Quebec City, QC, Oct. 1, 2012 – Excerpts of Remarks by Superintendent Julie Dickson Office of the Superintendent of Financial Institutions Canada (OSFI) to the 2012 National Insurance Conference of Canada.
ORSA
To have good corporate governance, insurers also need to have an appropriate
approach to assessing risk. That is why OSFI, and our counterparts in other
jurisdictions, are providing guidance on a concept called Own Risk and Solvency
Assessment, or ORSA, as a key component of regulatory reform.
ORSA is being introduced because it is not enough for companies to determine
their capital needs based solely on OSFI’s capital requirements. Our capital
rules are standardized and represent the minimum requirement. They are not
tailored to address the specific risks to which each individual company is
exposed, so companies cannot assume that using only OSFI’s capital rules will
give them the appropriate risk valuation. That’s why the new ORSA guideline is
so important.
Under ORSA, companies will have to establish tolerance limits for each risk,
assess their risk exposure based on their own methodology, compare it to their
limit and establish their internal target based on the exercise. Some companies
are already doing this, at least partially for certain risks, but they may not have
documented the process. Other companies already have in place many of the
elements of the ORSA process, such as stress testing exercises and Dynamic
Capital Analysis Testing (DCAT).
ORSA also involves having the board take a bigger role in understanding how
management is managing its risks. It means the board and management would
need to be aware of what makes a financial institution vulnerable to specific risks.
DCATs, the Appointed Actuarial Report, Guideline E-18 on stress testing, among
other tools, are forcing insurers and their boards to be even more aware of what
can go wrong in an insurance company. Thus, ORSA’s implementation will
strengthen the industry’s Enterprise-Wide Risk Management process.
Related to this is the Actuarial peer review process that OSFI requires. It gives
management and boards more information about the judgements being made by
the Appointed Actuary. We require this because those judgements are critical to
the safety and soundness of the insurer.
A word about Basel III
As you can tell from my remarks, there is no single factor that you or OSFI can
focus on to ensure the continuing stability of the property and casualty insurance
sector – corporate governance, capital, ORSA, earthquake risk, among others –
all are important to prudential regulation and supervision and to how you conduct
your business.
The same can be said about the other financial institution sectors – banking, for
example. Recently, we have been hearing from a number of quarters that Basel
III (and its predecessor, Basel II) is too complex, and that we need to go back to
a “simpler” solution. I cannot agree. Basel I was simple but did not work very
well; it created incentives to invest in risky assets. A simple leverage test alone
cannot be relied upon either; it, too, can create an incentive to invest in risky
assets. There is no simple measure. What works, as we have learned, is hard
work. It is not to rely on only one factor: yes, capital is critical, but so are things
like sound governance, robust controls and checks and balances, strong IT
systems to better aggregate and detect risk, strong management, good
disclosure, and effective regulation and supervision. There simply is no simple
solution.
Read Superintendent Julie Dickson’s full remarks (PDF)
About OSFI
OSFI is an independent agency of the Government of Canada. It reports to the Minister of Finance. For more information visit www.osfi-bsif.gc.ca.
