Supervision of Insurance Groups and Cooperation in Colleges

1. Supervision of Insurance Groups and Cooperation in Colleges Financial Stability Institute Regional Seminar for Insurance Supervisors in Latin America Santiago, Chile November 19-21, 2013 Neville Henderson Managing Director, Life Insurance Conglomerates

2. Overview • Supervision of insurance entities • Overview of Supervisory Framework • Non-regulated entities in a Group • Background to Colleges • Logistics • Effectiveness • Questions

3. Supervision of Insurance Groups and Cooperation in Colleges Supervision of insurance institutions

4. Overview of Supervisory Framework • Mandate • General Approach • Process • Key Principles • Significant Activity Reviews • Risk Matrix • Composite Risk Assessment • Inherent Risks

5. Mandate • Maintain up-to-date assessment of the risk profile of an institution in order to identify prudential issues and intervene to address those issues on a timely basis • Safeguard policyholders from undue loss

6. General Approach • Federally Regulated Financial Institution (FRFI) • OSFI – financial well being • Provinces – issues affecting policyholders (sales practices) • Provincially licensed companies • Consolidated supervision • Relationship manager • Principles based • Intensity and intervention • Board and Senior Management accountability • Risk tolerance • Reliance on external auditors • Use of work of others • Requirements for non-regulated entities in a Group

7. Process

8. Key Principles • Focus on material risk • Forward looking – early intervention • Sound predictive judgement • Understanding the drivers of risk • Differentiate inherent risks and risk management • Dynamic adjustment • Assessment of the whole institution

9. Significant Activity Reviews • Major lines of business • Corporate lending, group life, commercial liability • Enterprise-wide process • Asset/Liability management, AML/ATF, IM/IT, strategic management • Unit • Geographic unit such as UK operations • Subsidiary • Non-regulated (by OSFI) entities

10. Risk Matrix

11. Composite Risk Rating • Earnings • Strength • sustainability • Capital • Adequacy • Quantity • Quality • Capital management policy and practices • Liquidity • Prudent under normal and stressed conditions • Time Frame

12. Supervision of Insurance Groups and Cooperation in Colleges non-regulated entities in a Group

13. Background • One life insurance conglomerate has a non-OSFI regulated entity • The entity is regulated under a different law • Operating under this structure since late 2000 under an “Undertaking”

14. Terms of Undertaking • Provide access to corporate records of the non-OSFI regulated entities • Existing or subsequently acquired • Provide copy of all financial information made available to the public, the primary FI and the securities regulators • Notify OSFI of resignation of: • Its external auditors or directors of external auditors • Any directors of its controlled entities

15. Terms of Undertaking (cont’d) • Directors, officers, external auditors and actuary to provide relevant information • Notify OSFI of any acquisition in a “substantial investment” • OSFI can: • perform on-site examinations • Require external auditor to expand scope of audit • Identify an external actuary to do a valuation at FRFI’s expense

16. Effectiveness of Undertaking • Strengths: • Provides access to financial information that could negatively impact capital in the regulated entity • Can verify • Participate in Colleges • Weaknesses: • Timeliness of obtaining information • Indirect (i.e. if deemed prudent to increase capital, would be required at the regulated company level)

17. Supervision of Insurance Groups and Cooperation in Colleges Background to Colleges

18. Insurance Groups in Canada • Life industry is dominated by 3 domestic conglomerate groups that: • Operate in Canada, US, UK, Europe, Asia • Are supervised on a consolidated basis • General insurance is fragmented with no large domestic group • OSFI has established Supervisory Colleges for the three life groups

19. Objective of College • Share information among supervisors • Build relationships: • To facilitate information sharing about the Group • Discuss issues within a jurisdiction that may have implications for other legal entities in the Group

20. Development of Colleges • Started in 2011 • Currently triennial • Quarterly conference calls • Ad hoc discussions about new developments (i.e. acquisitions) • Foreign on-site visits • Timing based on risk criteria • Meet with local regulators if possible

21. Supervision of Insurance Groups and Cooperation in Colleges Logistics

22. Attendees • All jurisdictions in which the Group operates are invited • Bilateral MOUs must be in place • Invitees accept based on: • Materiality of business in their jurisdiction • Budget • Establish and maintain working relationships • Frequent follow-up over a relatively long time

