Pendulum of regulation in Canada is ‘swinging too far’: IBC president

Speaking about the dangers inherent in a risk-by-risk review of capital charges for property and casualty insurers, the regulatory pendulum in Canada is swinging too far towards the ‘overregulation’ part if the spectrum, according to Canada’s property and casualty insurers trade organization.
“Our [regulatory] regime in Canada is among the best in the world, but I believe it is important to recognize that the regulatory pendulum is swinging, and arguably swinging too far,” said Don Forgeron, president and CEO of the Insurance Bureau of Canada (IBC), in videotaped remarks presented at the National Insurance Conference of Canada (NICC) in Vancouver, B.C.
Forgeron could not attend the Sept. 26 NICC meeting in person because he was at an international forum on insurance regulation in Seoul, South Korea. Instead, he appeared in a video presentation shown during a luncheon at NICC.
The 20-minute video stressed the ‘high wire’ balancing act that exists between insurers and regulators. Forgeron noted that in light of the global market meltdown in 2008, it was not surprising that regulators were taking a closer look at insurers’ capital requirements.
“OSFI is taking steps that will substantially increase the capital that Canadian insurers must hold in order to conduct business,” Forgeron observed. “And we welcome the regulator’s emphasis on better risk management and the efficient use of capital by insurers. We accept this focus.
“[But insurers’] concerns, and I share them, have always been about a Canadian risk-by- risk-by-risk review of capital charges, an approach that may end up increasing capital requirements for our industry and compels insurers to hold more capital while earning less revenue. Some critics, a few of whom are insurers, simply see this approach as a problem on the horizon….”
Forgeron cited figures from reports by J.P. Morgan and Standard & Poor’s. These studies suggest European insurers facing a similar regulatory approach would need to increase their capital requirements by 30% to 50% on the conservative side, and to an upper limit of 65% to 75%, Forgeron said. At the same time, qualifying available capital would be restricted by anywhere from 20% to 50%.
Reduced capital mobility would increase the cost of holding capital. And because of the heavy capital charges applied to certain classes of investments, insurers might be forced to ship their portfolios heavily towards low-yield government bonds, Forgeron noted. This presents a new risk because of the sovereign debt issue.
Forgeron quoted an Oliver Wyman report, which discussed the necessity of conducting a “deep analysis” of how new regulations might affect the structure and behaviour of markets generally. “Without such an understanding, it is possible that the very regulations that are designed to prevent another financial crisis may unintentionally prove to be a destabilizing force.”