OSFI’s tough stand on earthquake reserves

The Office of the Superintendent of Financial Institutions (OSFI), the federal government’s financial services watchdog, is unhappy with the current level of voluntary earthquake reserving committed by property and casualty insurers. OSFI special adviser Julie Dickson indicated at the recently held North American Conference (see our upcoming January issue for further conference details) that compulsory reserving for earthquake risks could be introduced next year.

The Insurance Bureau of Canada (IBC) is adamant, however, that such a prospect is unlikely. Paul Kovacs, chief economist of the IBC and executive director of the Institute for Catastrophic Loss Reduction (ICLR), says he recently met with the federal regulator on earthquake exposure and the parties normally dealing with the earthquake issue have not taken this approach. He admits, however, that OSFI has in prior discussions raised concern over the low level of voluntary reserving. “If this is the case [compulsory reserving], then it’s definitely not good news for the industry,” he observes.

In a subsequent interview, Dickson confirms that compulsory reserving was definitely on what she described as “OSFI’s radar screen,” for next year. Discussions have been held with the IBC with regard to the regulator’s concern on the current low level of voluntary reserving, she confirms, although no formal discussions have yet taken place on the issue of compulsory reserving. This, however, will be an issue brought to the table next year, she stresses. “The level [of reserves] is far below what could have been set up. In a letter in 1998, we said we would monitor the buildup of reserves and consider the necessity of setting up a [compulsory] earthquake premium reserve. We’ve been quite upfront about our intention to keep an eye on this. Looking at the level, we were always questioning whether the [current] guidelines and rules are adequate.”

OSFI is not willing to release the current level of voluntary reserves established by the industry under the regulator’s earthquake “sound practices” guideline introduced at the beginning of 1999. Industry sources suggest that over the past year only $10 million had been set aside, whereas the regulator had been hoping to see a considerably greater pool. Under the sound practices guideline, which currently applies to insured earthquake exposures in Quebec and British Columbia, insurers are permitted to deduct tax-free up to 75% of earthquake premiums toward voluntary reserving – the maximum amount that can be set aside is also limited according to a formula based on premiums less that ceded to reinsurance. Kovacs points out that, based on the market’s low premium base, and the fact that most insurers have opted to cover their exposures through reinsurance, it is hardly surprising that voluntary reserves are low. “Our impression was that the regulator’s main concern was to ensure that insurers’ earthquake exposures are covered. Industry feedback suggests that companies are very well prepared.”

Toronto shudders

With little over a year having passed since the “mini quake” which rumbled a large part of Ontario in September 1998, another shaker measuring 3.9 on the Richter scale rattled cups and plates in Toronto and other centers in a 100 kilometer radius along Lake Ontario (including the Pickering nuclear energy plant) on November 26, 1999. The Geological Survey of Canada (GSC) identified the quake’s epicenter as being 10 kilometers beneath the lakebed near Oshawa.