The insurance industry was largely spared the financial fallout from the credit crisis, but that doesn’t mean they will be spared the regulatory fallout, according to Julie Dickson, Superintendent of Financial Institutions.

Speaking at the Canadian Reinsurance Conference in Toronto on Thursday, Dickson addressed possible regulatory reforms facing the insurance industry in the wake of the crisis. “In a way, the global financial crisis may have actually introduced more risk into the system, as there is a feeling that insurers have fared better than banks, so perhaps not much needs to change in terms of regulation or supervisory practices as a result,” she said.

And, she noted that while the crisis was largely a banking phenomenon, “I think that you would agree with me that when a part of the largest insurance company in the world is at the heart of the crisis, it signals that insurers certainly had a role to play. Furthermore, as the fallout from the crisis intensified, more life insurers took hits to their balance sheets and a few significant players in the United States chose to convert to bank holding companies in order to receive funding from the U.S. Troubled Asset Relief Program.”

So, the insurance industry is facing a variety of regulatory changes, too. Policymakers’ efforts to address issues such as “too big to fail” in the banking sector is spreading to the insurance side, she said. Capital requirements are another area of big change in both banking and insurance, she noted. “Solvency II is on the front burner and an area we at the Office of the Superintendent of Financial Institutions are watching closely. We think OSFI’s risk based capital rules are ahead of many existing systems in Europe but Solvency II is staking out new ground and we are watching it, as well as what other regulators are doing, like Australia,” Dickson said.

“Solvency II is very heavily weighted on models, even more so than the corresponding banking regulations known as Basel II. As supervisors, we ask ourselves how comfortable should we be with such differences? Will insurers with the same risks hold the same capital? Should the same risk on a bank’s balance sheet be valued in the same way on an insurer’s balance sheet, especially for market risk and credit risk? An OSFI focus will be on trying to answer these questions,” she said.

Finally, major changes to accounting rules are also in the works, Dickson noted. “One theme I see developing internationally seems to argue that if we can’t all agree on accounting changes, then there should be two sets of books – one that pleases the accounting standard setters and one that pleases everyone else (regulators and companies, assuming they can agree),” she said, and she cautioned against this notion.

“Historically there have been instances of having two sets of books – a statutory set and a GAAP set. This is a backwards step in OSFI’s view. A key aspect of the Canadian system is that all financial institutions report based on GAAP, and OSFI uses those same reports. Without such a system, how does management know what they are managing to? Why should regulators use different statements than shareholders and policyholders, when our interests ultimately converge? Will there be less transparency rather than more if two sets of statements are produced and used?” she asked. “These are critical issues and as new accounting regimes are developed I think we need to try to ensure that new problems are not created while trying to address other concerns.”

Additionally, Dickson said that OSFI has been beefing up its expertise in the reinsurance area, and that it is also considering changes to the regulatory regime for reinsurance. “The changes we have proposed to industry, and on which we have received feedback, are meant to achieve several ends. The changes seek to create more transparency in our system, to create a level playing field between domestic and foreign reinsurance entities, provide more similarity for capital credit and charges between the life reinsurance sector and the P&C reinsurance sector, and lead to Canada making further changes in line with other jurisdictions,” she explained.

“The past 18 months have proven to be challenging times for all sectors of the global economy. As the recovery continues, we have an opportunity to make changes to insurance and reinsurance regulation and supervision which will promote a healthy, vibrant, and strong financial sector, anchored by prudent risk management and effective governance,” she concluded.