Regulatory environmentHorizon 2012

RMA Insurance Roundtable June 5, 2009RBC Mississauga

Facilitated by : Anthony GagnonExecutive Consultantjagagnon@bell.net

What to expect

Risk management more critical than ever ERM is in, «siloed» approaches out ERM implies management across business lines and

integrating all risk categories in a strategic view More regulation coming, not less, with some regulation

of systematically important shadow markets Risk management emphasis :

Governance Liquidity Economic capital and procyclicality Product development risk and suitability Counterparty risk Reputation and moral hazard

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What to expect (continued)

Strong and independent risk management will be required

Strengthening of resiliency of critical payment and settlement systems

Capital will remain key for financial institutions, expect higher minimum requirements

Macro-prudential (systemic risk) focus for supervisors

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G-20 Planned Reforms

Establish Financial Stability Board

Extend oversight to all systemically important institutions and markets

Reform the credit rating agencies environment

Identify and respond to macro-prudential risks

Implement new principles on executive compensation

Improve and harmonize accounting standards

Improve quality and quantity of capitalLearn More at : ERM Symposium April 2009, Risk and Regulation at

Financial Institutions: New Directions, Cathy Lemieux, Federal reserve of Chicago 4

U. S. Treasury key regulatory issues

Systematic riskEliminating supervisory gapsEmphasizing consumer protection

(product suitability) International coordination

Handout available at : http://www.ermsymposium.org/2009/pdf/handouts/2009-chicago-erm-karl.pdf

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Canadian perspective

Canada is an active player in G-20 suggested reforms

Insurancy industry regulation is under discussion at the Superintendant of Financial Institutions (OSFI)

In Quebec, proposed guidelines are expected to be implemented by the end of 2011 covering : Governance Integrated risk management Interest rate risk mangement Liquidity risk Compliance Outsourcing

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IAIS ERM principles for insurers

Establish and operate an ERM framework Integrate the framework with the

strategies, operations and business cullture

Leadership and oversight should be a Board and C-suite task

Proper ERM requires quantification of risks over an adequate range of potential outcomes

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IAIS ERM principles for insurers

Risk measurement must be built on reliable data, description of risks and their explanation

Establish and perform an Own Risk and Solvency Assessment (ORSA)

«An insurer should regularly perform its own risk and solvency assessment

(ORSA) to provide the board and senior management with an assessment of

the adequacy of its risk management and current, and likely future, solvency

position.The ORSA should encompass all reasonably foreseeable and

relevantmaterial risks including, as a minimum, underwriting, credit,

market,operational and liquidity risks. The assessment should identify

therelationship between risk management and the level and quality

of financialresources needed and available.»

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Solvency II : three pillars

I Quantification of risks and capital II Governance and supervisory

oversight III Disclosure and transparency

Risk categories: credit, underwriting, market, liquidity and operational risk

Principle of proportionality: sound and transparent framework in relation to nature, size and complexity

Board accountability for framework, including policies, and oversight 9

Canadian Life paper

The minimum Continuing Capital and Surplus Requirements (MCCSR) paper is capital focused.

The paper nevertheless promotes : Regulatory framework areas: financial

requirements, governance and market conduct

An attention to risks that cannot necessarily be managed through financial requirements.

Reference : Federal : Canadian Vision for Life Insurer Solvency Assessment, November 2007QC : Joint Committee (OSFI, AMF, Assuris) Framework for a New Standard Approach to setting Capital Requirements, Draft for Comment, January 2008 10

Links and referencesLessons from the crisis & other

Senior Supervisors Groupwww.newyorkfed.org/newsevents/news/banking/2008/rp080306.html

President’s Working Group on Financial Markets

www.treasury.gov/press/releases/hp871.htm

Financial Stability Forumwww.fsforum.org/publications/r_0804.pdf

ERM Symposium Chicago April 2009, handouts

http://www.ermsymposium.org/2009/handouts.php

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Links and references (continued)Canadian regulators

Canada : OSFIhttp://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=363

Quebec : AMFhttp://www.lautorite.qc.ca/reglementation/assurances-institutions-depot.en.html

MCCSR Advisory Committee (MAC): The MAC is co-chaired by a member of the Canadian Institute of Actuaries (CIA) and a

representative of the Office of the Superintendent of Financial Institutions (OSFI). Its members are senior representatives from the Canadian Life and Health Insurance Association (CLHIA), CIA, Assuris, the Autorité des marchés financiers (AMF), and OSFI, as well as representatives from large and small insurers and the reinsurance industry.

