MCCSR in Canada – What Comes Next?

1. MCCSR in Canada – What Comes Next? PD-11 CIA Annual Meeting Vancouver, June 28, 2007 Allan Brender

2. Steps Towards Implementing the Vision • OSFI’s position on MAC • Relation to financial reporting • Timeline • Capital neutrality? • Standard and advanced approaches • Diversification and concentration • Model approvals • Minimum requirement • Implementation issues

3. OSFI’s Position on MAC • The definition of MCCSR is the domain of the regulator • OSFI is a partner in MAC • OSFI recognizes the need to update MCCSR to improve relative risk sensitivity, consistent with its efforts to introduce Basel II • The intention is to update MCCSR consistent with the path laid out by MAC • But, OSFI reserves the right to alter MAC’s suggestions to ensure adequate capital to absorb unexpected losses

4. MCCSR and Financial Reporting • The move to IFRS will require changes to MCCSR • in particular, for credit and ALM risks • Since regulatory and GAAP reporting are identical in Canada and financial reporting standards are set by AcSB, it is difficult to integrate MCCSR with liabilities • The Total Asset Requirement (TAR) approach offers a solution

5. Timeline • Credit risk and ALM risk will be handled first (by 2011) • This is feasible since neither risk will be covered at all in liabilities • Components for mortality, morbidity, lapse, pricing and expense risks will have to be introduced all at the same time since these interact within liabilities • For multinational insurers, competitiveness with European rivals operating under Solvency II may be an issue

6. Capital Neutrality? • In principle, neutrality for the system as a whole is the goal • It is not obvious how the level of liabilities will change under IFRS • Reductions in required capital are possible for institutions with sound risk management approaches and lower risk business

7. The Standard Approach • The standard approach applies to all lifecos except those authorized to use advanced approaches • The standard approach will be modified to a TAR approach • MAC’s original mandate does not include the standard approach – subject to change • Changes to the standard approach will be based upon experience gained in developing advanced approaches

8. Diversification and Concentration • In principle, adjustments for risk diversification and concentration seem to make sense • The devil is in the details – the current approach, based upon subjective selection of correlation factors, is not impressive • Current study sponsored by the CAS/CIA/SOA Risk Management Section may yield useful results • Correlation within risks is not the same as correlation between risks • A major difficulty is to account for the shift in relationships between risk factors as we move into tail events

9. Model Approvals • Internal models used in advanced approaches will require approval • The form of and requirements for this approval have not been determined • The use of “CALM-type” models for ALM risk is a particular issue • Approvals will probably not extend to models used for “Pillar II” determination of economic capital

10. Implementation Issues • Need for calibration • A series of Qualitative Impact Studies (?) • Done for Basel II, Solvency II • The investment in new systems is reasonable since the expectation is that the new regime will be implemented, subject to calibration adjustments

11. There will be a simplified minimum requirement Ensure the entire TAR does not consist of liabilities Ensure consistency with ICA Similar requirement in Europe under Solvency II Minimum Required Capital

12. Thank you for your attentionwww.osfi-bsif.gc.ca