Canadian insurance regulatory developments and market forces in 2014: Top 10 trends and predictions

January 8, 2014

The Canadian insurance regulatory regime became even more complex and onerous in 2013 and the pace of change continued to accelerate. At the federal level alone, there was major new guidance respecting, among other things, corporate governance, earthquake exposures, own risk and solvency assessment (ORSA), internal capital targets, cyber risk and longevity risk transfers. The provincial level saw, among other things, the rollout of the Ontario auto rate reduction regime, the finalization of the Quebec Commercial Practices Guideline and the reshaping of the regulatory structure in New Brunswick. Meanwhile, macro forces such as low interest rates and extreme weather continued to buffet the industry.

The pace of change is unlikely to slow over the next year, with the following ten trends expected to affect the industry in 2014:

  1. The Regulatory Universe Will Keep Expanding - As noted above, entirely new regulatory galaxies are being formed, focused principally on risk management (e.g. ORSA), while young galaxies continue to expand (e.g. privacy, AML/ATF and sanctions). Meanwhile, little provincial harmonization is occurring.

    While larger insurers have the resources to respond to each of these forces, smaller institutions struggle to keep up and try to avoid being judged by the standards of the larger institutions.

  2. Capital Will Remain King - The focus will remain on capital, with work continuing, in particular, on the various capital-related workstreams of the OSFI Life Insurance Regulatory Framework. Efforts will be influenced by the initiative of the International Association of Insurance Supervisors to develop a global capital standard for internationally active insurance groups (IAIGs) and simple backstop capital requirements for global systemically important insurers (G-SIIs). All this will occur in the context of the continuing low interest rate environment.

    The resulting need for cost savings (compounded for some P&C carriers by the required Ontario auto rate reductions), may drive more M&A activity, although the increased capital requirements may diminish private equity/hedge fund/pension fund interest in the sector.

  3. ORSA Will Prove Burdensome - The new OSFI ORSA Guideline came into effect on January 1, 2014, with insurers being expected to adopt processes during 2014 to meet OSFI's expectations. Insurers are to advise their OSFI Relationship Manager by March 31, 2014 of the target date in 2014 when their first ORSA report will be available. The ORSA process will present a very significant burden for many companies, particularly smaller ones.

  4. Corporate Governance Will Remain Key - Good governance will be more important than ever. Generally, at the board level, more experienced and more attentive directors are being expected to dig more deeply into more things more often. Many smaller companies will still be seeking to close the gaps between their practices and the expectations of the OSFI Corporate Governance Guideline.

    For foreign company branches, OSFI is expected to release a draft updated/expanded Guideline E-4A (Role of the Chief Agent and Record Keeping Requirements) in early 2014 that is anticipated to better and more clearly align the governance expectations for branches with those applicable to companies under the Corporate Governance Guideline.

  5. Cyber Risk Will Threaten - Cyber risk, including risk of data breaches and denial of service attacks, is likely to remain at the forefront of the operational risk theatre. OSFI expects insurer senior management to review cyber risk management policies and practices to ensure that they remain appropriate and effective in light of changing circumstances and risks. OSFI recognizes that many insurers may have already conducted, or may be in the process of conducting, an assessment of their current level of preparedness. With this in mind, OSFI believed that insurers could benefit from guidance related to such self-assessment activities, and consequently in late October, 2013 OSFI released cyber security self-assessment guidance to assist insurers in such activities.

    Insurers are encouraged to use the template or similar tools to assess their current level of preparedness, and to develop and maintain effective cyber security practices. OSFI does not currently plan to establish specific guidance for the control and management of cyber risk. However, and in keeping with OSFI's enhanced focus on cyber security as highlighted in its Plan and Priorities for 2013-2016, OSFI may request that institutions complete the template or, alternatively, OSFI may otherwise emphasize cyber security practices during future supervisory assessments.

  6. Emerging Technologies Will Continue to Reshape P&C Personal Lines Business - The potential of telematics will become clearer, big data will get bigger and internet-based distribution will continue to gain market share. However, these are long-term trends that are unlikely to present much short-term opportunity to help meet the Ontario auto rate reduction targets.

  7. Extreme Weather Will Continue - Severe weather in Alberta and Toronto made 2013 a very challenging year for many P&C insurers, and ice storms in Central and Eastern Canada at year end were a further blow. More of the same is likely in 2014.

  8. Tax Impacts Will Remain Unpredictable - Changes to tax legislation and interpretation will continue to throw monkey wrenches into carefully designed products and programs/structures, in the same fashion as the recent changes to the 10/8 life insurance policy rules and the perplexing treatment of HST on affiliated unlicensed reinsurance.

  9. Consolidation and Fragmentation Will Happen Simultaneously - Consolidation will slowly continue in the P&C personal lines area, with at least one large transaction likely. At the same time, a number of new niche insurance and reinsurance branches will become fully licensed and begin competing for business in their niche markets. The framework for P&C demutualizations may also begin to emerge.

  10. Innovative Risk Transfer Solutions Will Gain Greater Awareness, and, Possibly, Traction - Canadian insurers and other businesses will more closely examine, and potentially begin to embrace, innovative solutions becoming more common outside Canada, including longevity risk transfers and insurance-linked securities. In late August, OSFI issued a draft Advisory setting out its views and expectations for pension plan administrators entering into longevity risk transfer contracts.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at

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