It’s a Date!

For regulators and the Canadian property and casualty industry, it was all about setting a date.

Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), and Ontario’s insurance regulator, the Financial Services Commission of Ontario (FSCO), made announcements concerning timelines related to two key files — the implementation of a new guideline on reinsurance practices and Ontario auto.

The dates were penciled into re/insurers’ calendars at the Insurance Bureau of Canada (IBC)’s 10th Annual Regulatory Affairs Symposium, held in Toronto on Nov. 4, 2010.

The symposium also featured a spirited defence by OSFI of reinsurers performing due diligence.

REINSURER GUIDELINES: SIX-MONTH GRACE PERIOD

OSFI announced at the symposium that it would be granting the reinsurance industry a six-month extension to prepare for new guidelines on sound reinsurance practices and reinsurance security agreements.

“What we have in mind now is July 1 [2011],” said OSFI director of legislation and policy initiatives Philipe Sarrazin.

Sarrazin said the proposed July 1, 2011 implementation date would be discussed with OSFI senior executives first. But the original implementation date of “Jan. 1 [2011] is very much off the map,” he confirmed. “I have concurrence of senior executives on this one. So you are looking at a bit more breathing room and a better Christmas time.”

As of press time, OSFI had confirmed the new July 1, 2011 date for implementation.

OSFI released a draft of Guideline B-3-Sound Reinsurance Practices and Procedures on Aug. 6, 2010. The guideline outlines four key principles for reviewing the practices and processes of reinsurers, including:

• a sound risk management plan;

• a sufficient level of due diligence;

• clear terms and conditions in reinsurance contracts; and

• taking care to ensure policyholders are not adversely affected by the terms and conditions of a reinsurance contract.

OSFI also released in August 2010 its Draft Guidance for Reinsurance Security Agreements. This document establishes the new regime for obtaining a capital/ asset credit in connection with unregistered reinsurance. The final version of the security agreements guideline is to be posted on OSFI’s Web site by Dec. 31, 2010.

FSCO’S CONSULTATION PLAN

Ontario implemented its auto insurance reforms on Sept. 1, 2010 along with an IOU. The reforms are still missing three key ingredients: a new catastrophic impairment definition; a minor injury treatment protocol without an “interim” prefix; and a claims cost study intended to peg a number to the true tort costs related to the province’s hybrid no-fault/tort accident benefits system.

At the IBC symposium, Ontario’s insurance regulator announced clear time-lines for completing the catastrophic impairment definition and its proposed Minor Injury Treatment Protocol. It also announced the timeline for completing its proposed closed claims study on tort costs and a project to develop new health assessment standards.

Philip Howell, CEO and superintendent of financial services at FSCO, announced a timeline for the much-anticipated review of the province’s catastrophic injury definition. His estimated timeline would see the review finished sometime between April and June of 2011.

“Given the specialized nature of the issues involved, FSCO is assembling a panel of medical experts to make recommendations on what should be included [in the new catastrophic impairment definition],” Howell announced. “As in the case of the Minor Injury Treatment Protocol project, the work of this group will be scientifically evidence-based. Once the definition is developed, the panel will also propose required qualifications for assessors making assessments of catastrophic injury…. The project will also include a consultation process where stakeholders will be invited to comment on the panel’s recommendations. Again, we expect stakeholder input to focus on scientific evidence.”

Work is also underway on the Minor Injury Treatment Protocol, which is intended to replace the current, interim Minor Injury Guideline (MIG).The new protocol is expected to take between two-and-a-half and three years to develop, Howell said, with a final completion date set for 2013.

“The Treatment Protocol will focus on treatment outcomes and a set of milestones to help health care providers and adjusters measure a claimant’s progress,” Howell said. “It will also include a clinical prediction tool that will allow clinicians and insurers to screen patients with a higher likelihood of developing chronic pain and disability. The goal is to provide better outcomes for people injured in auto accidents.”

Finally, Howell said FSCO will be conducting a closed claims study in conjunction with the IBC on the current cost structure of tort claims and how they interact with the Statutory Accident Benefits system. “The last closed claims study in Ontario was conducted in 1988,” Howell said. “I think we all agree that Ontario’s auto insurance system has changed a good deal since then. This work will begin in the first half of 2011and take approximately six months to complete.”

Howell also announced work will soon be underway on a process to develop standards for third party medical exams. “During our Five Year Review consultations, a significant number of stakeholders expressed concern about the quality of insurer examination reports and the qualifications of providers conducting these exams,” he said. “It has been suggested that this is specialized work and practitioners should have an appropriate set of qualifications and operate in compliance with appropriate standards.”

OSFI ON DUE DILIGENCE

OSFI may have granted Canada’s reinsurance community some leeway concerning the date for implementing the regulator’s Guideline B-3-Sound Reinsurance Practices and Procedures, but OSFI is not wavering on its commitment to due diligence.

At the IBC symposium, Sarrazin acknowledged OSFI “created a lot of stir” within Canada’s reinsurance community because of its guideline, which states insurers should be performing a sufficient level of due diligence on reinsurance counterparties. But he insisted the principle of “due diligence” is not overly prescriptive and is still very much in keeping with a flexible principles-based approach.

“I am told we went overboard, but we don’t think it’s unreasonable, honestly, to perform due diligence on multi-million-dollar contracts,” he said. “There is a lot of due diligence that goes on in much smaller transactions…”

Sarrazin flatly disagrees with critics who have argued that OSFI expects an unrealistic amount of effort to comply with the guideline. “Read the words,” he said. “We want due diligence performed commensurate with an institution’s exposure. So, tailor it to your needs. Tailor it to how much reinsurance is being used…

“If a counterparty is selling you [financial] strength, shouldn’t you be allowed to verify it’s true that the strength is going to be there, and the payments are really going to be on time when you really want to call on your reinsurer counterparty?

“To us, it’s obvious. For some, it’s asking way too much. But we think it’s fair and reasonable to perform due diligence on contracts.”

Sarrazin said OSFI’s guidance should not be interpreted to mean brokers or ratings agencies could not be consulted as outside sources when performing due diligence on counterparties. But they should not be the only sources, Sarrazin said.

“What we are saying is, proper due diligence requires that you ask the right questions and you form your own opinion. We’re not restricting the use of outside sources, but we’re saying you need to ask questions.”

Consulting OSFI itself is no substitute for due diligence, he added.

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I am told we [OSFI] went overboard, but we don’t think it’s unreasonable to perform due diligence on multi-million-dollar contracts.