The article was written by Barbara Shecter | Financial Post
In a rare departure from global standard-setting cooperation, Canada’s top financial services regulator said Thursday it won’t adopt a common capital standard proposed for large internationally active insurance groups.
“OSFI’s view is that that the standard in its current form is not fit for purpose for the Canadian market,” the regulator said in a brief statement.
“Specifically, the proposed capital requirements for long-term products are too high to be compatible with OSFI’s mandate of allowing Canadian insurers to compete and take reasonable risks.”
The statement said that while OSFI is “broadly supportive” of the goals of the global Insurance Capital Standard, Canadian insurers will continue to be subject to the requirements of OSFI’s own capital framework for federally regulated insurance companies.
“It’s a disagreement, which is unusual for OSFI,” said Jason Mercer, an analyst at Moody’s Investors Service.
The design for the new global standard was proposed during a meeting at the annual conference of the International Association of Insurance Supervisors (IAIS), which is taking place in Abu Dhabi.
The IAIS first announced plans to develop risk-based capital requirements for systemically important insurers in 2014, with a target date of 2020 set for the establishment of the new international standard.
It was similar to a process undertaken in the aftermath of the 2008 financial crisis to ensure large banks had sufficient capital buffers to withstand another crisis and contain contagion that could put the whole system at risk.
In a speech in April 2016, OSFI’s deputy superintendent Mark Zelmer said the Canadian prudential regulator was “actively working” on the new insurance capital standard with the IAIS.
“There is no question that we will see the emergence of a new international capital standard for internationally active life and P&C (property and casualty) insurance companies,” he said in the speech delivered at the IBC Financial Affairs Symposium in Toronto.
In Thursday’s statement, OSFI said there will be a five year “monitoring period,” during which it will continue its work to try to achieve an international capital standard for insurance companies “that works for all jurisdictions.”
Earlier in the day, the Financial Stability Board, which promotes the implementation of effective regulatory and supervisory policies for stability in the financial sector, issued a statement welcoming the finalization of the IAIS’s “holistic framework” for the global insurance industry.
Analysts said it is rare for OSFI to depart from global regulatory standards. However, there have been occasions when the Canadian banking and insurance regulator has responded to what it views as differences in the domestic market. For example, OSFI adopted lower leverage ratios for Canadian banks in 2014 than international counterparts in recognition of difference in mortgage finance. Mortgage loans are often subject to government-backed insurance in Canada, which reduces the risks to financial institutions.