Tougher business conditions and the low interest rate environment may push property & casualty (P&C) insurers to seek out greater returns in different business lines or riskier investments, but they should be aware of the added risks they may be taking, cautions top federal regulator Julie Dickson.

Speaking to an industry conference in Cambridge, Ont. on Thursday, Dickson, head of the Office of the Superintendent of Financial Institutions (OSFI), notes that the P&C industry is facing some notable challenges. Not least of which stems from changes in the all-important Ontario auto insurance market, where the government is seeking a 15% decrease in premiums, along with measures to reduce fraud, among other things.

Dickson notes that it may take some time to determine the impact of these proposed changes, and that OSFI will be looking at how companies are affected by the changes, and how they respond to them.

“For example, if Ontario auto insurance business starts to lose money and companies decide to enter new markets or begin selling new products as a way of making up the losses, companies will need to ensure that they are not replacing one risk with a new risk – namely operating in a market they do not understand. We are already seeing moves into commercial lines and, without the right experience and controls, the more likely it is that mistakes will be made and that pricing will be inadequate,” she says.

Along with these industry-specific challenges, the P&C business is also affected by the prevailing low interest rate environment, Dickson says, which may also drive companies to enter new lines of business. “These are classic strategies for dealing with low interest rates that themselves create new risks,” she notes. “OSFI is looking at what sort of pressures the low interest rates are putting on P&C insurers and what their reactions to this pressure will be.”

“Indeed, we are seeing investment pressures as maturing assets in the investment portfolio are reinvested in lower-yielding assets. Companies are starting to look at different investment strategies and may become more aggressive with their investment portfolios,” she reports.

So far, OSFI is seeing “limited change in the investment mix of insurers”, she says. However, she notes that it has observed an increase in securities lending as firms look to boost their investment income.

Given these pressures, OSFI will continue to focus “on the impact on risk management at companies and the impact on capital,” she notes.

Indeed, OSFI is in the midst of revising the capital rules for the P&C industry, including updating various risk factors, introducing an explicit operational risk charge, and a credit for diversification. “The intent of the updates is to ensure that capital requirements remain appropriate for the risks that P&C companies currently face,” she notes.

“But capital is not the only element that an insurance company needs to consider,” she stresses, adding the capital rules represent minimum standards, not ideal capital levels. “Current capital rules are not tailored to address the specific risks to which each individual company is exposed, so companies cannot assume that using only OSFI’s standard capital rules will give them the appropriate risk valuation,” she says.

It also expects companies to consider the impact of moving into new business lines in their own solvency assessments and stress testing, and for governance mechanisms to ensure that risk management and internal controls are appropriate.