OSFI Releases Proposed "Standard Framework" for Insurers

OSFI has released a proposed Framework for a New Standard Approach to Setting Capital Requirements

This paper proposes a new standard approach to determine how much capital a Canadian life insurance company should be required to have on hand in order to be able to meet its obligations. The proposed framework is consistent with the “Canadian Vision for Life Insurer Solvency Assessment,” endorsed by the Office of the Superintendent of Financial Institutions (OSFI) and Autorité des marchés financiers (AMF). It uses a target asset requirement approach1, meaning that insurance companies would be required to hold assets equal to the sum of the best estimate of their insurance obligations and a solvency buffer.

They note that:

The current MCCSR does not adequately account for risk concentration and risk diversification. Nor does it provide explicitly for operational risk. These areas will also need to be considered in the updated standard approach. However, implementation may be later than for credit, market, and insurance requirements.

In yet another example of OSFI’s contempt for investors – who are the ones supposed to be supplying the market discipline. Remember? – they restrict participation in the discussions to industry:

We will now be preparing more detailed papers on market, credit, insurance and operational risk. We will ask the industry for comments on each paper and for participation in quantitative impact studies.

Further:

The framework will consider in the future the possible recognition of concentration or diversification of risk.

We can only hope that this is the NEAR future! It is not clear to me how a rational determination of the credit risk of a portfolio can be made without considering concentration risk, but maybe that’s just me.

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