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OSFI proposes to change its basis for calculating minimum assessments


July 18, 2012   by Canadian Underwriter


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Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), is proposing to change the basis on which it calculates minimum and non-minimum assessments.

OSFI has suggested using “required capital” as a proxy for how much time and resources it devotes to assessing insurers instead of “net premiums.”

The regulator is also planning to raise its minimum assessment level from $10,000 to $15,000, which OSFI estimates would capture an additional 15 property and casualty insurers on top of the 79 currently assessed at the $10,000 minimum.

This excludes mortgage insurers, for which OSFI is proposing a new assessment category separate from other P&C insurers.

Insurers have about 45 days to submit their responses to OSFI regarding the draft changes.

OSFI currently uses net premiums as a marker to determine the time and resources it will take to assess a company. But the regulator found that a company’s risk profile was often a better indicator of the amount of assessment time and resources required. Therefore, it is proposing to use a risk-based factor, such as a company’s “required capital” instead.

“While OSFI considered and analyzed different assessment options, it proposes to base its new assessment methodology on required capital for insurance companies and required margin for foreign branches, as defined in OSFI’s capital adequacy and adequacy of assets guidelines,” the regulator notes in an industry consultation paper posted on its website.

Among the benefits, it points out that required capital is a simple calculation, and it is more sensitive to measuring risks such as asset default, insurance, interest rate and foreign exchange risks. Also, required capital is less sensitive to changes arising from amendments to International Financial Reporting Standards (IFRS).

IFRS amendments have changed the way that insurers calculate net premiums, which is one reason why OSFI is considering a change to its assessment methods.

“Phase I of IFRS 4 introduced a new definition of an insurance contract, which has resulted in some contracts – previously accounted for as insurance contracts – to be reclassified as investments or service contracts,” OSFI notes. “Insurers are no longer able to report in their financial statements these contracts as insurance premiums. As a result, Phase I reduced the net premiums reported by insurers in Canada, all else being equal.”

In addition, IFRS amendments may mean volume information such as premium income might not be as readily available in the future.

OSFI is proposing to increase its minimum assessment from $10,000 to $15,000, noting that minimum assessment charges have not been updated in 10 years.

“Regardless of an institution’s size, OSFI performs a minimum amount of supervision for all financial institutions,” the regulator notes in its paper. “OSFI has determined that it spends, on average, 15 to 20 days per year supervising small insurance companies and foreign branches, and two to three days per year on small fraternals.

“Using a conservative rate of $1,000 per day, this would equate to a cost of $15,000 to $20,000 for insurance companies and foreign branches, and $2,000 to $3,000 for fraternals.

“In light of the foregoing, OSFI proposes to increase the minimum assessments from $10,000 to $15,000 for both insurance companies and foreign branches, and from $1,000 to $2,000 for fraternals.”

The full consultation paper can be found at:

http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=5012


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