OSFI Seeks Comments on P&C Capitalization!

The Office of the Superintendent of Financial Institutions has announced:

The Office of the Superintendent of Financial Institutions and the Canadian P&C insurance industry are working together through the Minimum Capital Test (MCT) Advisory Committee to develop more advanced risk measurement techniques (internal models) for incorporation into the MCT / Branch Adequacy of Assets Test. These techniques will include the development of risk management and disclosure criteria for risk-sensitive methodologies for use by companies that have the commitment and resources to implement them.

The MCT Advisory Committee has developed and proposed a set of high level key principles to guide the development of a new capital framework. Please provide your comments by August 31, 2009.

This is significant. In the past I have harshly criticized OSFI’s lack of consultation. There’s no way of telling at this point whether this is genuine consultation or merely window-dressing, but it is undeniably a step forward.

The Key Principles are, unfortunately, so generic as to be useless. Like, f’rinstance:

Capital requirements should be risk-based.

It’s pretty hard to argue about that!

The section that might prove contentious is:

To allow market discipline, the meaning and methodology for, and the factual disclosure related to, regulatory capital and capital requirements should be transparent.

Assiduous Readers will know of my long-standing complaint about the lack of disclosure of the double-leverage inherent in the holdco/sub structure. The accompanying letter provides information regarding submission of comments:

For comments or questions, please contact Bernard Dupont at (613)990-7797 or bernard.dupont@osfi-bsif.gc.ca or Judith Roberge at (613) 990-4412 or judith.roberge@osfi-bsif.gc.ca.

I suggest that all those with an interest in the preferred shares issued by P&C holdcos (e.g., ELF.PR.F, ELF.PR.G) write in and suggest that ownership of a controlling interest in a P&C operating company be made conditional on the holdco publishing deconsolidated financial statements.

And, with respect to procedure, it will also be worthwhile to suggest that

  • All comments be made public
  • The response of the committee to the comments be published

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