Supervision of Insurance
Groups and Cooperation in
Colleges
Financial Stability Institute
Regional Seminar for Insurance Supervisors in Latin America
Santiago, Chile
November 19-21, 2013
Neville Henderson
Managing Director, Life Insurance Conglomerates
Overview
• Supervision of insurance entities
– Overview of Supervisory Framework
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Non-regulated entities in a Group
Background to Colleges
Logistics
Effectiveness
Questions
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Supervision of Insurance Groups and Cooperation
in Colleges
SUPERVISION OF
INSURANCE
INSTITUTIONS
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Overview of Supervisory
Framework
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Mandate
General Approach
Process
Key Principles
Significant Activity Reviews
Risk Matrix
Composite Risk Assessment
Inherent Risks
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Mandate
• Maintain up-to-date assessment of the
risk profile of an institution in order to
identify prudential issues and intervene
to address those issues on a timely
basis
• Safeguard policyholders from undue
loss
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General Approach
• Federally Regulated Financial Institution (FRFI)
– OSFI – financial well being
– Provinces – issues affecting policyholders (sales practices)
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Provincially licensed companies
Consolidated supervision
Relationship manager
Principles based
Intensity and intervention
Board and Senior Management accountability
Risk tolerance
Reliance on external auditors
Use of work of others
Requirements for non-regulated entities in a
Group
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Process
Planning
Supervisory
Work
Reporting
and
Intervention
Executing
Supervisory
Work and
Updating the
Risk Profile
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Key Principles
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Focus on material risk
Forward looking – early intervention
Sound predictive judgement
Understanding the drivers of risk
Differentiate inherent risks and risk
management
• Dynamic adjustment
• Assessment of the whole institution
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Significant Activity Reviews
• Major lines of business
– Corporate lending, group life, commercial liability
• Enterprise-wide process
– Asset/Liability management, AML/ATF, IM/IT,
strategic management
• Unit
– Geographic unit such as UK operations
– Subsidiary
– Non-regulated (by OSFI) entities
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Risk Matrix
Net Risk
Direction
of Risk
Importance
Board
Senior Management
Internal Audit
Risk Management
Actuarial
Compliance
Operational Management
Quality of Risk Management
Strategic
Regulatory Compliance
Operational
Insurance
Market
Credit
Inherent Risks
Financial
Significant
Activities
Activity 1
Activity 2
Activity 3
Etc.
Overall Rating
Rating
Direction
Frame
Earnings
Liquidity
Risk
Intervention Rating
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Composite Risk Rating
• Earnings
– Strength
– sustainability
• Capital
– Adequacy
• Quantity
• Quality
– Capital management policy and practices
• Liquidity
– Prudent under normal and stressed conditions
• Time Frame
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Supervision of Insurance Groups and
Cooperation in Colleges
NON-REGULATED
ENTITIES IN A GROUP
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Background
• One life insurance conglomerate has a
non-OSFI regulated entity
• The entity is regulated under a different
law
• Operating under this structure since late
2000 under an “Undertaking”
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Terms of Undertaking
• Provide access to corporate records of
the non-OSFI regulated entities
• Existing or subsequently acquired
• Provide copy of all financial information
made available to the public, the primary
FI and the securities regulators
• Notify OSFI of resignation of:
– Its external auditors or directors of external
auditors
– Any directors of its controlled entities
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Terms of Undertaking (cont’d)
• Directors, officers, external auditors and
actuary to provide relevant information
• Notify OSFI of any acquisition in a
“substantial investment”
• OSFI can:
– perform on-site examinations
– Require external auditor to expand scope of
audit
– Identify an external actuary to do a valuation
at FRFI’s expense
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Effectiveness of Undertaking
• Strengths:
– Provides access to financial information that
could negatively impact capital in the regulated
entity
– Can verify
– Participate in Colleges
• Weaknesses:
– Timeliness of obtaining information
– Indirect (i.e. if deemed prudent to increase
capital, would be required at the regulated
company level)
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Supervision of Insurance Groups and Cooperation
in Colleges
BACKGROUND TO
COLLEGES
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Insurance Groups in Canada
• Life industry is dominated by 3 domestic
conglomerate groups that:
– Operate in Canada, US, UK, Europe, Asia
– Are supervised on a consolidated basis
• General insurance is fragmented with no
large domestic group
• OSFI has established Supervisory
Colleges for the three life groups
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Objective of College
• Share information among supervisors
• Build relationships:
– To facilitate information sharing about the
Group
– Discuss issues within a jurisdiction that may
have implications for other legal entities in
the Group
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Development of Colleges
• Started in 2011
– Currently triennial
• Quarterly conference calls
• Ad hoc discussions about new
developments (i.e. acquisitions)
• Foreign on-site visits
– Timing based on risk criteria
– Meet with local regulators if possible
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Supervision of Insurance Groups and
Cooperation in Colleges
LOGISTICS
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Attendees
• All jurisdictions in which the Group
operates are invited
