OSFI releases final revised earthquake exposure guideline

The Office of the Superintendent of Financial Institutions (OSFI) released the final revised version of its Earthquake Exposure Sound Practices (Guideline B-9) Thursday, following public consultations that began last August.

The revised guideline comes from a working group created in 2010, comprised of OSFI, and several provincial regulatory partners including British Columbia Financial Institutions Commission (FICOM) and Québec’s Autorité des marchés financiers (AMF), along with the Insurance Bureau of Canada (IBC).

The group formed to update the original earthquake guideline from 1998 to do the following:

• “Emphasize and strengthen the principles-based approach to managing earthquake
• exposure;
• Remove references to outdated Default Loss Estimates;
• Update the description of best practices in earthquake exposure management;
• Increase OSFI’s flexibility in the collection of relevant data; and
• Remove the details of the capital formula from Guideline B-9. The Minimum Capital
• Test (MCT) Guideline will include the updated capital formula. In the transitional period,
• please refer to Appendix A for Earthquake Reserve Requirement.”

A letter containing a summary of comments received and OSFI’s responses to them are available on its website along with the new guideline, which takes effect Jan. 1, 2014.

In the letter, OSFI has asked all insurers to complete a self-assessment of their practices compared with the new guideline by Sept.30, 2013.

“OSFI has refreshed its guidance to reflect the lessons learned and technological changes that
have occurred over the past fourteen years,” noted Mark Zelmer, assistant superintendent of the regulation sector.

“The revised guideline will help Canadian insurance companies continue to be well prepared for the financial consequences if a major earthquake were to occur in Canada,” he added.

OSFI will continue to work with IBC and provincial regulators on related financial requirements and will incorporate any future changes made to the Minimum Capital Test (MCT) Guideline, it noted.

In an article posted to its website earlier in the week, Toronto law firm Cassels Brock noted that the revised guideline puts the onus on individual companies to determine how to implement the changes.

“It can be argued that OSFI is simply tackling the uncertainty surrounding earthquake exposure by requiring insurers to throw more money at the problem,” the article notes. “The anticipated costs of meeting the new requirements and the possibility of higher capital requirements may induce insurers to withdraw their business from select markets.”

The article also notes that global insurers hesitant to invest in Canadian models may struggle with the changes.