Canada: OSFI Updates: ORSA And Life Insurance Regulatory Framework

Following public consultation, the Office of the Superintendent of Financial Institutions (OSFI) recently published the final versions of new Guideline E-19: Own Risk and Solvency Assessment and amended Guideline A-4: Regulatory Capital and Internal Capital Targets (the Guidelines). Both Guidelines have an implementation date of January 1, 2014, and require action in the first quarter of the New Year. In this bulletin, we set out what federally regulated insurers need to know about these Guidelines, as well as some of their history.

OSFI also recently provided an update on the progress it is making on implementing the Life Insurance Regulatory Framework published in September 2012, including revised timelines. The update is summarized below.

WHAT IS AN OWN RISK AND SOLVENCY ASSESSMENT (ORSA)?

OSFI intends an ORSA to be a comprehensive approach to the analysis and management, by an insurer, of its capital requirements. In part, it subsumes the current Dynamic Capital Adequacy Testing (DCAT) and capital target requirements, and integrates them with the insurer's risk management function.

An ORSA is a comprehensive risk assessment process, and it is meant to be integrated with the insurer's enterprise risk management and other management processes. An insurer's board of directors (or the Chief Agent in the case of the Canadian operations of a foreign insurance company) is responsible for overseeing the ORSA and any changes to the ORSA, though the associated tasks may be delegated to senior management. The ORSA should be performed on a regular basis and should be clearly and formally documented in a report to the board (or Chief Agent) at least annually or more often if warranted. An insurer should conduct regular reviews of its ORSA process for integrity, accuracy and reasonableness, and the ORSA should also be subject to periodic objective reviews (internal or external).

OSFI describes an ORSA as a dynamic, forward-looking self-assessment process that is intended to enhance an insurer's understanding of the connection between its risk profile and capital needs. OSFI states that there is no single correct approach to an ORSA and requires that each insurer tailor its ORSA to its own risk profile and appetite, and to the nature, scale and complexity of the insurer. However, Guideline E-19 provides that an insurer's ORSA should contain, at a minimum, the following five key elements:

  • Comprehensive identification and assessment of risks
  • Relating risk to capital
  • Board oversight and senior management responsibility
  • Monitoring and reporting
  • Internal controls and objective review

The risk identification process should identify, define and assess the materiality of all known, reasonably foreseeable, emerging and other relevant risks that may have an impact on an insurer's ability to continue operations, in both normal and stressed situations. The assessment should include all material risks, whether they are explicitly captured in the regulatory capital framework or not, as well as risks that are not easily quantifiable, such as the risks associated with reinsurance, hedging or securitization transactions, or with cross-border activities.

An insurer's determination of its own capital needs and the setting of internal target capital levels accordingly will now be key aspects of the insurer's ORSA process. Insurers should determine whether, for each risk, an explicit quantity of capital should be held and how the results for each risk should be aggregated. Insurers' capital assessments should reflect their own choice of data sets, distributions, measures, confidence levels, time horizons, valuation approaches, financial tools and methodologies. However, the approaches and tools used should be calibrated to determine the total amount of capital needed to cover extremely severe losses. Insurers are also expected to consider publications and professional and other research materials dealing with quantification of risks and risk mitigants.

Once an insurer has determined its own capital needs, it must establish its internal target capital levels, and OSFI's expectations for this process are still set out in Guideline A-4. The recent changes to Guideline A-4 incorporate the concept of an ORSA and make Guideline A-4 consistent with new Guideline E-19. In determining target capital levels, insurers must (as they are already doing) consider the impact of a range or series of adverse scenarios of varying nature or severity and their ability to avoid supervisory interventions or continue as a going concern, but now this function is encompassed within an ORSA. The results of stress testing, along with other single and combined forward-looking stress and reverse stress tests, including an insurer's DCAT scenarios, should be directly incorporated, referenced or otherwise used in an ORSA for setting the insurer's internal capital targets.

WHO IS SUBJECT TO AN ORSA?

Guideline E-19 applies to all federally regulated life and property and casualty insurers in Canada, including Canadian operations of foreign life and property and casualty companies operating in Canada on a branch basis, as well as fraternal benefit societies operating in Canada.

