International perspectives on solvency modernisation: Canada



New development

Increasing focus on risk-based measures

Scope of regulation

Regulations apply to all federally regulated financial institutions, including both Property & Casualty (P&C) and Life & Health (L&H) insurance companies and branches.

Background information

The Canadian regulatory body, the Office of the Superintendent of Financial Institutions (OSFI), continues to participate actively in international forums (including the International Association of Insurance Supervisors) "to contribute to the development of internationally agreed upon bank and insurance capital standards; review and improve domestic regulatory capital requirements and assessment practices; and enhance risk sensitivity of capital requirements in the insurance and banking sectors". [Source: OSFI 2010-2011 Annual Report]

What's changing

2012 rules continue the move to a risk-based capital approach. For L&H re/insurers, there are changes relating to asset default risk requirements for investments in mutual funds; and there is a clarification of the concept of retained loss positions in reinsurance arrangements. For P&C re/insurers, there are a number of significant changes, including  a new interest rate risk margin within required capital, more granularity of credit risk factors for invested assets, and risk factors on collateral held as security for unregistered reinsurance.

In addition, industry advisory committees, staffed by industry associations and companies, together with OSFI representatives, have published Vision Papers for L&H Insurers (November 2007) and P&C Insurers (July 2011), which outline OSFI's vision for new principles-based solvency financial requirements, which are "intended to encourage the use of  improved risk-based business decisions and better reflect each company's risk profile and risk management practices". [Source: MCT Advisory Committee's Canadian Vision for Property and Casualty Insurer Solvency Assessment]

The impact

The 2012 changes are expected to have a limited impact on L&H entities, except those that have mutual fund investments or variable risk transfer reinsurance arrangements. Negative impact expected for most P&C entities, unless they change their investment portfolio. The long-term direction, as promulgated by the Vision Papers will have a significant impact.

Similarity with Solvency II

Although OSFI have not committed to following Solvency II, or applying for equivalence, many of the rules adopted are risk-based.  The anticipated future direction of the Canadian regulatory capital environment (as set out in the Vision Papers) has a lot of similarities, as well as several key differences with Solvency II.

Published 13 December 2011

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