Canadian vision for life insurer solvency assessment, November 2007http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/guidelines/mac_e.pdf

Solvency Advisory Committe/AMF, Framework for a New Standard Approach to setting Capital Requirements, Draft for Comment, January 2008

http://www.lautorite.qc.ca/userfiles/File/Consultations/solvency-committee-4.pdf 12

References : Bank for International Settlements (BIS) & European Council (EC)

Proposed enhancements to the Basel II framework

Range of practices and issues in economic capital frameworks (mars 2009)

Amended Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the taking-up and pursuit of the business of Insurance and Reinsurance (SOLVENCY II) Brussels February 2008

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References : Joint Forum (selected post 2001)

Credit risk transfer – developments from 2005 to 2007, July 2008

Credit risk transfer, March 2005 Cross-sectoral review of group-wide

identification and management of risk concentrations, Avril 2008

Customer suitability in the retail sale of financial products and services, April 2008

Financial disclosure in the banking, insurance and securities sectors: issues and analysis, May 2004

The Joint Forum members are: supervisors for banks (BCBS)and insurers (IAIS); securities regulators IOSCO

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References : Joint Forum (continued) High-level principles for business continuity,

August 2006 Initiatives by the BCBS, IAIS and IOSCO to combat

money laundering and the financing of terrorism, June 2003

Operational risk transfer across financial sectors, August 2003

Outsourcing in Financial Services, February 2005 Regulatory and market differences: issues and

observations, May 2006 The management of liquidity risk in financial

groups, May 2006 Trends in risk integration and aggregation, August

200315

References : International Association of Insurance Supervisors (IAIS)

Issues paper on group-wide solvency assessment and supervision (5 mars 2009)

Standard on enterprise risk management for capital adequacy and solvency purposes (October 2008)

Standard on the use of internal models for regulatory capital purposes (October 2008)

Standards on disclosures concerning technical performance and risks for non-life insurers and reinsurers (October 2004)

Glossary of Terms (February 2007)16

Appendix: Canada Vs U.S.A. The Canadian banking and insurance sector is dominated by a

small number of large and relatively stable players. It grew with little government intervention until the collapse of Home Bank in the early 1920s. Ottawa then created the Office of the Inspector General of Banks to regulate the sector with an entire staff that could be counted on one hand. The Office of the Superintendant of financial Institutions, known as OSFI, was created when OIGB merged with the insurance regulator in 1987. It has since been steadily growing both its employee-count, now standing at approximately 500, and its oversight of the industry.

OSFI continues to be more focused on the principles of sound management than on rules. The Canadian approach is closer to the British than our southern neighbor.

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Appendix: Canada Vs U.S.A. (continued)

There are more than 7,000 commercial banks in the United States of which 10 to 20 could be considered to dominate the market. Financial institutions are overseen by numerous federal and state regulators. They sometimes overlap, leaving holes. Depending on their type, size and location, U.S. financial institutions could be subject to a number of regulators, from the Federal Reserve Board and, through it, the Federal Reserve Banks (which preside over about 900 state banks and roughly 5,000 bank holding companies), to the Federal Deposit Insurance Corporation (which supervises state banks that are not members of the Federal Reserve System), to the Comptroller of the Currency and the Office of Thrift Supervision , etc. A Canadian Bank Executive was recently quoted as saying their U.S. operations can have as many as 17 «inspectors» at any time.

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Your facilitator : Anthony Gagnonww3.sympatico.ca/anthony.gagnon

With a career spanning more than thirty years, Anthony Gagnon offers value added expert advice and contractual interim executive services in the areas of finance, strategy, risk management and business unit structuring. From 2003 to now, the majority of mandates have been in policy writing and framework design and implementation of Basel II operational risk programs and initiatives: general framework, business continuity, outsourcing, trust company fiduciary risks, etc.

Typical mandates require acting on behalf of an Executive, the project sponsor, in executing project requirements. Sponsoring Executives retain full ownership, are involved on an on-going basis and expertise is transferred to the internal team by the agreed delivery date.

Anthony also works on a sub-contract basis or as partner with reputable firms in major projects requiring teams and multi-disciplinary resources.

Anthony is currently working with Desjardins General Insurance Group

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Desjardins Group

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Desjardins General Insurance Group

4 subsidiaries: 2 individual insurance companies (Desjardins General Insurance and Certas Direct) and 2 group insurance companies (under The Personal banner)

Operates many call centres renowned as being among the most efficient in North America

Client/member satisfaction: 95% policy renewal rate

Expertise in risk and client segmentation and rates management

Some 2,000 agents, experts and client service representatives in various client call centres in Québec and Ontario

1.8 million policies and premium

volume of $1,429 million

Underwriting profit for the 15th year

in a row

Assets: $3.1 billion

Net earnings: $126 million

(Data as at December 31, 2007)

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