The Office of the Superintendent of Financial Institutions has issued a proposed set of principles to guide the creation of a new capital adequacy framework for the property & casualty insurance business.

In a letter to P&C companies, OSFI reports that it has been working with the Canadian P&C industry to develop more advanced risk measurement techniques (internal models) to use in its capital adequacy tests. These techniques will include the development of risk management and disclosure criteria for risk-sensitive methodologies for companies that want to implement them.

To that end, OSFI’s Minimum Capital Test advisory committee has developed a set of principles to guide the development of a new capital framework. The committee plans to develop and recommend possible changes to the current framework to both OSFI and the Autorité des marchés financiers in stages. Its first priority is to develop an approach to measure the insurance risk.

OSFI says that as the committee completes its work, the regulator will follow its normal public consultation and approval process before any changes are made to the framework. While a definitive timetable has yet to be approved, the implementation of a measure for insurance risk for regulatory capital purposes is expected by 2014. The development of models to measure the other risks will follow after that.

Comments on the principles are sought by August 31.

The MCT committee is co-chaired by Chris Townsend, P&C representative of the the Canadian Institute of Actuaries’ risk management and capital requirements committee, Chris Walton, the Insurance Bureau of Canada’s financial affairs committee, and Bernard Dupont, director of OSFI’s capital division. Its members are senior representatives from OSFI, the AMF, the IBC, the CIA, the Property and Casualty Insurance Compensation Corp., the Canadian Council of Insurance Regulators, and the industry.

IE