Profitability “first line of defence”, says regulator

Profitability is the “first line of defence” for insurers facing rough financial times, says the country’s top regulator. In a speech to the Empire Club, superintendent Nick Le Pan of the Office of the Superintendent of Financial Institutions notes that regulators need to “be highly interested in the success of institutions and their profitability”.He adds that the regulator has a “love-hate” relationship with financial institutions, wherein strong regulations are necessary to ensure confidence in institutions, but over-regulation can be a choke hold. Regulators have not put enough importance on ensuring a competitive environment where profits can be made in the past, and Le Pan notes that when he has stressed the need for profitability, financial institutions are pleasantly surprised. “I can’t tell you the number of people who have commented to me that it is refreshing to hear a regulator say this. Why is that?” he asks. “Does is reflect the Canadian value system where profits are to be mistrusted?”He is also concerned with the view that the current regulatory structure imposes undue costs and insufficient benefits for the country’s financial institutions. “Canada is a small country in world capital and we cannot afford an inefficient regulatory system.”While Le Pan believes the Canadian system is a good model for other countries, he does think that insurers and regulators should take a look at how Canada’s capital requirements in particular stack up against those of other countries. As new requirements are set in place for Canada’s banks through the Basel Accord, Le Pan notes that in this case the new rules may indicate less capital is required than previously. “If the new rules indicate less capital is required for a successful, well-managed institution, my office will not stand in the way.”Le Pan sees the current focus on risk-based oversight as a means to creating a more efficient regulatory regime. The system asks institutions to take charge of their own governance and processes and to reduce exposure to risks, particularly financial risks. “And that is as it should be, because ultimately, it is the job of the board of directors and of senior management to direct and run the institution.”The collapse of U.S. energy trading giant Enron has caught the attention of regulators, but Le Pan says that his office will not be deviating from its risk-based approach in reaction to the Enron failure. “We will not respond in a knee jerk way, nor do I believe that there is any ‘silver bullet’ answer [to preventing such failures].”