Rules and lessons from the banking sector

Expect a more rules-based approach to financial services regulation, explained a leading legal expert on corporate insurance.

Brian Rose, senior partner at Stikeman Elliott, told delegates at the Insurance Bureau of Canada’s Financial Affairs Symposium in Toronto on April 23, 2009, that despite the effectiveness of the Canadian regulatory regime, changes toward a more prescriptive, and possibly prohibitive, regime are expected.

“Our regulatory regime, not withstanding [its challenges], has worked [and] clearly much better than the [regimes in the] U.S.A. and the U.K,” said Rose.

He suggested that the Ontario Superintendent of Financial Institutions (OSFI) would begin to move to a more rules-based regime, as opposed to a principle-based regulatory regime, a result of current economic conditions.

“I’m not saying [principle based regulation] is dead, but from a practical matter it’s retrenching.”

Rose explained that tough economic conditions—conditions that are a result of other failed regulatory regimes—will prompt regulators and industry participants to demand more prescriptive policy—and this will be the impetus behind OSFI’s move from principle- to rule-based regulation in Canada.

OSFI is aware of financial woes, suggests learning from banks
Speaking on the same panel, Penny Lee, managing director of OSFI, said Canada’s financial woes are squarely on the regulator’s radar.

“Our view is that the risk [to financial service businesses] has increased,” explained Lee. For that reason, OSFI is committed to “reviewing more companies,” while drilling down in key risk areas. The result will be more contact with the regulator, said Lee and OSFI’s commitment to “active monitoring,” and communication with international regulators.

Lee suggested that the insurance industry and the banking sector could learn from one another.

“A move to a more robust stress testing,” means banks need to learn from insurers how to develop and utilize dynamic capital asset testing, while insurers need to learn from the banks how to develop quality investment stress testing models.

Auto insurance: One major concern for OSFI
“On the auto side, many of you know that Ontario auto has been on our radar for awhile,” said Penny Lee. “We actually [believe] the inherent risk for Ontario auto is above average and there are no assurances that the impending regulatory reforms will be sufficient to help with claims activity or claims costs.”

Recently, Ontario’s insurance regulator, the Financial Services Commission of Ontario (FSCO), submitted a report to the province’s finance minister with 39 recommendations for reforming the province’s auto product.

To date, the industry was still determining the impact of these recommendations.

Lee also said uncertainty will dominate this product for some time as a result of two recent court cases against the constitutionality of minor injury regulation (MIRs), one in Alberta and the other in Nova Scotia. With the cases in the appeal process, “uncertainty will persist,” said Lee. “And if caps are struck down, and if [the impact of such decisions on claims] are retroactive, this will be a big blow to the industry.”

Originally published in Canadian Insurance Business Magazine in April 2009