Julie Dickson, Superintendent of Financial Institutions, today discussed the challenges banks faced in moving to risk-based capital adequacy requirements, and warned that the same troubles likely face insurers.

Speaking to the KPMG Insurance Issues Conference in Toronto, Dickson noted that the insurance industry is also seeking its own version of the global banks’ capital adequacy system, known as Basel II. And, she suggested that they will likely also face exactly the same challenges as the banks did.

She detailed 10 notable challenges, including: the unanticipated effort required to adopt leading edge of risk management practices; costs were far higher than expected; data availability, accessibility and integrity was also an issue; adopting advanced capital approaches in countries with far-flung operations is a huge challenge; as was producing reasonable risk estimates to support a capital measurement.

Also, she notes that explaining it all to senior management and directors was not easy. There was confusion about the ultimate goal. And, there is a steep learning curve for analysts as well as for the institutions that implement the advanced approaches, requiring greater disclosure.

“I am not trying to dissuade any companies from going down this road, because it is where companies need to go,” she says. “But I think companies need to start the journey with their eyes wide open.”

“While we are at the early stages, I can say that we already see some of the same worrisome signs. We see a tendency to think that this can be done quickly and some even say that P&C companies in Europe are already there. We have talked to our colleagues in Europe and the sense we have is that being “there” is a major overstatement,” she added.

“The data requirements and costs are also being underestimated. I think people are also realizing the challenge in explaining it to your CEO and board. You need to make a complex subject simple which is always a challenge,” she noted.

Dickson said she’s happy to see the interest in moving toward risk based capital regimes. “I think the insurance industry should talk to banks about their experience, and talk to their international counterparts about progress being made internationally. We are certainly talking to our counterparts. We all have a common interest – to build a strong and prosperous Canadian financial system, a system in which Canadian can put their reliance and their trust,” she concluded.