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Clearly Canadian: Federal Regulator Tells It Like It Is

One of the highlights of last week’s Canadian Section Annual General Meeting – and there were many – was the presentation by Jim Doherty, Senior Director of the Office of the Superintendent of Financial Institutions (OSFI), Canada’s federal insurance regulator.  Over the past few years, Jim has become a staple of the CFA meeting program and has developed a reputation for delivering clear messages on what he and OSFI see when it comes to the future of insurance regulation and fraternals.  This year’s address was true to form and provides a worthwhile glimpse of what’s ahead on the regulatory front for all fraternals on both sides of the border. OFSI Jim commended Canadian fraternals and the CFA Section leaders for their efforts to seek system-wide solutions to the challenges – from product development, to sales and marketing, to regulatory compliance – facing smaller and thinly capitalized societies.  Even though CFA Section members agreed that there was no single “silver bullet” solution which all fraternals could support, Doherty reported that the initiative resulted in “greater awareness among fraternal board members and executives about sustainability issues” and that such awareness can only help societies address these problems before regulatory intervention becomes necessary. Jim said that currently “even small fraternals are adequately capitalized.”  But he was quick to reiterate that “time is running out on small societies – and regulatory pressure to change will continue.”  OSFI’s goal is not to put societies out of business.  “If that happens, then regulation has failed,” said Doherty.  However, OSFI will not deviate from its primary mission of protecting consumers and if regulators feel that an insurer – commercial or fraternal – is endangering the financial security of its members/policyholders, it will not hesitate to take aggressive action to prevent consumers from being hurt. This message was virtually identical to the thoughts that the U.S. regulators on the PresidentsMid-Year Meeting panel delivered to Alliance members last month in Savannah, GA. Doherty also touched on compliance with Canada’s new “Own Risk Solvency Assessment” (ORSA) regulation.  U.S. regulators have placed a high threshold for ORSA compliance, resulting in only a handful of fraternals having to comply with the regulation.  Canada has no such threshold.  All insurers – large and small – must file an ORSA report this year.  According to Doherty, the process of preparing an ORSA report is as valuable as the report itself.  Moreover, OSFI is not looking for a small fraternal to have the same type of report as a large, national insurer.  “The report should reflect the size and complexity of the organization,” he said.  “The reports are idiosyncratic and should be unique to each organization – it’s not a one-size-fits-all report.” Corporate governance is also a high priority for OSFI – as it is for U.S. regulators.  “Every problem can be traced back to a failure of governance,” said Doherty.  “The most effective way to protect policyholders and enhance an organization’s long-term viability is to ensure that competent people are running the show.” Finally, Doherty acknowledged that the increasing cost of regulatory compliance is a burden on smaller insurers.  He said that regulatory costs have risen as a result of the organizational failures of 2007-09 and policymakers desire to do everything possible to prevent a similar meltdown from occurring again.  But he held out little hope that insurers would see rollbacks in the cost and complexity of regulatory compliance.  “If you want to be in this business, it is the cost of entry,” he said.

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