1) State a responsibility of federal insurance regulatory authorities.
- Consumer protection is the heart of all government regulation.
- The focus of regulation is 1) solvency 2) market conduct 3) affordability of insurance 4) availability.
- Affordability and availability are of most concern for mandated products.
2) What government department or regulatory body is responsible for insurance in your province?
- Provincial insurance legislation is mainly concerned with market conduct issues, policy wordings, including statutory conditions, affordability and availability.
3) What major issues are addressed by provincial insurance legislation?
- Due to federal and provincial mix of legislation, rules may impose conflicting requirements or overlapping requirements causing confusion and added costs.
- Provinces have so many individual needs; the luxury of uniform legislation has not been feasible.
4) List FIVE (5) possible results of government insurance reform legislation.
- 1) Informed and empowered consumers;
- 2) Timely and fair claims management;
- 3) Meaningful choice for insurance companies;
- 4) Low system costs;
- 5) Market stability
5) When regulatory change is considered, what THREE (3) things may be affected?
- 1) Significant activities: like the lines of business written and the risks inherent to such business.
- 2) Business function: such as u/w and claims settlement is reviewed to determine whether risks are mitigated.
- 3) Business processes: IT must be reviewed in the context of the particular business.
6) List FIVE (5) developments that could mean reforms will not produce required savings in the early phases.
7) What are TWO (2) ways reforms can affect an insurance company’s actuarial projects?
8) What is the Office of the Superintendent of Financial Institutions (OFSI)?
- OSFI is the primary regulator of federally chartered Canadian and foreign P&C companies.
- Its mission is to protect the interests of depositors, policyholders, pension plan members, and creditors of financial institutions from undue loss.
- To advance and administer a regulatory framework that contributes to public confidence.
- OSFI supervises and regulates all banks, trust/loan companies, insurance companies and credit co-ops.
9) What are the regulatory functions of OFSI?
- Developing and interpreting legislation and regulations, including guidelines and approving requests as required.
10) What are the supervisory functions of OSFI?
- Assessing the safety and soundness of the institutions under its mandate.
- Evaluating a company’s risk profile, financial condition, risk management practices, and compliance with applicable laws and regulations.
11) List FOUR (4) characteristics of an insurer that OSFI would review to measure an insurer’s inherent risk.
- OSFI stresses profitability, adequacy and quality of capital and earnings, adequacy of reserves for policy liabilities, adequacy of reinsurance protection, the quality of assets, and internal controls.
- 1) issues advisories outlining its views of best practices or risk management measures;
- 2) provides notice to inform public of items of general interest;
- 3) publishes warnings for the financial sector;
- 4) presents internally and externally generated consultation papers of interest to its stakeholders;
- 5) continuously monitors insurers’ financial condition and operating performance;
- 6) verifies compliance with statutory and other regulatory requirements;
- 7) conducts periodic on-site examinations as required by statute.
12) List THREE (3) developments that resulted from project established by OSFI, the IBC , and regulators in 3 provinces to regulate the management of an insurer’s earthquake exposures.
- 1) Insurers must document procedures outlining to OSFI how they plan to manage their earthquake risk (including limits of coverage).
- 2) They must advise how their financial resources would cover their calculated probable maximum loss (PML).
- 3) The insurers are required by OSFI to reserve against potential liabilities arising from a major earthquake.
- How an insurer’s earthquake exposure is reinsured is also prescribed by OSFI.
- Guidelines have been developed for tracking and managing earthquake exposures. Computer models have been developed that estimate PML.
13) What FOUR (4) actions might OSFI take if it was concerned about an insurer’s outsourced functions?
- 1) Evaluate the risk of outsourcing
- 2) Carry out a due diligence study
- 3) Create a business continuity plan in case a third party cannot perform outsourced activities
- 4) Establish a process for monitoring and managing the outsourced activities
14) What does the Minimum Capital Test (MCT) measure for OSFI?
- MCT is used to measure solvency.
- A single harmonized asset test applies to all Canadian insurers.
- Test is intended to give regulators early warning of an insurer’s potential solvency problems.
- MCT requires that insurers have assets worth at least a certain multiple of the amount of their liabilities as well as a margin of additional assets.
15) How did OSFI determine the amount of capital required for insurance companies?
- Capacity is the function of capital available and extent of exposure that insurers are prepared to accept.
- The level of capital and surplus must be sufficient to cover expenses, commissions, premium taxes and claims which are incurred prior to policy premiums becoming earned.
Guidelines to capacity:
1) Ratio of net premiums to equity (capital and surplus) is measured
2) The maximum single exposure, max % of equity that can be put at risk on a single exposure is assessed.
16) Theoretically, what would an overcapitalized insurer want to accomplish in relation to its premium volume?
- Overcapitalized insurers have a business problem: they will want to increase their premium volume to take full advantage of their capital at their disposal.
- Undercapitalized insurers must restore an acceptable balance between their premium volume and the capital they have to support it.
- Such insurers can 1) reduce premium volume 2) take a different strategic direction on type of businesses 3) use reinsurers 4) reduce capacity to certain lines of business 5) restructure their balance sheet to free up capital.
17) What is the responsibility of the Canadian Council of Insurance Regulators (CCIR)?
- CCIR is an association composed of regulators from each province and territory and the federal level.
- CCIR cannot enact legislation but members can make recommendations on their respective governments on related issues.
- CCIR is a means for insurance regulators to share information and find common solutions.
- The focus is on improving the efficiency and effectiveness of the Canadian regulatory framework.
18) What did the CCIR develop as part of its harmonization project?
- CCIR has been involved in:
- 1) Harmonizing and streamlining licensing approvals and financial and corporate sector filings;
- 2) Fast-tracking licence approvals for insurers who are licensed in one Canadian jurisdiction and seeking authorization in another;
- 3) Further streamlining financial and corporate filings, such as one-point filing with the primary regulator.
- CCIR facilitated the development and adoption of the minimum capital test.
18) How may regulatory intervention in the automobile insurance industry affect insurers?
- While regulatory intervention tends to please consumers, price regulation is an unnecessary and expensive administrative burden.
- The free market system anticipates a self-regulating market that will ensure that prices reflect the true cost of doing business; rating boards and commissions only create imbalances in the free market pricing system.
- Higher staffing requirements or different software applications to rate and report data might be required.
- Increased operating costs and politically-imposed premiums could reduce the insurer’s profitability and return on equity.
19) What are some disadvantages that may flow from an insurer exerting excessive internal cost-cutting?
- They may find that the company’s functional competence suffers, questionable risk selection occurs, succession plans cannot be developed and the company’s financial results are negatively affected.
20) What action might an insurer take when the effects of government imposed reforms are unknown?
- Projects for premium, loss ratio, and ROE made before the changes must be redeveloped.
- Some insurers may shelve business strategies to achieve organic growth or to expand territorially until the effects of government actions are made clear.
- Other insurers may consider withdrawing from their jurisdiction, adjusting marketing plans for the affected area, or reserving any financial decisions until the regulator’s plans are announced.
- This in turn reduces automobile insurance capacity in the insurer’s jurisdiction.
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