In a webcast on risk management for life insurers that aired on June 9, 2021, the Office of the Superintendent of Financial Institutions (OSFI) highlighted the key areas of climate-related risks and evolving technology-related risks.
Armed with 70 submissions from a climate risk consultation, OSFI will be able to better focus its domestic prudential efforts, said Stewart McIlwraith, OSFI's Senior Director of Insurance Supervision. “We continue to analyze the input and plan to publish key findings this September,” he adds.
Quantifying climate risk
After reviewing the submissions, McIlwraith noted that quantifying the impacts of climate risk remains a topic of interest for many. He also realized that it is important to consider both international developments and the Canadian context when looking at climate-related risk.
“These themes are not surprising, but the content and quality of the submissions has demonstrated desire for action and for more clarity on both implementing measures to address climate change and to improve the measures and transparency around those actions,” the senior director of insurer supervision points out.
OSFI added that the consultation results have helped inform its contribution to international work, including the Sustainable Insurance Forum (SIF). The SIF has 30 members from the regulatory sector, including OSFI. They represent a 92 per cent share of the global insurance market.
Systems vulnerable to cyber threats
In his remarks, Stewart McIlwraith pointed out that technology has enabled many firms to continue operations despite the disruptions of the pandemic. However, he expressed concern about increased exposure to cyber threats, system outages and privacy breaches.
“Combining this environment with antiquated legacy systems can further increase vulnerabilities. These risks can quickly affect confidence in an institution and perhaps its bottom line,” the senior director cautions.
The proliferation of outsourcing arrangements is compounding the problem by increasing the operational complexity, he adds. Especially “when dealing with service interruptions and possible threats.” This is why OSFI has made the operating environment of insurers a focus.
Low for longer rates
Economic uncertainty is another area of concern. “Through the pandemic central banks have kept interest rates low. Low rates have a clear impact on insurers’ investment income levels. Insurers have been and will likely need to continue to manage the low for longer interest rate environment, OSFI's Senior Director of Insurance Supervision continues.
COVID-19 influencing mortality
McIlwraith points out that the annuity business experience has had an offsetting impact on life insurance mortality due to COVID-19 so far, but that balance could eventually shift. "We recognize that the insurers’ financial impact from higher mortality has so far been manageable for the insured population. However, there is uncertainty of the extent and severity of long-term health and long-term mortality impacts for those that have had COVID-19. The data is sparse and is still too early to tell if any post COVID-19 health issues will have a material impact for the insurers,” he says.
Higher mortality requires insurers to pay out more death benefits than expected. At the same time, the shorter annuity payment period creates an offsetting effect.
IFRS 17 and regulatory capital
McIlwraith also discussed the January 1,,2023 implementation of the International Financial Reporting Standard on Insurance Contracts, IFRS 17. He noted that IFRS 17 will have an impact on regulatory capital guidelines for all insurance sectors. In fact, OSFI has just launched a consultation on this subject.