OSFI will maintain its principles-based approach to regulation

par Susan Yellin | January 27 2016 07:00AM


Canada is holding on to its principles-based set of life insurance regulations despite different approaches taking place around the world, said the assistant superintendent of insurance at the Office of the Superintendent of Financial Institutions (OSFI).

Neville Henderson told a KPMG conference in late November that the uncertainty of the global economy and the “new normal” of low interest rates are bound to see the industry undergo changes for some time. Henderson said it’s that very reason why OSFI is supportive of ORSA – Own Risk and Solvency Assessment, a process that uses stress and scenario testing to help insurers determine their capital needs.

Even though other regulators may be going in different directions, particularly prescription-based, he said Canada should be able to maintain its own approach.

“I think we have to because we are principles-based and we are tied to being principles-based and staying that way. Many of the other regulators are not,” he said. “But we do have a heavy involvement in virtually all the international committees and we do influence them. Our objective is to pick out what is suitable for the Canadian environment and what really helps us improve our opportunities. Those are the regulations that we would espouse and adopt. We just don’t go out and accept [other] regulation.”

Mixed message

He noted that OSFI is one of the few organizations that uses principles-based regulations. Some see principles-based rules as flexible, while others find them difficult to interpret. “We get a mixed message [from different insurers] on that: we have some companies that complain that principles-based is too difficult to manage and others would prefer we would be prescriptive – just get on with it and get the work done.”

Canada has taken a seat at many international insurance committees, part of the globalization of the industry. Henderson said OSFI recognizes there are a lot of international companies that are subject to different regulations in different jurisdictions. He said the regulator wants to avoid forcing companies to set up extra books just because Canadian regulations are slightly different.

He also said smaller insurers, on both the life and property and casualty sides, are concerned about the increasing amounts of capital they have to have on hand to meet their regulatory requirements because doing so cuts back on their profits.

They also have a tougher time with regulatory burdens than the larger companies, struggling to manage regulatory costs while hiring the most skilled and knowledgeable managers to supervise those costs.

Low interest rates, in particular, have been hard on all insurers, said Henderson. Some companies have merged to drop per unit costs while others have de-risked by redesigning products and/or increasing hedging to put themselves in a position to move forward. Henderson said the payout annuity business, in particular, “is virtually not active at all right now” because of a combination of low interest rates and rising longevity.

Henderson acknowledged that consumer demands will continue to put pressure on insurers to innovate and come up with different methods of sales, including online. But he said advisors will continue to play an active role in the lives of Canadian investors.

“Distribution is changing, and it will continue to change,” Henderson said. “But I don’t think face-to-face will ever disappear to be honest with you. I think there’s a need for that.”

His view was supported at a later seminar by Louis Regimbal, a partner in KPMG’s advisory department, who said that people – especially younger people – go online looking for convenience, simplicity and lower prices, in that order.

Active role for advisors

And while the internet is considered a valuable source of information, in the end, the financial professional will remain a critical component of financial services. “So the whole idea that by going digital, we’re shoving the intermediary aside and that they no longer have a role – in fact, not only will it not come to pass, if we look at the younger generation’s expectations, they believe they need that extra help,” said Regimbal.

He noted that not everything pundits have predicted in the past have borne fruit – online selling is not overwhelming, banks are not dominating the insurance market, at least in Canada, and people are not dispensing with professional financial advice in favour of online purchases.

“People still value advice from professionals and experts,” he said.

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