Final MCT Guideline, Internal Models, Assessing the Actuarial Function, and Stress Testing 2014 and Beyond

Transcription

1 Final MCT, Internal Models, Assessing the Actuarial Function, and Stress Testing 2014 and Beyond Presented to the 2014 Canadian Insurance Financial Forum (CIFF) May 21, 2014 Judith Roberge and Chris Townsend Agenda I MCT : Development of the 2015 MCT Final Adjustments in the 2015 MCT Capital Impact of 2015 MCT OSFI s Perspective Statutory Returns II. Internal Models Page 2 out of 33 1

2 Development of 2015 MCT Summer 2013: -Proposed new capital framework (Discussion Paper) Winter / Spring 2013/2014 : -Issued draft 2015 MCT September 2014: -Issue 2015 MCT -Assessed capital impact (QIS) and gathered industry comments -Reviewed industry comments and made adjustments -Gathered industry comments -Reviewed industry comments and made adjustments January 2015: -Implementation of the MCT Page 3 out of MCT Thank you for your comments OSFI will respond to industry comments Four adjustments from draft MCT to final MCT : Page 4 out of 33 2

3 Final Adjustments in the 2015 MCT 1. Revised Operational Risk Margin: 15% reduction of factors Revised formula MCT 8.50% Capital Required* +2.50% Direct Premiums Written +1.75% Premiums Assumed +2.50% Premiums Ceded +2.50% Growth Premiums *before the diversification credit and operational risk margin Original formula - draft 2015 MCT 10% Capital Required* +3% Direct Premiums Written +2% Premiums Assumed +3% Premiums Ceded +3% Growth Premiums Cap remains unchanged at 30% of capital required Similar reductions for intra-group pooling arrangements Page 5 out of 33 Final Adjustments in the 2015 MCT 2. Phase-in of capital impact: Phase-in period extended to 12 quarters instead of 8 quarters Companies with an October 31 year-end will: o Calculate the phase-in amounts on October 31, 2014 o Implement the phase-in impact starting on January 31, 2015 Page 6 out of 33 3

4 Final Adjustments in the 2015 MCT 3. Audit opinion on MCT: Filing date extended from 60 to 90 days following fiscal year-end 4. Clarifications: Language used in the MCT has been clarified for: o Deferred Tax Assets o Goodwill o Structured Settlements o Intra-pool Investment Partnerships Page 7 out of 33 Capital Impact of the 2015 MCT Revised operational risk formula increases the average MCT / BAAT ratio by 6.3% points The MCT / BAAT ratio is reduced by 2.8% points under the 2015 MCT (including the impact of the revised operational risk formula) Capital impact on individual insurers varies across the industry Page 8 out of 33 4

5 Capital Impact of the 2015 MCT Summary of Impacts on Capital Ratios MCT BAAT Combined Ratio at December 31, % 311.1% 261.2% 2015 MCT 250.0% 283.7% 258.4% Total Impact of 2015 MCT +3.6% points -27.4% points -2.8% points Impact of Considerations Subsequent to the Draft 2015 MCT Reduction of operational risk formula +6.1% points MCT BAAT Combined +6.7% points +6.3% points Page 9 out of 33 Capital Impact of the 2015 MCT Distribution of Minimum Capital / Asset Requirements by Risk Category 2015 MCT (Combined) Insurance risk 58.1% Market risk 24.5% Operational risk 16.1% Credit risk 8.0% Catastrophes 1.6% Off-balance sheet exposures 1.2% Unregistered Reinsurance 0.8% Diversification credit (between risks) -10.3% Total 100% Page 10 out of 33 5

6 Capital Impact Mitigants Phase-in of impact Possible re-calibration of internal target Vesting assets under the control of the Chief Agent De-risking strategies Capital injection Page 11 out of 33 OSFI s Perspective In general, well capitalized companies and branches will continue to be well capitalized Not necessary to maintain current capital ratio New framework = new calibration Internal targets may be adjusted under the new framework Educational sessions with rating agencies to explain the re-calibration under the new framework Page 12 out of 33 6

7 Statutory Returns One combined return for Canadian companies and foreign branches 13 new & revised capital exhibits Exceptions where the combination was too complex or confusing only in capital exhibits o Capital Available o Capital Required for B/S Assets o Unregistered Reinsurance Page 13 out of 33 Return Instructions One set for Canadian companies and foreign branches Streamlined to eliminate duplication Additional instructions added to provide guidance on new exhibits for 2015 Page 14 out of 33 7

8 Internal Models P&C MAC comprised of representatives from OSFI and industry Continue working together to develop a framework for internal models (since July 2008) Industry developing a handbook on characteristics of economic capital models and best practices OSFI developing criteria for approval of the use of internal models Partial modelling at first Expectation for full modelling Page 15 out of 33 Internal Models 3 year parallel run for first models Implementation date likely 2018 Upcoming communication to the industry Page 16 out of 33 8

9 Assessing the Actuarial Function, and Stress Testing 2014 and Beyond Page 17 out of 33 Actuarial Function was added to OSFI s Revised Supervisory Framework (2010) There are 7 oversight functions that may exist in a federally regulated financial institution (FRFI): Financial, Compliance, Actuarial, Risk Management, Internal Audit, Senior Management, and Board. Oversight functions are responsible for providing independent, enterprise-wide oversight of operational management. Board Senior Manage ment Internal Audit Finance FRFI Risk Manage ment Complia nce Actuarial Page 18 out of 33 9

