Transcript Canadian Institute of Actuaries L’Institut canadien des

Canadian
Institute
of
Actuaries
2007 General Meeting
Assemblée générale 2007
Montréal, Québec
L’Institut
canadien
des
actuaires
2007 General Meeting
Assemblée générale 2007
PD 16
Other Stakeholders in ERM
Speakers
2007 General Meeting
Assemblée générale 2007
•
Donald Chu
–
•
James C. Baillie
–
•
Director, Financial Institutions Ratings,
Standard & Poor’s
Director and Chair, Risk Review
Committee, Sun Life Financial
Allan Brender
–
Special Advisor, Capital Division, OSFI
2007 General Meeting
Assemblée générale 2007
OSFI’s View of ERM
2007 General Meeting
Assemblée générale 2007
Regulatory Influence on ERM
• Historically, ERM developed
within the banking sector,
primarily due to the effects of the
Basel Accord
• OSFI encourages the development
of ERM within the Canadian
insurance sector
2007 General Meeting
Assemblée générale 2007
OSFI’s Mandate
• Supervise institutions and pension plans to determine
whether they are in sound financial condition and
meeting minimum plan funding requirements
respectively, and are complying with their governing law
and supervisory requirements;
• Promptly advise institutions and plans in the event there
are material deficiencies and take or require
management, boards or plan administrators to take
necessary corrective measures expeditiously;
• Advance and administer a regulatory framework
that promotes the adoption of policies and
procedures designed to control and manage risk;
• Monitor and evaluate system-wide or sectoral issues that
may impact institutions negatively.
2007 General Meeting
Assemblée générale 2007
Some Principles in OSFI’s
Supervisory Framework
• The level and frequency of
supervisory scrutiny will depend
upon the risk assessment of the
institution. Institutions that are
well managed relative to their risks
will require less supervision. Not
all areas within an institution need
to be reviewed every year.
2007 General Meeting
Assemblée générale 2007
Some Principles in OSFI’s
Supervisory Framework
• Supervision will include reviews of
major risk management control
functions such as Financial Analysis,
Compliance, Internal Audit, Risk
Management, Senior Management and
Board Oversight. OSFI’s supervisory
process uses, where appropriate, the
work of the institution’s internal
management and control functions.
2007 General Meeting
Assemblée générale 2007
Some Principles in OSFI’s
Supervisory Framework
• …. The degree of intervention will
be commensurate with the risk
profile of the institution …
• Ratings will be provided to the
institution after each on-site review
…
2007 General Meeting
Assemblée générale 2007
ERM in OSFI’s Regulatory
Framework
• The regulatory framework consists
of the collection of regulations and
guidance attached to the legislation
that is administered by OSFI
• Many of these regulations and
guidelines refer to an institution’s
ERM
2007 General Meeting
Assemblée générale 2007
ERM and Capital
• ERM is a financial institution’s first line
of defense
– Manage and control risk; prevent trouble
from happening
• Capital is an institution’s second line of
defense
– Hold sufficient financial resources to meet
the costs of trouble when it develops
2007 General Meeting
Assemblée générale 2007
ERM and Capital
• A recent development in capital
requirements is the introduction of
advanced approaches more tailored
to an institution’s specific
circumstances
– Basel II
– MCCSR Advisory Committee
(MAC)
– Solvency II
2007 General Meeting
Assemblée générale 2007
ERM and Capital
• When would a regulator agree to the
introduction methods for the
determination of required capital that
are likely to lead to reductions in
required capital?
• ANSWER: When the institution has a
strong ERM culture and program that
reduces the likelihood of difficulties
occurring and controls their costs
2007 General Meeting
Assemblée générale 2007
Internal Models and Capital
Requirements
Current requirements with respect to
banks’ trading blocks and
segregated fund guarantees are
prototypes
• Risk management
• Board resolutions and reporting
• Model approvals
• Use test
Hedging
2007 General Meeting
Assemblée générale 2007
• Hedging of financial risks can be a significant
component of ERM
– OSFI encourages hedging
• Recognition of hedging in capital requirements
– As opposed to banking, the term of risks in
insurance often exceeds the term of available
hedging instruments
– Recognition must be for a hedging policy and not
just for hedges in place
– The regulator needs assurance the institution will
implement its hedging policy appropriately
2007 General Meeting
Assemblée générale 2007
Do Institutions Properly Recognize
their Risks?
•
•
•
•
Credit derivatives
CMOs
Asset Backed Commercial Paper
Securitized instruments
• Reliance only on “credit” ratings
may be insufficient
The Bottom Line
The primary component of OSFI’s mandate is:
2007 General Meeting
Assemblée générale 2007
•
Supervise institutions and pension plans to determine whether
they are in sound financial condition and meeting minimum
plan funding requirements respectively, and are complying
with their governing law and supervisory requirements
Solid ERM culture and practices increase the
probability an institution’s financial condition
will remain sound, thereby easing the
supervisor’s task and increasing the security of
policyholders and depositors
Questions and
Discussion