Federal financial regulators have released a paper setting out their vision for more risk-sensitive capital rules for property and casualty insurers.
The Office of the Superintendent of Financial Institutions released the final version of a paper first published for comment back in July. In a letter released on Wednesday, OSFI reports that the comments received on the Property & Casualty Minimum Capital Test Advisory Committee’s initial paper were supportive of the approach outlined. Therefore, it’s now releasing its final vision for new principles-based solvency financial requirements for Canadian P&C insurers.
The committee’s objective is to develop more risk sensitive capital rules that recognize improvements in risk management. The paper calls for regulatory asset requirements to be calculated on two bases – a target requirement and a minimum requirement.
All insurers will be required to use the standard approach to calculate the minimum requirement, whereas there will be more flexibility in calculating the target requirement. The most sophisticated method of calculating the target would use models integrated with the insurer’s risk management system, but this approach will only be available to insurers that can demonstrate that they have robust controls in place and that they meet minimum standards set by the regulators.
“Leading insurers are moving toward internal capital models for internal risk management, capital management, regulatory reporting requirements and rating agency assessments,” the paper notes. “The [committee] believes it is important to support these developments in risk management as all stakeholders benefit from a better determination and allocation of capital to risk.”
The letter also reports that a new industry working group on economic capital models has been formed. The working group will undertake various projects, including helping the committee to define the appropriate characteristics of economic capital models, and outlining best practices in the use of these models for the P&C insurance industry in Canada. This will start with a focus on insurance risk and its components, but will later be expanded to include other forms of risk.
Currently, OSFI reports, the committee is concentrating its efforts on criteria and best practices, for example whether a value at risk, or a tail value at risk, should be used to measure the insurance risk. It is also studying whether a one-year or a lifetime time horizon should be used for regulatory capital requirement purposes. And, it’s helping to develop considerations in modeling P&C insurance risk and the criteria and standards that P&C insurers will have to meet in order to use internal models for regulatory capital purposes.
OSFI notes that, while a definitive timetable has yet to be approved, the implementation of the internal model approach in the new capital framework should be done gradually starting with the measure for insurance risk for regulatory capital purposes expected no sooner than 2015.