The International Monetary Fund (IMF) recently released its Financial System Stability Assessment for Canada. The assessment is released in accordance with the IMF's Financial Sector Assessment Programme.
In 2010 the IMF mandated that stability assessments be conducted regularly for nations deemed to have "systemically important financial sectors", as part of bilateral surveillance under Article IV of the Articles of Agreement of the IMF.(1) An assessment must be conducted every five years in which the stability of a country's financial system is evaluated and suggestions for improvement are provided.(2) Canada is deemed to have a "systemically important financial sector" by the IMF and the importance of its financial sector was ranked ninth in the world in 2010.(3) This ranking is based on the weighted average of a country's financial sector size and interconnectedness to other countries' economies.(4)
The assessment noted that Canada's insurance sector performed well in stress tests undertaken by the IMF.(5) However, the IMF offered suggestions to safeguard further the stability of Canada's insurance sector. Canada's federal insurance regulator is the Office of the Superintendent of Financial Institutions (OSFI). One of OSFI's strategies for "anticipating and responding to risks emanating from the economy and financial system" – listed as a priority for OSFI – is to address the assessment's recommendations.(6) (7) When contacted for comment about which recommendations might be implemented, OSFI stated that it is still in the process of reviewing the recommendations and has yet to determine what actions will be taken. Therefore, some of these recommendations may be implemented in some form by OSFI in the near future.
Improvement of group-wide insurance regulation
The assessment recommended that Canada's insurance regulators work together, as well as with the Department of Finance, to improve the regulation of group-wide insurance by enacting a "clear and consistent regulatory regime" for the supervision of group-wide insurance throughout Canada.(8) The assessment further suggested that supervision of group-wide insurance should include "material non-regulated entities as well as prudential and market conduct requirements at the group level".(9)
Moreover, the assessment recommended that insurance regulators in Canada be given powers to "take necessary remedial and enforcement measures at the holding company level in line with emerging international best practices".(10) While the assessment did not articulate the specific emerging international best practices, this approach is similar to that outlined in the International Association of Insurance Supervisors' publication "Insurance Core Principles, Standards, Guidance and Assessment Methodology" which states, in reference to the supervision of group-wide insurers, that "[r]emedial or enforcement actions should be taken in coordination with other involved supervisors, where required and appropriate".(11) The assessment suggested that the recommendations regarding the improvement of group-wide insurance regulation be implemented within one to three years.(12)
The assessment noted that Canada's Insurance Companies Act allows the minister of finance to overrule OSFI in certain circumstances.(13) While the IMF acknowledged that this is not currently an issue, it stated that Canada's regulatory structure could be improved if the act were amended so that the minister could "override" OSFI's "prudential" decisions only in "extraordinary circumstances and with full public disclosure".(14)
Similarly, the IMF recommended that Canada's laws be revised so that insurance regulators such as OSFI retain sole authority over "prudential" decisions.(15) The IMF identified change of control as an example of a prudential issue over which regulators should have decision-making control. The IMF further recommended that OSFI be empowered to make and enact its own legally enforceable rules. Currently, OSFI can issue guidelines that are essentially "best or prudent practices that it expects financial institutions to follow".(16) As a practical matter, the strong powers generally given to OSFI under the act tend to raise OSFI guidelines to a higher level than best practices, as OSFI has a way of persuading regulated entities to comply. In any event, the assessment suggested that OSFI be granted such rule-making powers within one to three years.(17)
Macro-prudential tools to manage risk in insurance sector
The assessment recommended that Canadian insurance regulators use macro-prudential tools to help manage risk in the insurance sector. It suggested that market-wide stress tests be conducted to determine which tools to use to manage risk. It furthers stated that an example of a macro-prudential tool that could be used by Canadian regulators is instituting a limit on the amount of higher-risk business that insurers are allowed to conduct.(18) While not mentioned in the assessment, other examples of macro-prudential tools include requiring reserves and instituting debt-to-equity standards.(19) The IMF provided no implementation timeframe for this recommendation.
It is not possible to predict which of the IMF recommendations, if any, will be implemented in Canada. Insurance supervision was only one aspect of the Canadian financial system that the IMF reviewed; other sectors included banking supervision and securities regulation. Therefore, it remains to be seen whether, and to what extent, Canada will make changes to:
- group-wide insurance regulation;
- the relative powers of the insurance regulator and governmental departments; and
- rule-making authority of insurance regulators.
With respect to risk management tools in the insurance sector, over the past year or so OSFI has implemented a number of requirements relating to risk management that are commensurate with international best practices. Examples include the requirement for insurers to design and implement a risk appetite framework and an own regulatory solvency assessment.
It is evident that Canada has attempted to be and desires to stay at the forefront of international supervisory standards. In speaking to the 58th Annual Canadian Reinsurance Conference on April 2 2014, OSFI Superintendent Julie Dickson commented on the assessment, noting that:
"The assessors… have concluded that we continue to be effective with a high level of compliance with international standards... it is very important, however, not to rest on laurels because the bar is constantly rising."(20)
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(1) IMF, "Financial Sector Assessment Programme: Frequently Asked Questions" (18 March 2014).
(3) IMF, "Integrating Stability Assessments Under the Financial Sector Assessment Programme into Article IV Surveillance" (27 August 2010) at p 14.
(5) IMF, "Financial Sector Stability Assessment – Canada", IMF Country Report 14/29 (Washington DC: International Monetary Fund, 2014) at 15.
(6) Canada, OSFI, "Plans and Priorities for 2014-2017" (Report) (Ottawa: 2014).
(11) International Association of Insurance Supervisors (IAIS), "Insurance Core Principles, Standards, Guidance and Assessment Methodology", (np: IAIS, 2013) at para 23.8.1.
(16) Canada, OSFI, "Table of Guidelines" (Ottawa: 2014).
(19) Jacek Osinski, Katharine Seal & Lex Hoogduin, "Macroprudential and Microprudential Policies: Towards Cohabitation, Monetary and Capital Markets Department Staff Discussion", Note 13/05 (np: IMF, 2013), at p 9.
(20) Julie Dickson, "Remarks by Superintendent Julie Dickson Office of the Superintendent of Financial Institutions Canada (OSFI) to the 58th Annual Canadian Reinsurance Conference" (Remarks delivered at the 58th Annual Canadian Reinsurance Conference, Toronto, April 2 2014).