Where insurers stand on OSFI’s reinsurance rules

Although proposed draft reinsurance rules from the federal solvency regulator have not been finalized, the president and CEO of Insurance Bureau of Canada (IBC) is indicating that the regulator and Canadian P&C insurers may be bridging the gap.

“I take some solace in how the reinsurance file has played out,” IBC president and CEO Don Forgeron said during IBC’s 24th annual Financial Affairs Symposium, held virtually on Tuesday. “[It] got us to another round of discussions with OSFI,” he said, referring to the Office of the Superintendent of Financial Institutions.

“There was an openness there with OSFI to do that, and I’m hopeful and optimistic that on the IFRS file — while I realize there is more than just OSFI involved as a stakeholder — that we will find some solutions.”

Forgeron made his brief comments during a fireside chat with Colin Simpson, chief financial officer at Aviva Canada. The symposium focused on IFRS 17, an insurance accounting standard that is set to come into effect on Jan. 1, 2023. Topics included risk pooling arrangements, key performance indicators, the income tax framework under the reporting standard, and a regulatory component.

Don Forgeron, president and CEO of Insurance Bureau of Canada, speaks during IBC’s 24th annual Financial Affairs Symposium.

On the reinsurance file, OSFI created a stir several years ago when it proposed new rules. In its first draft, OSFI expressed concern about insurers rapidly increasing the amount of commercial risk they cover while ceding a substantial portion of that risk offshore to reinsurers not registered in Canada. OSFI didn’t want an unregistered non-Canadian reinsurer to fail, creating a situation where no funds would be available to pay out claims occurring in Canada.

But after a discussion paper was released in June 2018, IBC said Canada’s P&C insurers would have to post an additional $21-30 billion in capital to insure Canadian risks if the rules went through. On average, that would require Canadian carriers to more than triple their capital base, Forgeron said in September 2019 at the National Insurance Conference of Canada.

Reissued rules were expected early last year, but then the COVID-19 pandemic hit.

“OSFI came out with some pretty controversial plans and ideas and the industry hit back with some hard-hitting rebuttals, and we still haven’t landed that particular file,” Simpson said during the IBC webinar. “And it’s been disrupted through COVID.

Colin Simpson, chief financial officer for Aviva Canada, during IBC’s Financial Affairs Symposium.

“I’ve been in Canada for five years and we still haven’t nailed the reinsurance file,” Simpson added. “That’s not meant as a form of disrespect to everyone involved. It’s just a really complex item.”

Like the proposed reinsurance rules, IFRS 17 will change capital requirements. For Aviva, the new standard is “a change in reporting and a change in solvency, a change in the ability to pay our dividends and just a change in the way we run the company.”

IFRS, or international financial reporting standards, was adopted around the world in the last decade for public companies. It allows financial professionals to exercise more judgment in a standardized manner. It replaced generally accepted accounting principles, or GAAP, which took a rules-based approach. Many countries, including Canada, adopted IFRS. The United States, however, did not.

The judgment component of IFRS 17 will force actuaries and accountants to work a lot closer, Simpson observed. In particular, performance management will be in the spotlight.

“The jury is out on how we are going to look at performance management in a post-IFRS 17 world,” Simpson said. “I’m pretty sure that companies south of the border are going to continue with their U.S. GAAP and their traditional P&C metrics. And so the question in my mind is, ‘How are we going to judge performance management going forward?’

“I know OSFI is really focused on that,” Simpson added. “We have a KPI [key performance indicators] working group that is very popular at the moment.”

Feature image by iStock.com/EtiAmmos