFI identifies group scope through supervisory activities, supplemented by publicly available information and supervisory coordination (e.g., supervisory colleges), and continuously updates scope for restructurings, acquisitions or changes in significant activities. - OSFI uses internal reporting, organizational charts and interviews with board and senior management to understand group structures; it may obtain undertakings from foreign insurance companies for access to foreign operations information. ### Group-wide supervision approaches - OSFI adopts different approaches to group-wide supervision depending on legal authority and group head: - a) Where headed by a FRHOG, OSFI supervises the group on a consolidated basis and directly supervises FRFIs within the group. Two large insurance groups are regulated using this approach; a distinct capital regulation approach applies under OSFI Guideline A2 for regulated insurance holding companies and non-operating life companies. - b) Where headed by a non-regulated entity, OSFI supervises indirectly through letters of undertaking with the regulated FRI parent, which “may” contain requirements such as: - Filing of financial and corporate information that are publicly available or filed with another supervisor; - Notification of any change in the directors or external auditors; - Examination and inquiry into its business and affairs; - Extend the audit of any financial statements at the FRI’s expense; and - Submission of the valuation of actuarial and other policy liabilities by an OSFI approved actuary on a periodic basis. - Five insurance groups including one large L&H group are supervised on the basis of letters of undertaking. - For foreign branches, OSFI’s Supervisory Framework is applied solely to their Canadian operations, including assessment of parental support strength; OSFI monitors head offices and affiliated entities via branch-provided information, public sources and supervisory cooperation. - At the time of assessment, OSFI has executed supervisory contract/undertaking with five out of 17 of the groups headed by unregulated holding companies; terms are negotiated case-by-case and deemed confidential. - Some groups are subject to OSFI’s consolidated supervision at a parent bank level (financial conglomerate), but consolidated supervision of such groups does not include a requirement to report to OSFI on risk concentrations and significant intra-group transactions and exposures at the group level. - The ICA empowers OSFI to obtain information from non-regulated affiliated entities to determine compliance and financial soundness (s671 of ICA), but OSFI has no general legal authority over non-regulated entities beyond s671 and uses indirect means (e.g., requiring increased capital in a FRFI). ### Reporting, intra-group transactions and market conduct - There is no standardized reporting requirement on risk concentration and intra-group transactions and exposures. - The ICA prohibits related party transactions but defines related parties narrowly with many exemptions (s521 to s528, s533 and s534 of ICA). - Transactions with a related party, a wholly owned subsidiary and any party outside the group that exceeds 10 percent of a FRI’s assets during a rolling 12 month period must be approved by OSFI. - Board approval is required for aggregate exposures to related parties that exceed two percent of a FRI’s regulatory capital (s528.1 to s528.3 and s530 of ICA). - AMF supervises groups for which it is home supervisor and the CoB of insurers doing business in Québec that are part of a group supervised by another supervisor; AMF’s Sound Commercial Practices Guideline (June 2013) articulates expectations on group-wide market conduct (ICP 19). - FSCO supervises insurers’ CoB on a legal entity basis and generally monitors group conduct via licensing and statutory filings but has no explicit group-wide market conduct requirement; FSCO’s monitoring is risk-based and reactive due to resource constraints. ### Assessment of group-wide supervision (summary) - Assessment: Partly observed. - Key observations: - The ICA, IA and OIA do not have an explicit definition for insurance group nor the scope of an insurance group for group-wide supervision, but supervisors address elements within their legal authority. - OSFI applies consolidated supervision for L&H FRIs headed by regulated entities; holding companies can be established under the ICA though none exist. - For groups headed by non-regulated entities, OSFI applies indirect supervision via unpublished contracts or letters of undertaking on a case-by-case basis; only five of 17 groups have such undertakings with varying terms. - The A2 Guideline (Capital Regime for Regulated Insurance Holding Companies and Non-Operating Life Companies) does not apply to holding companies regulated indirectly via contract or undertaking. - OSFI’s indirect approach can result in differing supervisory outcomes across groups and may be ineffective where negotiation of undertakings is protracted or the entity is reluctant to provide information. - AMF extended Sound Commercial Practices Guidelines to cover financial groups and exercises consolidated supervision; FSCO has not established group-wide market conduct requirements. - Recommendation: - Authorities should formulate and implement a clear and consistent regulatory regime for group-wide supervision under the relevant insurance laws covering scope (including material non-regulated entities), and prudential and market conduct requirements at the group level. - Authorities should empower supervisors to take remedial and enforcement measures at the holding company level, in line with emerging international best practices. ### ICP 24 — Macroprudential surveillance and insurance supervision - OSFI’s approach components: - Maintain capacity including a dedicated team for market-wide information gathering and analysis. - Internal process to identify, prioritise and act on emerging risks via the Emerging Risks Committee (ERC). - Link market-wide analysis to supervisory work on individual FRIs and feed supervisory insights back into market-wide