Julie Dickson on tighter underwriting

Following Julie Dickson's opening address to those attending the National Insurance Conference of Canada, the Superintendent fielded questions on the current state of the insurance union. Here are the highlights:

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Following Julie Dickson's opening address to those attending the National Insurance Conference of Canada, the Superintendent fielded questions on the current state of the insurance union. Here are the highlights:

Julie Dickson on the question of further tweaks to underwriting guidelines for federally regulated lenders: We had looked at whether changes to B20 were necessary. That was before the summer.  We concluded that we did not need to make any changes to B-20. At this time, we are spending a lot of time monitoring what is going on and we are also collecting more data from banks.  If we do decide to make any changes to B-20, of course, we’ll have public consultations, which is what we always do whenever we change any sort of guideline.

Question:  What are the one or two top priorities you absolutely want to achieve before your term is up?

Julie Dickson: I think we can talk about internal priorities and external priorities.  I think what we really need to focus on at OSFI is the integration of the people that we’ve added. We’ve added a lot of people since the financial crisis started.  That’s kind of a priority of mine to really work on the integration in the nine months or so that I have left. (continued.)

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I think when it comes to everything else it’s not really my term that governs it.  It’s more what is going on out there in the industry; we’re obviously very, very focused on the housing market.  In the industry in general, insurance accounting changes that are being proposed by the IASB (International Accounting Standards Board) are taking up a lot of time right now.  There’s a lot of concern in the industry about insurance accounting changes.

Aside from that, it’s the follow up from the G20 work plan to deal with the global financial crisis. I spent the weekend at Montebello to attend a Ditchley conference and it was all about the financial crisis and “are we out of the financial crisis or not”.  The conclusion seemed to be that we are not out of the financial crisis.

You can tell that by the extraordinary monetary policy, particularly emanating from the U.S. Federal Reserve.  Until that is withdrawn, which goes way beyond just tapering – tapering only refers to the Federal Reserve cutting back on the amount of borrowing every month.  We hope other issues, what you do with a balance sheet that has exploded and the U.S. central bank’s balance sheet has probably not grown as much as other central bank balance sheets around the world.

Others – like Japan – seem to be jumping on the bandwagon.  There’s a huge amount of liquidity to unwind.  I consider that to be an indication that this is still a very challenging world in which we live.  People should be very, very focused on what that could mean for financial market performance, which means in this industry you really are dealing with two things – your traditional risks, your underwriting etc. and with catastrophe risk and everything added on to that. That’s a big, big challenge, but the whole financial market side of things, your big investors, is something to really be focused on.

I’ve talked about monetary policy.  I haven’t even mentioned the whole European side of things, where a considerable amount remains to be done even though the markets have decided that Europe looks good.  I think underneath not a lot has changed.  I would encourage everyone in the industry to keep very focused on what is actually going on and separate fact from fiction, I guess.

Question: Can you comment on developments on convergence and regulation, IAIS (International Association of Insurance Supervisors), things you were talking about, Solvency II, single regulators and global groups, that kind of thing?  Is there any development on that you want to comment on? (continued.)

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Julie Dickson: I think convergence in banking is a lot further ahead than convergence in the insurance world.  I do know that the Financial Stability Board is getting much more interested in the insurance industry and the lack of convergence.  One shouldn’t be surprised at that.  People may know that the FSB released a list of global systemically important insurance companies.

The U.S. is in the process of designating a few insurance companies as being systemically important.  When that happens, people start to get worried about the fact that there is no global capital standard in the insurance industry and that there is a huge disparity between supervisory and regulatory approaches from country to country.

People often focus on the fact that it’s not perfect in banking, but insurance is much further behind in terms of that global coordination.  I think that there is a possibility that there could be a lot of change on that front in the next while because one of the functions of the Financial Stability Board is to really push standard setters to take action when they perceive that not enough is being done.  I think that’s what’s going on now with the FSB and the IAIS.

Question: You mentioned what a difference a year can make in P&C sector and it requires a reset, a response by the regulator of capital requirements.  Almost by definition, those events are extreme, unpredictable and varied. How do you get the balance right that you don’t hamper the businesses with something that may or may not happen again?

Julie Dickson: Our mandate drives us to focus on the unexpected; capital is for the unexpected.  When you look at catastrophe risk, I think that as I mentioned in the speech, some of the things we did just encourage companies to think more about the kinds of losses, catastrophes that they could face.  I think this conference itself is going to lead to a lot more thinking about that.

We had a lot of comments from the industry on whether we have thought enough about that balance.  We will never agree on the balance.  That’s just the nature of the thing.  OSFI’s mandate is pretty clear to be focused on what could go wrong, not to focus on everything that could go right.  We really hope for the best, but you really have to plan for the worst.

From time to time, even if I look at the capital requirements as mentioned, the companies that did the quantitative impact study and provided us with views, that has a very positive impact because at the end of the day a number of improvements have been identified by the industry that will result in an outcome that the industry is going to be happier with.

That’s just us being better informed of what the impacts of some of the things that we’re looking at may result in.  That’s one reason why I do like coming to events like this, why we have OSFI people here at this conference as well, because we need to have that interaction and get the industry perspective so that we don’t do something that has huge unintended consequences and we weren’t really thinking about them prior to making our decisions. (continued.)

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Question: Is it conceivable that OSFI may be giving specific advice in the future to the Ontario Ministry of Finance?  For example, is it conceivable you may say we advise you not to do what it is that you are planning on doing with respect to auto?

Julie Dickson: Usually we talk to other regulators.  We don’t really talk to Ministries of Finance about these things.  I think the industry certainly has an obligation to make its views known to other parties and make their views known to us on OSFI-related matters.  We do rely on the industry to do that.

From our perspective, what we’re really focused on is what this does to the industry’s capital position etc.  We live in a world where auto premiums are regulated and I remember a speech a few years ago where the message was that the industry does have some of ability to influence what happens there.

If the industry, if a company waits and waits and waits before putting in a request to increase premiums, they’re not going to be in the best position relative to a company that is ahead of the curve, has the data; is in there early. That’s really what we encourage. We’re seeing some clarity from the Ontario government on this, which I think means that the outcome here might not have been what people thought it was going to be when these changes were first announced.

Question: I got the sense that you had some concerns about the convergence capital coming into the P&C industry, basically from pension funds.  It used to be from the hedge funds.  It’s probably $40 - $45 billion right now. It could go up to $100 billion, some people predict, in five years’ time.  Is this a concern that you have that companies here in Canada or around the world may be using that capital more so than the traditional markets? (continued.)

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Julie Dickson: I think the concern is simply when a flood of money flows into an industry, there can be impacts that we, as a prudential supervisor, would not find helpful.  Again, we have not seen this in Canada.  It is something that people are starting to focus on globally, probably more so in Europe.

I think if that does lead to underpricing of risk because of the amount of money sloshing around, then that’s going to be an issue. That’s in part why unwinding the monetary stimulus and getting back to a more normal situation is so important, because the unintended consequences of the impacts of this could be quite important.

The longer it goes on, the more people can start to think this is normal and it’s not normal, it’s very, very far from normal. I think that’s the big concern that I would have right now and I think there are many others who feel the same way.
 

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