Regulators to balance principles-based approach with more prescriptive approach

Canada’s insurance regulators are working with the industry to establish a foundation for a new principles-based (as opposed to rules-based) approach to regulation, but that doesn’t mean regulators are likely to throw out more prescriptive approaches should they be deemed more appropriate, the executive director of the Financial Services Commission of Ontario (FSCO) told an Insurance Bureau of Canada (IBC) seminar.

The seminar looked at the industry take-up of the IBC’s five Standards of Sound Marketplace Standards, which, taken together, advocate a client-centric approach to sales transactions and claims handling. The IBC has encouraged insurers to implement their own best practices based on these standards.

IBC says risk- and/or principles-based approaches make regulation more efficient, effective and transparent.

But insurers should keep in mind, FSCO executive director Grant Swanson told the IBC seminar, that regulators will not likely abandon the possibility of using more traditional, transaction-based and rules-based approaches.

“There’s no one regulatory approach that fits every situation,” Swanson said. “As we’ve been looking at different issues, we feel that there are certain circumstances in which risk-based approaches work especially well, and there are certain situations in which a prescriptive approach can also work very well.

“I’ll give you a simple example: You can have a general admonition [or principle] for people to drive safely, but I think most of us here feel most secure when the light turns red and everyone is supposed to stop [i.e. following rules].

“There will be some cases where appropriate choices need to be made as to which kind of regime works best. We’re not necessarily looking at throwing out one thing and replacing it wholesale with something else. On the same side, we’re not looking at layering or duplicating one regime on top of another which also would not be a good outcome.”