10 It is important to balance the risk portfolio with the extent and quality of the oversight functions The presence and nature of these functions will vary based on the nature, size and complexity of a FRFI and its inherent risks. Inherent Risks Senior Management and the Board Where a FRFI lacks some of the oversight functions, they are not sufficiently independent, or they don t have enterprise-wide responsibility, OSFI expects other functions, within or external to the FRFI, to provide the independent oversight needed. Inherent Risks Senior Management and the Board; Risk Management; Actuarial, Internal Audit, etc. Page 19 out of 33 The definition of Actuarial Function is flexible Actuarial Function is applicable only to FRFIs with insurance business, with responsibilities beyond the legal requirements of the Appointed Actuary. Actuarial Function may be responsible for overseeing the management of risks for which the actuary can provide expertise such as pricing, reinsurance, stress testing, modelling, etc. Actuarial Skills Actuarial Oversight Legal requirements of the AA The organization of the Actuarial Function varies considerably across the industry. Page 20 out of 33 10

11 Actuarial Function must be independent Actuarial Function Head (AFH) should have sufficient gravitas to adequately carry out his/her mandate. Actuarial Function should be clearly distinct from other oversight functions. The work of the AFH must not include planning, directing or controlling the day-to-day operations of a significant activity of the insurer. A sample mandate of Actuarial Function Adequate oversight over modelling Maintain effective relationship with other oversight functions Adequate oversight over claim management Fulfill the legal requirements of the AA Adequate oversight over reinsurance Adequate oversight over Stress testing Adequate oversight over pricing Reporting Senior Management and the Board Page 21 out of 33 Overall rating of the Actuarial Function considers both its characteristics and the effectiveness of its performance. Effective and independent actuarial oversight enhances the protection of policyholders. FRFIs are expected to demonstrate the effectiveness of such oversight. OSFI s revised Corporate Governance reinforces certain expectations of the Actuarial Functions. OSFI is using Actuarial Function Assessment Criteria (similar to the ones for other oversight functions) to guide the determination of the overall rating/direction. Overall rating Strong Acceptable Needs Improvement Weak Improving Stable Deteriorating Direction Page 22 out of 33 11

12 OSFI s Actuarial Function Reviews: a dozen P&C insurance companies were assessed from 2012 to 2013 The reviews are not completed, and OSFI is assessing more companies in 2014/2015. Characteristic Performance Relationship with other oversight functions Mandate Pricing So far no threats to solvency or systemic actuarial function deficiencies was identified, but a number of areas needed to be improved. Organization Structure Resources Policies, Practices and Methodologies Reinsurance Reserving Claim Management Risk Management Internal Audit Senior Management and the Board Areas to improve: Enhance the actuarial policies, practices and methodologies. Obtain additional resources. Comply with Corporate Governance. Reporting Stress testing/ ORSA/A4 AAR DCAT Page 23 out of 33 OSFI Standardized Stress Testing was designed to focus on the impact of a highly severe external event from one risk category In 2009, examined the impact of certain changes in automobile insurance contracts on P&C insurers. In 2010 and 2011, examined the impact of inflationary and deflationary scenarios. In 2012, with the high level of earthquake related losses globally, OSFI tested earthquake scenarios. Page 24 out of 33 12

13 A scenario combining risks is often more severe than a single risk scenario 99 Percentile (1:100 event) 90 Percentile (1:10 event) Risk A Risk B Risk A & B 105 Bad things come in threes! Jamais Deux sans Trois! Page 25 out of OSFI Standardized Stress Testing is combining a few multiple risks categories Three risk categories: Catastrophe Risks, Auto Insurance, and Economic. Examines the impact of these three less severe risks occurring in the same time period. Results in a highly severe adverse scenario. Severe stress Combined Severity Low stress Catastrophic Auto Inflation Single risk/single time period Complexity Many risks/interactions & time periods Page 26 out of 33 13

14 $' Scenarios Catastrophe Risks There has been an increase in Canadian catastrophic activity in recent years. Many losses arising from perils that do not have widely accepted industry loss models. $4,000,000 $3,500,000 $3,000,000 Catastrophe Loss in Canada Modelled? Unmodelled $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $- Source: data from IBC, ICLR, AonBenfield and PCS Canada Page 27 out of Scenarios Auto Liability A perennial hot topic for the Canadian insurance industry. Reserving for this line has unique challenges. 175% 150% Auto insurance loss ratio Accident benefits Bodily injury 125% 100% 75% 50% 25% 0% Source: Appointed Actuarial Report (insurers only) Page 28 out of 33 14

15 Scenarios Economic A return to higher inflation and interest rates is a question of when, not if. Canadian Economic Indicator 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Consumer Price Index Govern Bond 3-5 YEAR? Source: CIA Report on Canadian Economic Statistics Final Release: Tables Page 29 out of 33 ORSA - Key Metrics Report Page 30 out of 33 15

16 ORSA Implementation Insurers submitted their ORSA workplan and key milestones by March 31, Most FRFI s (on a legal entity basis) plan to complete their ORSA report in Q4 (primarily November and December) with a smaller number completing their in Q3 (roughly evenly split across the three months).. Eleven P&C insurance groups accounting for nearly half (44.3%) of FRFI s have indicated that they would be completing their ORSA on a group basis. 100% 80% 60% 40% 20% 0% ORSA Report Review/Sign-off Expected Completed Q1 Q2 Q3 Q4 Source: FRFI submissions to OSFI Page 31 out of 33 ORSA An iterative process Page 32 out of 33 16

17 Questions? Page 33 out of 33 17