OSFI releases discussion paper on new capital-testing framework

Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), has just released a discussion paper on developing a new capital-testing framework.
The paper, Key Principles for the Future Direction of the Canadian Regulatory Capital Framework for Property & Casualty Insurance, outlines 14 key principles that should be incorporated into any new capital framework.
The paper is intended to help lay the groundwork for introducing a measure for insurance risk in 2014.
In addition to “encouraging good risk management,” any new framework should minimize the effects of insurance business cycles, the paper says. In addition, it should be part of the supervisory rating and staging process that defines possible supervisory interventions.
Principle Number 2 in OSFI’s paper talks about the need for a new model to encourage capital planning and avoid pro-cyclicality.
“The capital framework should encourage appropriate capital planning and the creation of high-quality buffers during times of profitable growth — such buffers should be sufficient to withstand expected loss scenarios and to carry an insurer through adverse circumstances,” the paper reads.
“Where practicable, the capital framework should minimize pro-cyclicality (i.e. the tendency of a rule, such as capital requirement, to exacerbate the effect of a market phenomenon such as a business cycle) and its macro-prudential impact (e.g. the effect the rules have on the strength of the financial system as a whole) should be considered.”
A new framework should also be part of the staged intervention levels for supervisory action, OSFI says. “The capital ratio level for intervention should be sufficiently high to allow for supervisory action at an early stage,” the paper says.
The full paper is available on OSFI’s Web site at:
http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=3090