On November 11, 2013, the Office of the Superintendent of Financial Institutions Canada ("OSFI") issued its final version of Guideline E-19 Own Risk and Solvency Assessment (the "ORSA Guideline") and Guideline A-4, which has been renamed Internal Target Capital Ratio for Insurance Companies (the "Capital Guideline").
The final ORSA Guideline clarifies OSFI's position in respect of a number of points raised by the industry after drafts of these Guidelines were published in December, 2012. The final ORSA Guideline, in some instances, appears to be less prescriptive than the 2012 draft ORSA Guideline. A few of the significant changes affecting the implementation of ORSA in 2014 are as follows:
- Timing and Implementation. While the final ORSA Guideline continues to have an effective date of January 1, 2014, OSFI expects insurers will implement processes needed to meet the expectations in the ORSA Guideline "over a period of time" in 2014. OSFI requests insurers to inform their Relationship Manager by March 31, 2014, of the expected date in 2014 when their ORSA report will be available. OSFI has indicated that in its review of the ORSA report, Supervision will take into consideration the time required for Board education and for developing/implementing the necessary processes to conduct an effective ORSA. OSFI will also be requiring insurers to file a Key Metrics Report on an annual basis that will provide back-up for how their Internal Targets for required capital are determined. The Key Metrics Report will likely become an important tool that will be used by OSFI to monitor how ORSA is being implemented.
- Group ORSA. The final ORSA Guideline makes it clear that insurers can prepare their ORSA either on an individual insurer basis or on a group basis (the 2012 draft ORSA Guideline stated that OSFI expects an insurer's ORSA to cover the consolidated operations from the top level OSFI regulated entity, which suggested that a group ORSA was mandatory as opposed to optional for a Canadian group of companies). A group ORSA can include related insurers, parent operations and/or home office operations, and can apply to a wholly Canadian group or a group involving foreign insurers.
- Canadian Addendum. Where a group ORSA is used, OSFI expects it to give adequate consideration to the business and risk profile of the individual insurer and the particular circumstances of the relevant markets in which it operates to yield own capital needs and internal targets that are appropriate for that individual insurer. For example, for a foreign insurer that leverages its home jurisdiction ORSA, OSFI expects the group ORSA to adequately reflect the Canadian branch's operations. In practice, we expect foreign insurers will likely require a Canadian addendum to its group ORSA in order to satisfy this requirement, and in some cases, a separate stand-alone Canadian branch ORSA may be necessary.
- Home Office ORSA. The compliance deadline for ORSA in Canada may pre-date the effective date of ORSA compliance elsewhere such as the United States and in Europe (under Solvency II). In this regard, OSFI has indicated that in the event that a foreign insurer intends to use its home jurisdiction ORSA in Canada, but it is not yet available, OSFI expects the insurer to provide, in its first ORSA report to OSFI, a brief status update on the home jurisdiction ORSA along with highlights of areas and timelines for expected future improvements. OSFI has not made a similar statement with respect to Canadian subsidiaries who intend to use their foreign parents ORSA in Canada, although we would expect OSFI to take a similar position in such a case.
OSFI does not approve an insurer's ORSA and ultimate responsibility for ORSA is left to each insurer's board of directors (or Chief Agent in the case of branch operations). However, the final ORSA Guideline continues to state that OSFI may review an insurer's ORSA, its ORSA reports to the Board and/or other supporting documentation, and may also request that a report by an insurer's objective reviewer (e.g. internal or external auditor) be prepared and made available to OSFI - all under the explicit acknowledgment that OSFI's supervisory review is not intended to prescribe how an insurer should perform, use or report on its ORSA. As the name "own" risk and solvency assessment suggests, the ORSA Guideline seems to leave a significant amount of flexibility for insurers to develop their own individualized ORSA to support its risk and capital assessment, on-going management, governance and other decision making activities. It will be interesting to see in the coming years what OSFI supervision will do with the ORSA information it collects and how much or little impact its review will have on insurers operations in Canada.
Although OSFI's recent position on a phased-in approach will provide Canadian branches and subsidiaries of foreign insurers the opportunity to take advantage of the work done by their parent or home office in developing a group ORSA, it is important for all insurers – including Canadian branches and subsidiaries of foreign insurers - to begin, if not done so already, the planning process and allocation of a significant amount of time and resources to developing its ORSA in compliance with the final ORSA Guideline. Developing and implementing ORSA is a considerable undertaking for both large and small insurers, which includes a review of certain existing policies and procedures as part of the overall ORSA implementation process. For example, insurers will also need to review and update their existing capital management policy in light of the changes to the Capital Guideline and ORSA process.
The Corporate and Regulatory Insurance Group at Cassels Brock has formed an ORSA team to assist insurers with navigating their way through ORSA compliance in Canada. The ORSA team is familiar with various domestic and foreign ORSA documents, including the ORSA Guidance Manual published by the US National Association of Insurance Commissioners.
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