Mark White, who seems to have become OSFI’s chief public apologist, delivered a speech to the Osgoode Hall Financial Regulatory Reform Conference.
Assiduous Readers will remember my complaints about insurers’ double-leverage and lack of disclosure thereof. In the best news I’ve had all week, there seems to be recognition by OSFI that this is a problem:
Second, recent events, such as those at AIG, have shown that holding company strength is important to their regulated subsidiaries. This is particularly true where the holding company is the primary issuer of capital or is required to raise debt.
OSFI regulates both non-operating insurers acting as holding companies, and entities that are formed as holding companies under applicable financial institution legislation. Currently, this only affects the life insurance industry. OSFI is considering updating its current regulatory guidance for these entities.
For example, OSFI’s Minimum Continuing Capital and Surplus Requirements (MCCSR) tests could be used to evaluate a financial group’s consolidated riskbased capital – and an ACM like-test could be used to evaluate leverage.
It’s my guess that this is happening under Treasury’s resolve to look at consolidated capital – but the intellectual dishonesty of OSFI is such that no acknowledgement is made of any external source of ideas.
They are also considering changes in the MCCSR requirements as it applies to seg funds:
Currently, segregated fund guarantees are the only area where Canadian insurers use such models to determine capital requirements. The recent financial turmoil has shown flaws with internal capital models, and segregated fund models are no exception. Particularly as both traditional life insurance risks and non-diversifiable market risks are concerns when dealing with segregated fund guarantees.
OSFI is conducting a fundamental review of internally-modeled capital requirements for segregated fund guarantees. We hope to present the results to the MCCSR Advisory Committee early in 2010, and to use this as a cornerstone for our ongoing work.
It’s nice to know they’re actually going to spend some time thinking about it rather than just taking dictation from well-connected companies … but OSFI has blown its credibility as an enforcer; all credit analysis must be performed with the assumption that in times of trouble, the rules will be changed so it doesn’t look like trouble any more.
Update, 2009-12-26: I’m sure I’ve mentioned this before, but I do not fully understand Mr. White’s assertion that OSFI regulates both non-operating insurers acting as holding companies, and entities that are formed as holding companies under applicable financial institution legislation. Currently, this only affects the life insurance industry.
Both Fairfax Financial (FFH) and E-L Financial (ELF) are holding companies that own P&C insurers. However, it is possible that they are not “formed as holding companies under applicable financial institution legislation.”