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OSFI defends decision not to allow debt on Canadian P&C balance sheets


October 2, 2008   by Canadian Underwriter


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The Office of the Superintendent of Financial Institutions (OSFI), Canada’s federal insurance solvency regulator, makes no apologies for insisting on eliminating debt from the balance sheets of Canadian property and casualty companies, noting that its strategy to reduce leverage has allowed Canadian property and casualty insurance companies to weather the current financial turmoil in the United States.
“OSFI has faced criticism in the past for our stance against financial leverage in P&C companies, and we have been criticized by those who say we artificially add to the cost of capital, but despite the criticism we stand by our decisions,” OSFI superintendent Julie Dickson told insurance industry delegates attending the National Insurance Council of Canada in Gatineau-Ottawa, Quebec.
On the basis of OSFI’s stance, Canadian property and casualty companies have the lowest operational leverage than at any time in the past 15 years, Dickson noted. “And most likely in the last 30 years.”
As a result, Dickson added, to date, no Canadian property and casualty insurers have been forced to take significant writedowns as a result of exposure to the financial turmoil currently gripping the United States.
“In Canada, we know that regulated P&C companies are not overly leveraged,” Dickson said, comparing the difference between the Canadian and U.S. property and casualty insurance markets right now. “Regulated P&C companies in Canada do not have debt on their balance sheet, nor are they generally selling products that require collateralization in the event of credit downgrades.
“Debt and OSFI has been adamant about this does not belong on the balance sheets of operating P&C companies.”
But while defending OSFI’s decisions on capital requirements, Dickson noted the regulator could not be too careful.
“We are in uncharted waters,” Dickson observed. “The total losses that global banks and insurance companies have had over the past three or four weeks were on what until very recently were perceived to be low-risk, conservative debt instruments.”


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