OSFI staff ‘very actively engaged’ in international capital standard for insurers: Zelmer

An international capital standard for global systemically important insurers is “probably not going to have much of an impact on the Canadian p&c industry,” an official with the Office of the Superintendent of Financial Institutions suggested recently, but Canadian insurers “will likely need to change some of their business practices to conform to the new international standards of market conduct,” Insurance Bureau of Canada’s president and chief executive officer said.

The International Capital Standard (ICS) is the third step in a project to develop risk-based group-wide capital requirements for global systemically important insurers, the International Association of Insurance Supervisors announced in 2014.

In a press release Oct. 5, 2015 IAIS said the risk-based group-wide global ICS “due to be adopted by the end of 2019.”

“There is no question we will see the emergence of a new international capital standard,” said Mark Zelmer, OSFI’s deputy superintendent, regulation sector, during a presentation April 13. “Like its banking counterpart it will be very much focussed on internationally active insurance companies, whether they are life companies, p&c companies, you name it.”

Zelmer made his remarks during a presentation – titled A Regulatory ‘Walk Down Memory Lane’ – at IBC’s 20th annual Financial Affairs Symposium in Toronto.

IAIS “has been busy introducing a capital standard for insurance companies and my colleagues at OSFI have certainly been very actively engaged in that work,” Zelmer said at the symposium.

“Because it is kind of version 1, we expect that it is probably not going to have much of an impact on the Canadian p&c industry,” Zelmer said of ICS. “It is not likely going to improve upon our own domestic requirements, and that’s probably not too surprising because the first time any international standard is agreed to, it’s usually pretty crude relative to what it evolves to over time, so the first version will probably be pretty straightforward and more of a safety net. Over time, as we gain more experience with it, I would expect it will evolve and we will see down the road what kind of a role it plays in terms of each country’s domestic framework.”

With ICS, IAIS “aims to create a level playing field in terms of capital requirements for global insurance companies,” IBC president and CEO Don Forgeron said during a separate presentation at the symposium, titled Financial Regulation in an Era of Constant Change.

The ICS is one of four developments in global regulation “that will likely affect the Canadian P&C insurance industry,” Forgeron added.

Another development is International Financial Reporting standards, which the IFRS Foundation – part of the International Accounting Standard Board – describes as a “single, trusted accounting language.”

A third development cited by Forgeron is the effort by Organisation for Economic Co-operation and Development (OCED) to “crack down on multinational corporations that minimize their taxes by operating in many jurisdictions and moving money among them.”

Forgeron alluded to a section in the federal government’s budget document for the 2016-17 fiscal year – released March 22 – that refers to base erosion and profit shifting.

“Budget 2016 proposes new legislation to strengthen transfer pricing documentation by introducing country-by-country reporting for large multinational enterprises,” the nation’s ruling Liberals said at the time. “The Canada Revenue Agency is applying revised international guidance on transfer pricing by multinational enterprises, which provides an improved interpretation of the arm’s-length principle.”

In its budget document, the government said March 22 that Canada “is participating in international work to develop a multilateral instrument to streamline the implementation of treaty-related BEPS recommendations, including addressing treaty abuse.”

The “overall aim” of OECD “is to close gaps in international tax rules that allow multinational enterprises to shift profits to low tax jurisdictions,” Forgeron suggested April 13 at the Financial Affairs Symposium, held at the Design Exchange – which was once the trading floor of the Toronto Stock Exchange – located next door to the Toronto Dominion Centre.

“The OECD and the G20 are currently working on a multinational framework to prevent this practice and we know Canada intends to participate as last month’s federal budget clearly indicates,” Forgeron continued. “Because it will involve rules on the re-characterization of capital, it’s an initiative that the insurance industry needs to watch closely.”

Another development in global regulation of note to insurers is an “expectation for more stringent market conduct regulations based on the concept of fairness to consumers,” Forgeron said.

In November, 2015 the Canadian Council of Insurance Regulators published a document titled Framework for Cooperative Market Conduct Supervision in Canada.

Members of CCIR – which include the Financial Services Commission of Ontario and other provincial and territorial regulators – will meet to discuss supervisory plans for market conduct, CCIR said at the time. The members plan to “identify areas of mutual concern and opportunities for collaboration to achieve the commitments outlined in their plans,” CCIR added.

Market conduct “encompasses any product or service relationship between the insurance industry (insurers or intermediaries) and the public, specifically the risks to customers that arise if an insurer or intermediary fails to treat customers fairly, and includes the terms ‘conduct of business’ and ‘commercial practices’ as used in some jurisdictions,” CCIR stated in November.

“Our industry is preparing for new and extensive requirement that will go into effect early next year,” Forgeron said April 13 of market conduct at the financial affairs symposium. “As well, it is likely that insurers will need to change some of their business practices to conform to the new international standards of market conduct.”

The financial crisis that started with mortgage-related losses in the United States in 2007 “has triggered a whirlwind of white papers, draft regulations, multilateral meetings and other actions, all primarily aimed at preventing another financial crisis,” Forgeron said, adding that the regulatory environment has been “intensely dynamic” since then.

“Policymakers recognize that the world’s financial markets are so intertwined through globalization that financial regulation itself needs to be globalized,” he added.

The creation, in 2009, of the Basel, Switzerland-based Financial Stability Board “reflects the drive to globalize financial regulation,” Forgeron noted.

In addition to OSFI, the Bank of Canada and the federal finance department, FSB members include central banks and regulators from the United States and 22 other countries. Other FSB members include the Hong Kong Monetary Authority, European Central Bank and European Commission.

“International bodies such as the FSB don’t have any real authority on the ground,” Forgeron said. “That still rests in the hands of national governments and regulators. But much of the regulatory change we find ourselves adapting to is being formulated now on the global stage and then being brought home to Canada to be interpreted and applied. We see this global influence both at the OSFI level with solvency and capital issues, and at the level of provincial regulators who are overseeing market conduct issues.”

More coverage of the IBC Financial Affairs Symposium

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