COVID-19: Ottawa allows insurers to temporarily deviate from their capital targets
The Office of the Superintendent of Financial Institutions (OSFI) is allowing some leniency to life and health insurers forced to deviate from their internal capital targets by the public health crisis that is rocking the Canadian industry.
understands that, “on unusual and infrequent occasions” such as in the current situation, an insurer’s capital ratio may fall below its internal capital targets as per OSFI guideline A-4 Regulatory Capital and Internal Capital Targets.
“If this happens, or is anticipated to happen within two years, the insurer should promptly inform OSFI and provide plans on how it expects to manage the risks and/or restore its capital resources levels to its internal capital targets within a relatively short period of time.”
In determining a reasonable period of time to restore capital resources to the target level, OSFI takes several factors into account, including the insurer’s risk, the nature of the stress, the circumstances prevalent at the time of the stress, and its expected duration. OSFI explains that it proceeds on a case-by-case basis and considers all of these factors in assessing an insurer’s plans to restore its capital resources.
A question of principles
OSFI believes that the solvency of life and health insurers is determined more by the principles spelled out in Guideline E-19 - Own Risk and Solvency Assessment (ORSA) -than by any strictly quantitative measure of capital resources levels. OSFI thus expects insurers to conduct an ORSA to manage their capital.
OSFI also expects insurers to proactively manage risk, take appropriate steps to maintain capital, actively monitor and manage their risk exposure, and consider additional stress testing, including adverse scenarios.
According to OFSI, insurers could also consider making significant changes to their overall risk profile based on changing risks in their current operating environment and actions taken in response to those risks, or other relevant factors, and update their internal capital targets and capital management policies accordingly.
Adjusting the target to the risk
OSFI also encourages insurers to discuss with it any developments that could “materially change” their risk profile and their ability to meet their internal capital targets; It reminds them that they must provide plans indicating how they expect to manage their risks and maintain or restore capital levels to their internal capital targets.
OSFI also expects insurers to set their internal capital targets at levels that support their risk profile and risk appetite. It reminds them that “this includes consideration of all reasonably foreseeable and relevant material risks, and of their ability to continue operations in the normal course, under varying degrees of stress and under a wind-up scenario.”
OSFI believes that insurers should set internal capital targets that surpass supervisory targets and take into account potential changes in risks, business strategies, and their operating environment, which includes economic and market conditions, anticipated growth, and acquisitions.