Why us? P&C industry responds to new foreign interference rules

Just when you thought it was safe to return to underwriting property and casualty (P&C) insurance risk, OSFI has new marching orders from Parliament to provide guidance on foreign interference in financial institutions, prompting yet another round of consultations with the industry.

OSFI’s holistic approach to providing guidance on risks to financial institutions has met with concern from the P&C industry about the rapid pace of regulatory change. And the industry is publicly observing that some of this guidance is more relevant to banks than P&C insurance.

“One of the big stories here is the expansion by OSFI of non-financial risks,” Stikeman partner Stuart Carruthers observed during a regulatory topics panel at the National Insurance Conference of Canada (NICC) last week in Montreal. “This has been something we’ve seen a lot over the [last] little while.

“A lot of the risks OSFI’s talking about are non-financial. So, digital innovation, cyber, third-party [risks], climate and there’s new guidance in these areas….

“So people are [now] expected to have policies and procedures [in place] to protect themselves against threats to integrity and security, including foreign interference. OSFI is going to come in and they’re going to look at these policies and they’re going to assess them, and they’re going to report to the Minister of Finance.

“This is a new area of work, and there’s going to be new guidance coming out from OSFI. They’ve said they’re going to come out with updated guidance on operational risk and resiliency, as well as guidance on integrity and security. So this is all coming in…at the same time. And so yeah, that’s a lot.”

This year’s NICC opened with a “fireside chat” with Peter Routledge, the superintendent of Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI). Routledge informed more than 600 attending P&C industry delegates that Parliament has extended OSFI’s mandate to guard against risks associated with foreign interference.

“The government has asked OSFI to ensure that the financial institutions regulate and ensure policies and procedures are in place to protect themselves against threats to their security and integrity, including foreign interference,” Routledge said. “And so what does that mean? Integrity and security are big words.

“As we looked at them and thought about how we’re going to interpret these instructions from Parliament, we sort of realized that all the work we’ve done since the financial crisis, in building non- financial guidelines or expectations — be that for accounting, be that for corporate governance, culture, be that for third party risk management, cyber risk — although we call them non-financial risks, they fall neatly into either security or integrity. And so our first take was, this isn’t really something that new. It just re-categorizes and brings up to eye level work we’ve been doing for the last number of years….

“This is a challenge we do not see as a major threat today. And we aim to keep it that way.”

Related: Industry input sought on new crypto-asset guidance

Federal focus

Parliament has been consumed with the issue of foreign interference since it was revealed in late 2022 that China may have tried to influence the outcome of 2019 Canadian election. That concern has morphed into the threat of foreign governments trying to tamper with Canadian financial institutions.

Routledge said OSFI expects to produce draft guidance on foreign interference in mid-October. Public consultations will take place for six weeks, and a finalized guideline will be in place for January 2024. OSFI is expected to report back to Parliament in December 2024.

For the P&C industry, it’s one more public consultation among many others. And in a lunchtime NICC keynote address, Insurance Bureau of Canada president and CEO Celyeste Power suggested some of OSFI’s guidance is more appropriately applied to banks than to P&C insurers.

“[OSFI has] an obligation to monitor and respond to global developments and trends,” Power said. “We appreciate the fact that they’ve been willing to listen, willing to engage in good faith dialogue, and willing to make some important changes.

“But in our view, there’s more work to do to get the balance right….Canadian companies need a stable, predictable regulatory environment so they can grow and innovate. But for regulation to truly be effective, it can’t be one-size-fits-all. The P&C industry is so diverse, so many insurers, so many different business models and levels of complexity.

“We’re not the same as banks, not even close. And so we shouldn’t be treated the same as them when it comes to anti-money laundering, foreign interference, crypto, and a range of other initiatives. There must be a bespoke approach to regulation to bring stability and predictability, an approach that reflects the competitive nature of our industry.”

Dentons partner Laurie LaPalme acknowledged during the NICC regulatory panel the importance of P&C insurers defending themselves against the risk of foreign interference. But she said it may not be the most important priority for the P&C industry at this time.

“It’s not to say that foreign interference, anti-money laundering…is not important to the P&C industry,” LaPalme said. “Because I’ve heard from clients saying, ‘Why P&C? We’re not getting attacked. It’s the life insurers and the banks.’

“But as my sanctions partner told the CMHLA the other day, ‘Yeah, the banks are really tight now, and the life industry is getting really good. So where is the next haven for the money-launderers to use? P&C Cat losses…and things that are happening globally is the next safe haven.

“So, I think it is something we have to look at. But I agree I agree with you, right now in Canada it may not be the most important initiative. I think the industry is just getting used to IFRS 17 and looking at reinsurance rates. So, maybe the pace needs to slow.”

Feature image courtesy of iStock.com/metamorworks