OSFI: Canadian insurers underestimating work involved in becoming Basel 2-compliant

Canadas insurance industry may be looking for their own form of Basel 2 capital framework, but they are seriously underestimating the time and effort involved to achieve compliance with its capital standards, according to the Superintendent of Financial Institutions, Julie Dickson.
Dickson spoke to property and casualty insurers attending KPMGs 16th annual insurance issues conference, entitled The Leadership Challenge, held in Toronto.
Dickson said she was impressed with the enthusiasm of Canadian insurers to move to their own form of Basel 2, even holding up such optimism as an example to Canadian bankers, who completed the implementation of Basel 2 at the beginning of November 2007.
Implemented in 1988, Basel 1 was designed to strengthen the soundness and stability of the international banking system as a result of the higher capital ratios it required. Basel 2 is a revision of the existing framework, aiming to make the framework more risk-sensitive and representative of modern banks’ risk management practices.
Dickson urged Canadian insurers not to underestimate the shift in corporate culture required by compliance with Basel 2. She said life insurers are currently ahead of where P&C insurers are now in terms of becoming compliant with Basel 2, but the whole process to become compliant would take no less than five years to implement.
And the journey to Basel 2 does not end with compliance, she noted, saying it was not like Y2K, which featured a definitive time at which the efforts to become Y2K compliant were rewarded or not.
Just as bankers did early in the banks transition to Basel 2, Canadian insurers are seriously underestimating the amount of time, effort and resources it will take to become compliant to Basel 2-style standards, Dickson observed. She said she has frequently heard in conversations with Canadian insurers that European property and casualty insurers are already there on the road to Basel 2 compliance.
That is a major overstatement, said Dickson, noting some European P&C insurers have only started doing their own dynamic capital stress-testing.