mccsr in canada – what comes next? pd-11 cia annual meeting vancouver, june 28, 2007 allan brender
TRANSCRIPT
2
Steps TowardsImplementing the Vision
• OSFI’s position on MAC• Relation to financial reporting• Timeline• Capital neutrality?• Standard and advanced approaches• Diversification and concentration• Model approvals• Minimum requirement• Implementation issues
3
OSFI’s Position on MAC
• The definition of MCCSR is the domain of the regulator
• OSFI is a partner in MAC• OSFI recognizes the need to update
MCCSR to improve relative risk sensitivity, consistent with its efforts to introduce Basel II
• The intention is to update MCCSR consistent with the path laid out by MAC
• But, OSFI reserves the right to alter MAC’s suggestions to ensure adequate capital to absorb unexpected losses
4
MCCSR and Financial Reporting
• The move to IFRS will require changes to MCCSR– in particular, for credit and ALM risks
• Since regulatory and GAAP reporting are identical in Canada and financial reporting standards are set by AcSB, it is difficult to integrate MCCSR with liabilities
• The Total Asset Requirement (TAR) approach offers a solution
5
Timeline
• Credit risk and ALM risk will be handled first (by 2011)– This is feasible since neither risk will be covered
at all in liabilities
• Components for mortality, morbidity, lapse, pricing and expense risks will have to be introduced all at the same time since these interact within liabilities
• For multinational insurers, competitiveness with European rivals operating under Solvency II may be an issue
6
Capital Neutrality?
• In principle, neutrality for the system as a whole is the goal
• It is not obvious how the level of liabilities will change under IFRS
• Reductions in required capital are possible for institutions with sound risk management approaches and lower risk business
7
The Standard Approach
• The standard approach applies to all lifecos except those authorized to use advanced approaches
• The standard approach will be modified to a TAR approach
• MAC’s original mandate does not include the standard approach – subject to change
• Changes to the standard approach will be based upon experience gained in developing advanced approaches
8
Diversification and Concentration
• In principle, adjustments for risk diversification and concentration seem to make sense
• The devil is in the details – the current approach, based upon subjective selection of correlation factors, is not impressive– Current study sponsored by the CAS/CIA/SOA Risk
Management Section may yield useful results
• Correlation within risks is not the same as correlation between risks
• A major difficulty is to account for the shift in relationships between risk factors as we move into tail events
9
Model Approvals
• Internal models used in advanced approaches will require approval– The form of and requirements for this approval
have not been determined
• The use of “CALM-type” models for ALM risk is a particular issue
• Approvals will probably not extend to models used for “Pillar II” determination of economic capital
10
Implementation Issues
• Need for calibration
• A series of Qualitative Impact Studies (?)
• Done for Basel II, Solvency II
• The investment in new systems is reasonable since the expectation is that the new regime will be implemented, subject to calibration adjustments
11
Minimum Required Capital
• There will be a simplified minimum requirement
• Ensure the entire TAR does not consist of liabilities
• Ensure consistency with ICA
• Similar requirement in Europe under Solvency II