MCCSR in Canada – What Comes Next? PD-11 CIA Annual Meeting Vancouver, June 28, 2007 Allan Brender.

MCCSR in Canada –

What Comes Next?

PD-11 CIA Annual Meeting

Vancouver, June 28, 2007

Allan Brender

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Thank you for your attention

www.osfi-bsif.gc.ca