– Bilateral MOUs must be in place
• Invitees accept based on:
– Materiality of business in their jurisdiction
– Budget
• Establish and maintain working
relationships
• Frequent follow-up over a relatively long
time
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Preparation
• Scheduling with attendees
– One year in advance identify OSFI team and organize
process with supervisory attendees and the insurance
Group management
– Location/timing set with all attendees to lock in
schedules about 6 months in advance of meeting
– Budgets set where OSFI covers some hospitality
• Confidentiality requirements stipulated
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College logistics
• Day 1: (insurance group and supervisors)
– Insurance group management present
– Q&A with senior executive team
• Day 2 until noon: (supervisors only)
– Supervisor’s presentations
– Roundtable discussion
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Company Management
• Preparation
– general guidance regarding topics of interest
– Periodic touch-points
– provide input on the draft presentations
• Time
– Day 1
– Q&A
– External Auditor
• Issues
– Significant risks
– Management mitigation
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Sample of Day 1 – insurance group
presentations/ Q&A
• CEO – strategic direction and key challenges
• Chairman of the Board – quality of board
oversight, corporate governance, and challenges
• CFO – capital management and future direction
• Chief Actuary – risk mitigation plans
• CRO – stress testing on key inherent risks
• Internal Auditor - identification of key issues
• External Auditor – identification of key issues
• Q&A with senior executive team of the Insurance
Group
– Planted questions
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Sample of Day 2 – Supervisor’s
presentations/ Roundtable Discussion
• Review of Day 1
• Host’s presentation of supervisory strategy for
the consolidated group
• Half hour for each jurisdiction’s supervisory
team to present strategy/issues
• Roundtable discussion
– Planted questions
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Materials – College Binder
• Prepared by OSFI for Supervisors
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Structure, mandate etc. of College
Risks and issues in the FRFI
Ongoing monitoring / intervention
Lessons learned
Copy of presentations
• Company
– Information from the Group
– Management presentations
– External auditor’s presentation
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Conference Calls
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quarterly financial results
current regulatory / supervisory issues
updated risk assessments
Each supervisor makes a brief
presentation on issues related to their
jurisdiction
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Supervision of Insurance Groups and Cooperation
in Colleges
EFFECTIVENESS
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Effectiveness of Colleges
• Maintains contacts
• Have experienced insightful exchanges
of information
• Ad hoc calls when problems arise in the
group
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Example #1
• A major acquisition abroad by a Group.
• Information sharing at the College and by
conference call between the relevant Supervisory
authorities as the acquisition progressed was very
helpful in getting comfortable with the approval.
• It was learned that both of the jurisdictions involved
had concerns about governance and risk
management and had similar recommendations.
• This resulted in consistent messaging to the group
about deficiencies and processes for correction that
would be satisfactory to the Supervisory authorities.
• Provided greater comfort at approval.
• Eliminated mixed messages to the group.
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Example #2
• Aggressive market guarantees in a product sold by
several members of the Group.
• The College enabled the supervisory authorities to
identify the materiality in each jurisdiction and how
the supervisors were dealing with it.
• Capital standards for the guarantees varied by
jurisdiction.
• OSFI learned that its capital requirement were the
most conservative and was comfortable in applying
its requirements on a consolidated basis.
• Provided comfort that the total capital required would
be appropriate and required considerable stress
testing.
• Shared results with other supervisors and situation is
improving.
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Example #3
• Large block of business in a jurisdiction where
changes in reserving standard could result in a
major financial loss due to reserve strengthening.
• The Group believed the effect would be immaterial.
• The supervisor for the jurisdiction made OSFI aware
that the potential range for the reserve change was
large and this member of the Group would very likely
be affected.
• In the course of discussions, OSFI pressed the
company to strengthen reserving assumptions which
would soften the impact of the reserve change and
required stress testing on the effect.
• Though not yet resolved, potential impact is
manageable by the Group as supported by testing.
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Example #4
• Divestiture of a high risk portfolio in another
jurisdiction.
• Group trying to decrease risk profile and capital
requirements.
• Acquirer had difficulty in its home jurisdiction.
• Supervisor for the jurisdiction provided OSFI with
deeper insights into the issues that the Group was
facing which assisted OSFI in the timing of its
monitoring and review activities.
• Divestiture was transacted.
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Questions?
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Reference Documents
OSFI Supervisory Framework
http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?DetailID=117
2013 Minimum Continuing Capital and Surplus Requirements
(MCCSR) for Life Insurance Companies
http://www.osfibsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/guidelines/MCCSR2013_
e.pdf
OSFI Guide to Intervention for Federally Regulated Life
Insurance Companies
http://www.osfibsif.gc.ca/app/DocRepository/1/eng/practices/supervisory/sup_guide_life_e.pdf
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