OSFI flags risks facing reinsurers

Specifically, Dickson suggested that there’s an ongoing debate about whether “it is prudent to assume that recent mortality improvements can serve as the basis for long-term projections. In other words, can we simply continue to extend the line projecting ever-longer lives into the future?”

In recent decades, life spans have been steadily increasing. But it’s not clear that this will continue in the future. Dickson noted that, in the UK for example, mortality rates have improved by 2%-3% every year over the past decade, yet that rate has slowed in the last two years. “Whether this was just a statistical blip or the beginning of a tapering of the rate of improvement remains to be seen,” she noted.

Indeed, as research explores the biology of aging and new frontiers in medicine, “forecasting mortality rates will become increasingly uncertain,” she said.

For industry players that rely on these forecasts, such as pension actuaries and companies selling longevity insurance, Dickson said they “need to be prudent as they make projections that can have significant financial impacts.”

What’s more certain, is that the reinsurance industry, like many others, will face growing cyber threats, she said. “This has become a big focus for banks, as well as insurers, and significant attention must be paid to it,” she noted.

“Adequately addressing and mitigating these risks requires an active and dynamic approach that many institutions have already adopted or are planning to in the near future,” she said.

In her remarks, Dickson also addressed efforts to create new global capital standards for the insurance industry. While new global standards are important, she said that “It is premature to determine the impact these will have on Canadian capital requirements.”

In the meantime, she said, “OSFI intends to continue development of our internal set of rules, given the international global standard might initially act as only a minimum requirement until sufficient time has been allowed to develop and test a robust enough capital test.”

Turning to the ongoing overhaul of global accounting rules that apply to insurance companies, Dickson lamented that the reforms are not being harmonized between international standard and U.S. standards. “In Canada, we are very concerned about where [International Financial Reporting Standards] may end up,” she said, adding, “Our primary concern is over the impact on long-duration insurance contracts and the presentation of insurers’ asset-liability management.”

Additionally, a particular concern for Canada is ensuring that new standards apply to all IFRS companies at the same time, she said. “Past experience with a brand new accounting standard, where Canada was first to adopt, caused Canadian insurers and their auditors to lead the work at the global level. It would be far better if all global companies and auditors are working on a new standard at the same time, so that global agreement on interpretations can be reached,” she said.