An ORSA can be prepared on an individual insurer basis or on a group basis (Group ORSA). However, when an insurer's business and risk profiles or circumstances are not adequately reflected in a Group ORSA, OSFI expects the insurer to have a separate ORSA that covers only the consolidated Canadian operations of the insurer and not the operations of its parent, home office or other related insurers. In response to industry comments on this issue, OSFI has said that while it does not seek to create duplicative or redundant work for insurers, an OSFI-regulated insurer operating in Canada is expected to comply with OSFI guidance.

WHERE DID AN ORSA ORIGINATE?

The term "ORSA" originated in the United Kingdom in the mid-2000s when the Financial Services Authority developed the concept of an "Own Risk and Capital Assessment." The European Commission endorsed the concept and embedded it within the Solvency II Directive (changing the word "Capital" to "Solvency"). In recent years, the International Association of Insurance Supervisors (IAIS) included an ORSA as one of its insurance core principles. Insurance regulators in a number of different countries have implemented an ORSA principle or are in the process of doing so.

WHY IS OSFI IMPLEMENTING AN ORSA IN CANADA?

Canada is an IAIS member, and this is another example of OSFI importing an international principle into its local regulatory framework. OSFI regularly monitors international practices and considers whether it is appropriate to implement international standards in Canada. OSFI's predisposition to adopt standards from international organizations in which it is a participant continues with an ORSA.

Following the global economic crisis, OSFI increased its emphasis on internal risk assessment, as illustrated in its updated Corporate Governance Guideline, which was published earlier this year (see Blakes Bulletin: OSFI Releases Final Corporate Governance Guideline, February 2013). In implementing an ORSA, OSFI is further emphasizing for insurers the importance of linking the enterprise-wide risk assessment process with the determination of the capital needs of the insurer.

WHEN MUST THE ORSA BE IMPLEMENTED?

The Guideline Impact Analysis Statement issued with the new Guidelines indicates that implementation of the Guidelines is expected to occur throughout 2014. OSFI approval of an ORSA is not required. In a letter to insurers released when the final Guidelines were published, OSFI said that, while the Guidelines will have an effective date of January 1, 2014, OSFI recognizes that a number of insurers will not immediately meet all of the expectations of the Guidelines. OSFI also stated in the letter that it expects insurers to make their initial ORSA report available to OSFI at some point in 2014 and has requested that insurers inform their relationship manager by March 31, 2014, of the expected date in 2014 when the first ORSA report will be available. In reviewing the initial ORSA report, OSFI said it will take into consideration the time required for board education and for developing/implementing necessary processes.

Going forward, Guideline E-19 provides that OSFI may review an ORSA and, upon request, the ORSA reports made to the board to determine whether an ORSA is consistent with OSFI's own understanding and assessment of the insurer's risk appetite and risk profile. The depth and frequency of supervisory review of an insurer's ORSA will be proportional to the nature, scale and complexity of its activities, and the risks assumed by an insurer as assessed through OSFI's supervisory framework.

UPDATE ON IMPLEMENTATION OF OSFI LIFE INSURANCE REGULATORY FRAMEWORK

In September 2012, OSFI issued its Life Insurance Regulatory Framework (the Framework), which outlines OSFI's priorities and initiatives with respect to the life insurance industry. The Framework addresses issues such as corporate governance and risk management, evolving regulatory capital requirements and promoting the transparency of information by life insurance companies. OSFI's updated Corporate Governance Guideline and new Guideline E-19 are specific enhancements to the Framework that OSFI has introduced in the last year.

OSFI has updated its timelines for implementing its various regulatory capital initiatives set out in the Framework. Notably, the milestone for finalizing the life insurance capital framework has been shifted from 2014 to 2016, with implementation now targeted for 2018 (originally 2015). The revised timeline is to provide OSFI with more time to consult with industry stakeholders and to develop the framework components, and also gives life insurers more time to prepare for the upcoming changes. In addition, work on developing an internal models framework for segregated funds has been halted to accelerate the development of the standardized approach for segregated funds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
23 Nov 2018, Other, Toronto, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

28 Nov 2018, Speaking Engagement, Toronto, Canada

Arbitration has a number of advantages and some disadvantages for the resolution of domestic and international commercial disputes.

Similar Articles
Relevancy Powered by MondaqAI
Cassels Brock
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cassels Brock
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions