Chapter 9

Question 1

What must a newly incorporated insurer file with OSFI?

Answer 1

Letters patent and an order to commence

Question 2

What is an example of a consumer complaint outlining an insurer’s non-compliance?

Answer 2

Charging increased rates to a driver involved in an accident but not at fault

Question 3

What can the Facility Association do if they determine an insurer is in non-compliance?

Answer 3

Investigate further and order a full audit to be completed, potentially at the expense of
the insurer

Question 4

What is the document called that dictates how the outside consultant will carry out its assignment,
including the people involved and the timeline, with the insurer?

Answer 4

b. