Globalized capital standards may be a long way off for Canadian industry

par La rédaction | February 19 2013 09:34PM

The Canadian insurance industry should move to a more globalized set of capital standards, but the chances of that happening soon are pretty slim, the head of the Office of the Superintendent of Financial Institutions (OSFI) told a recent conference in Toronto.Julie Dickson told those attending KPMG’s annual insurance issues conference in December that current capital requirements are very specific to Canadian insurers – unlike their banking counterparts that have moved to a more globalized set of solutions following the 2008 financial crisis.

“When you look at what other countries are doing on the capital side…insurance is still a very much made-in-Canada solution,” said Ms. Dickson. “I do think that over time we should move to more harmonized global standards in the insurance industry. There would be advantages to that, but I don’t expect that any time soon.”

Which standards to follow and how quickly they could be implemented are the biggest hurdles to globalized insurance standards, she said later. But she added Canadian insurers aren’t losing any sleep over whether they could meet those standards because they already adhere to a robust system of oversight and capital rules.

While the global nature of banking has made banks virtually interconnected, the same cannot be said about insurance. “It’s a much less accepted philosophy in the insurance world, but I think people will get there because it is a global industry and investors will increasingly begin to demand it.”

Meanwhile, major differences remain on the accounting side of harmonization, especially between the United States, which uses U.S. Generally Accepted Accounting Principles (GAAP), and countries like Canada that have adopted International Financial Reporting Standards (IFRS). Having two standards imposes costs on customers and companies alike and is not in anyone’s interests, Ms. Dickson said. She said it’s taken some time for investors and analysts to understand the difference between U.S. GAAP and IFRS because low interest rates have taken centre stage. But even then, “I think the reality is that we will continue to have two very different sets of [accounting] standards.”

On a different topic of harmonization, Ms. Dickson talked about OSFI’s release for comment in August of a new, multi-pronged corporate governance guideline. Meant as an update to the 2003 guideline following the financial crisis, the latest series focuses heavily on risk governance and is more in line with international standards.

Part of the guideline calls for each federally regulated financial institution (FRFI) to have a designated Chief Risk Officer (CRO), independent from the operations of the company. “Since the world financial crisis, the role of the CRO is incredibly important. It’s an important role in the corporation and that role ought to report to the CEO,” she said. “For the most part that was not the case prior to the crisis and a lot of institutions have moved to upgrade that role since then and the guidelines needed to reflect this.” Smaller institutions that can’t afford to have one person only doing the CRO role will be allowed to have that person carry on other responsibilities.

As well, the guideline indicates more members of insurance boards of directors should have risk management experience and knowledge of the insurance industry. Ms. Dickson said some banks that have taken this message to heart have found that increasing the number of directors with these attributes has been so worthwhile that they now want one-third of the members on their boards to be made up of directors with this experience.

“I do get disappointed when people say they can’t find anyone or they’ve interviewed a couple of people but they were too technical and that would just bog the board down in too-technical discussions,” said Ms. Dickson. “Yes, it’s difficult [to find the right people], but it’s worthwhile.”

Not only is it tough to get a board filled with directors knowledgeable about the industry and risk issues, it’s not always a great idea, Steve Roder, senior executive vice president and chief financial officer with Manulife Financial, said at a separate panel discussion.

“My observation is that if you have all the directors with the same background and they’ve all been drinking the same Kool-aid then we might end up with a pretty strange discussion,” said Mr. Roder, adding that such like-minded individuals often get bogged down in “groupspeak.” He said while Manulife is casting its net widely for knowledgeable directors, it also looks for balance and diversity.

Marcel Côté, a senior partner at SECOR Consulting and a member of the board of Intact Financial Corporation, said what companies really need is board independence from management and members with enough character to speak up. “When management says something you don’t understand or you think something’s fishy, you have to tell management to leave the room and [allow the board] to discuss it among themselves.”

The guideline also discusses the establishment of a dedicated board risk committee that will oversee risk management throughout the company and a strengthening of the role of the audit committee.

In addition, the guideline delves into the relationship between senior management and the board. Both are accountable for the safety and soundness of FRFIs, but with specific differences.

“The board is responsible for providing stewardship, including direction-setting and oversight of the management and operations of the entire FRFI. Senior management is responsible for directing and overseeing the operations of the FRFI. This distinction in the responsibilities between the Board and Senior Management is critical,” states the final guideline, released at the end of January.

The guideline notes that risk governance is a crucial part of the new guideline, adding FRFIs should be able to identify, assess the impact and have policies and controls in place to manage these risks effectively. The list of risks includes liquidity, credit, market, insurance, operational (including legal), regulatory compliance, reputation and strategic risks.
Neil Parkinson, a partner in KPMG and national insurance sector leader of KPMG Canada’s insurance industry practice, said some companies commented that parts of the guideline are too prescriptive. As well, Mr. Parkinson said subsidiaries of foreign companies felt that even though the guideline calls for periodic third-party reviews, oversight from their parent company should be sufficient, while others have indicated concerns over costs of these reviews.

Pushback from boards

Ms. Dickson said there had been some pushback from insurance boards on issues of governance, and she asked boards to accept the large amount of change taking place on the whole governance topic.

“[There is] this view that boards can’t get the job done because OSFI has too many requirements,” she said. “Well, we have looked at all our requirements and asked ourselves whether any of these are truly not advisable...I haven’t yet received anything concrete from boards on anything they are required to do as a result of OSFI.”

As part of a general wish list, Ms. Dickson urged insurers to pay attention to “the risk of complacency” and when a new regulation or guideline comes out not to tell OSFI that the problem the regulator is trying to resolve is not a Canadian issue and therefore shouldn’t apply to them. “I would say to you: pay very close attention to that risk and nip it in the bud.”