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OSFI looking at changes to earthquake guideline for insurers


August 16, 2012   by Canadian Underwriter


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Canada’s federal financial services regulator is proposing revisions to how property and casualty insurers measure and manage earthquake exposure.

The Office of the Superintendent of Financial Institutions (OSFI) says the changes to Guideline B-9, Earthquake Exposure Sound Practices are designed to “emphasize and strengthen the principles-based approach to managing earthquake exposure.” As part of the revisions, OSFI notes it will remove details of the capital formula from Guideline B-9 and provide an updated capital formula for inclusion in the Minimum Capital Test (MCT) Guideline.

In addition to these measures, OSFI is also recommending changes that will:

  • remove references to outdated default loss estimates;
  • update the description of best practices in earthquake exposure management; and
  • increase OSFI’s flexibility in the collection of relevant data.

Weaknesses in the current guideline include default loss estimates that “are out of date, difficult to use because of changes in CRESTA zone (groupings of postal codes) definitions and may no longer be considered conservative due to changes in earthquake modelling and the underlying science that have occurred over the last 15 years,” OSFI reports.

The regulator also notes that “best practices developed in the last 15 years in the use of earthquake models and in mitigating the risks associated with using models, need to be reflected in the guideline.”

OSFI is seeking feedback to the proposed changes during August and September 2012. It expects the revised guideline to be finalized in 2012, with an effective date of January 2014.