Looking up from the corner of Bay and Adelaide streets in Toronto’s financial district. OSFI has released details of new regulations modelled on the Basel Committee’s guidelines. Come 2015, Canadian banks must meet a liquidity coverage ratio of 100 per cent.Gloria Nieto/The Globe and Mail
Canada's banking and insurance regulator has revised its capital requirements for the property and casualty (P&C) insurance sector, and the largest insurer in the sector believes the move is positive.
The Office of the Superintendent of Financial Institutions (OSFI) is changing the Minimum Capital Test (MCT) guidelines for insurers, to better align the amount of capital companies are required to hold with the modern risks they face. A company's MCT level is expressed as a ratio of total capital available, divided by the total capital required to meet commitments.
The new framework unveiled on Sept. 24 is expected to produce an average 2.8 percentage point decline in capital ratios across the industry, OSFI said. The Insurance Bureau of Canada (IBC), which represents the insurers, notes that "about half the companies in the industry are positively impacted by the revised MCT, while the other half is negatively impacted," depending on the risk levels linked to the kinds of insurance they sell.
For Intact Financial Corp. the largest P&C insurer in Canada, the changes will likely be good for the company. "Our assessment is that the new guidelines could result in a lower amount of capital that we are required to maintain," said Gilles Gratton, spokesman for Intact.
The first MCT guidelines were put into effect more than a decade ago. Since then, updates have been limited. OSFI issued a discussion paper for public consultation last summer, followed by draft guidelines in December. The changes now being made to the initial draft are the result of discussion with prominent members of the insurance industry and with the IBC.
The move comes as the world's insurance companies, including life insurers, are grappling with the prospect of the first global capital requirements, after the financial crisis showed how interconnected these companies are, to each other and to the financial system as a whole. Some companies have been designated globally systemically important by the Financial Stability Board, an international financial oversight group.
And OSFI has also been revising capital requirements for Canadian life insurers — back in 2013 it delayed finalization of the life insurance capital framework until 2016. The pending lifeco changes have generated more concern from analysts and industry groups.
The revised P&C guidelines include a 15 per cent reduction in the operational risk charge, which is the capital buffer insurers hold largely to protect against risk arising from internal processes and people. The IBC said this was "positive for the industry and responds, in part, to industry concerns that OSFI's original proposal… had the potential to be quite onerous for the industry and was out of sync with the current valuation of this risk in other major jurisdictions."
The new MCT guidelines take effect at the start of 2015, and companies have three years to implement the changes – a year longer than initially expected. The IBC said this extension "responds to requests they have received from some companies that are most negatively impacted by the new solvency rules."