23. Preparation • Scheduling with attendees • One year in advance identify OSFI team and organize process with supervisory attendees and the insurance Group management • Location/timing set with all attendees to lock in schedules about 6 months in advance of meeting • Budgets set where OSFI covers some hospitality • Confidentiality requirements stipulated

24. College logistics • Day 1: (insurance group and supervisors) • Insurance group management present • Q&A with senior executive team • Day 2 until noon: (supervisors only) • Supervisor’s presentations • Roundtable discussion • OSFI’s role: • Seeks input from all supervisory attendees regarding issues • Guides presenters about content • Review presentations for key issues and timing • CONFIDENTIALITY

25. Company Management • Preparation • general guidance regarding topics of interest • Periodic touch-points • provide input on the draft presentations • Time • Day 1 • Q&A • External Auditor • Issues • Significant risks • Management mitigation

26. Sample of Day 1 – insurance group presentations/ Q&A • CEO – strategic direction and key challenges • Chairman of the Board – quality of board oversight, corporate governance, and challenges • CFO – capital management and future direction • Chief Actuary – risk mitigation plans • CRO – stress testing on key inherent risks • Internal Auditor - identification of key issues • External Auditor – identification of key issues • Q&A with senior executive team of the Insurance Group • Planted questions

27. Sample of Day 2 – Supervisor’s presentations/ Roundtable Discussion • Review of Day 1 • Host’s presentation of supervisory strategy for the consolidated group • Half hour for each jurisdiction’s supervisory team to present strategy/issues • Roundtable discussion • Planted questions

28. Materials – College Binder • Prepared by OSFI for Supervisors • Structure, mandate etc. of College • Risks and issues in the FRFI • Ongoing monitoring / intervention • Lessons learned • Copy of presentations • Company • Information from the Group • Management presentations • External auditor’s presentation

29. Conference Calls • quarterly financial results • current regulatory / supervisory issues • updated risk assessments • Each supervisor makes a brief presentation on issues related to their jurisdiction

30. Supervision of Insurance Groups and Cooperation in Colleges Effectiveness

31. Effectiveness of Colleges • Maintains contacts • Have experienced insightful exchanges of information • Ad hoc calls when problems arise in the group

32. Example #1 • A major acquisition abroad by a Group. • Information sharing at the College and by conference call between the relevant Supervisory authorities as the acquisition progressed was very helpful in getting comfortable with the approval. • It was learned that both of the jurisdictions involved had concerns about governance and risk management and had similar recommendations. • This resulted in consistent messaging to the group about deficiencies and processes for correction that would be satisfactory to the Supervisory authorities. • Provided greater comfort at approval. • Eliminated mixed messages to the group.

33. Example #2 • Aggressive market guarantees in a product sold by several members of the Group. • The College enabled the supervisory authorities to identify the materiality in each jurisdiction and how the supervisors were dealing with it. • Capital standards for the guarantees varied by jurisdiction. • OSFI learned that its capital requirement were the most conservative and was comfortable in applying its requirements on a consolidated basis. • Provided comfort that the total capital required would be appropriate and required considerable stress testing. • Shared results with other supervisors and situation is improving.

34. Example #3 • Large block of business in a jurisdiction where changes in reserving standard could result in a major financial loss due to reserve strengthening. • The Group believed the effect would be immaterial. • The supervisor for the jurisdiction made OSFI aware that the potential range for the reserve change was large and this member of the Group would very likely be affected. • In the course of discussions, OSFI pressed the company to strengthen reserving assumptions which would soften the impact of the reserve change and required stress testing on the effect. • Though not yet resolved, potential impact is manageable by the Group as supported by testing.

35. Example #4 • Divestiture of a high risk portfolio in another jurisdiction. • Group trying to decrease risk profile and capital requirements. • Acquirer had difficulty in its home jurisdiction. • Supervisor for the jurisdiction provided OSFI with deeper insights into the issues that the Group was facing which assisted OSFI in the timing of its monitoring and review activities. • Divestiture was transacted.

36. Questions?

37. Reference Documents OSFI Supervisory Framework http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?DetailID=117 2013 Minimum Continuing Capital and Surplus Requirements (MCCSR) for Life Insurance Companieshttp://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/guidelines/MCCSR2013_e.pdf OSFI Guide to Intervention for Federally Regulated Life Insurance Companies http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/practices/supervisory/sup_guide_life_e.pdf