Large, parent-controlled companies poised to capitalize on OSFI’s proposed new rules allowing internal capital model targets

The size of an insurer and whether or not the Canadian office has a parent company will likely be key drivers in whether or not Canadian property and casualty insurers take advantage of the solvency regulator’s move to allow internal capital modeling targets by 2014.
For Aviva Canada, the influence of a parent company was definitely a key factor in its development and use of an internal capital model, according to Chris Townsend, the senior vice president and chief actuary at Aviva Canada.
Townsend spoke at a seminar at the 2010 IBC Financial Affairs Symposium held in Toronto.
Aviva Canada noted “parental expectations and requirements” were important in its own use of internal capital modeling. Aviva UK first developed its own stochastic capital model in 2003, as the UK Financial Services Authority and other European regulators were looking to improve their solvency framework.
Townsend said Aviva Canada’s internal capital model has supported company decisions on catastrophic and per risk XOL reinsurance strategy, different potential business mixes by line and by region, alternative investment mix strategies and the risk mitigation benefits of IT remediation projects.
OSFI is proposing to allow companies meeting its minimum capital criteria to use internal capital models to establish their own target capital requirements (one risk at a time).
Bernard Dupont, managing director of OSFI’s capital division, said there would be a three-year “parallel run” (beginning in 2012 and ending in 2014), when qualifying companies would be expected to use both internal capital models and OSFI’s capital targets to demonstrate compliance with OSFI standards.
Dupont said OSFI would be watching to make sure that companies using internal capital model targets would not gain a competitive advantage over those using OSFI capital targets.
But Doug Hogan of the Dominion of Canada General Insurance Company said larger insurers were more likely to use internal capital models, and that was something for smaller and mid-sized insurers to watch in the future.
“If you are a mid-sized or small company, if you are not owned by a European parent…I think you really need to pay attention to where this is going,” Hogan said.
While the capital targets won’t change, he added, companies might be able to use their internal capital models to achieve better allocation of capital, better segmentation of risks, which may give that company a competitive advantage over those that don’t.