process. - Interaction between individual-FRI supervisors and risk specialists managed within the supervision unit. - Conduct regular market-wide stress tests. - Develop a framework for identification of systemically important individual FRIs, drawing on bank methodology. - ERC focuses on vulnerabilities such as earthquake exposure and exposure of some L&H FRIs to the low interest rate environment. - Risks, Surveillance and Analytics Division manages ERC, participates in quarterly meetings with large insurance groups, coordinates input from Assuris and provincial regulators via CCIR, and coordinates market-wide stress tests. - ERC meets at least monthly; chaired by head of Specialist Support Group. - Market-wide actions informed supervisory reviews and DCAT design; OSFI updating requirements on managing earthquake risk and reviewing catastrophe risk following escalating weather-related claims. - OSFI conducts quarterly reviews of L&H and P&C sectors integrating frontline supervisory perspectives with cross-sector specialists; recent topics include Ontario auto insurance rate decisions. - Risk Assessment Document (RAD) sets out environmental factors for FRIs; examples include low interest rate environment, volatility in global financial markets and credit risk in commercial real estate. - OSFI publishes aggregated market data quarterly and annually; disclosure process requires industry consultation and approval by Assistant Superintendent, Regulation and the Minister (s673(1) of ICA, s22(3) of OSFI Act). - OSFI is developing identification and regulation approach for systemically important insurance companies, drawing on banks’ methodology; it currently allocates more resources and intensive supervision to large groups though FRIs are not formally categorized by systemic importance. - Assessment: Observed. - Priorities suggested for OSFI: - (a) Ensure access to data sources and develop international dimension of macroprudential work through liaison with other regulators. - (b) Consider whether sector-based approach is complemented by consideration of bank–insurer linkages. - (c) Extend consideration of risks from system-wide market conduct issues, including reputational risks from non-compliance and conflicts between prudential and market conduct regulation. ### ICP 25 — Supervisory cooperation and coordination - Domestic arrangements: documented in Section C; information exchange amongst federal and provincial supervisors described in ICP 3. - International cooperation: OSFI is a signatory to the IAIS Multilateral MoU and has bilateral MoUs with over 30 foreign regulators. - OSFI hosts and participates in supervisory colleges, including crisis management panels; colleges are tailored to the nature, scale and complexity of the group. - MoUs address information flows, communication expectations (not explicitly with head of group), periodic visits/meetings, and arrangements for sharing information to facilitate supervision. - OSFI is generally the group-wide supervisor (GWS) for large Canadian internationally-active life insurers and initiates supervisory colleges; for P&C FRIs OSFI is rarely the GWS and has not hosted any P&C supervisory colleges to date. - OSFI-led colleges involve presentations by company Chair, senior executives and external auditor; information exchanged is highly confidential with stringent safeguards. - After each OSFI-led college and quarterly monitoring, conference calls with key supervisors are held to share findings and coordinate actions. - Assessment: Observed. - Comment: OSFI has coordination arrangements domestically (FISC, CCIR) and internationally (supervisory colleges) that facilitate effective supervision. ### ICP 26 — Cross-border cooperation and crisis management - Major international operations of Canadian insurance companies: large L&H groups in USA, Asia and Europe; P&C foreign operations more limited but significant participation by branches of foreign companies in Canada. - OSFI’s preparedness for cross-border crises is being developed through: - Ensuring availability of effective intervention tools and procedures (ICP10 and ICP12). - Developing supervisory cooperation mechanisms, including supervisory colleges, to include crisis management preparation. - Working with major L&H companies on recovery plans addressing international operations. - Legal frameworks and arrangements: - OSFI has extensive powers under the OSFI Act and the ICA for interventions and arrangements with compensation schemes. - WURA provides powers for liquidators to act on foreign assets of a Canadian insurance company and assets of a branch of a foreign insurance company in Canada. - Crisis preparedness status: - A crisis management exercise simulating stress at a major L&H group was carried out but international dimensions remain untested. - OSFI’s network of information-sharing MoUs and relationships with foreign supervisors covers supervisors where coordination would be highest priority. - Recovery and contingency planning: - OSFI requested recovery plans from three largest L&H companies; plans were received in 2011 and 2012 but not yet shared with core supervisory colleges pending further development. - OSFI does not have specific requirements for all FRIs to maintain contingency plans; current recovery planning work is confined to large L&H groups. - Existing DCAT and internal target guidance require FRIs to evaluate potential crises, providing OSFI supervisors insight into preparedness. - Assessment: Observed. - Recommendations for OSFI: - (a) Continue crisis management testing and simulations, extending to international groups. - (b) Consider potential needs of supervisors in jurisdictions where the Canadian company is material and anticipate these needs. - (c) Review need to supplement stress testing requirements by explicitly requiring FRIs to establish and maintain contingency plans and procedures for going- and gone-concern situations as set out in the ICP. *Source: _cr1472 - Part XVII at the time of assessment. Part XVII does not cover the P&C industry such that* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1472.pdf_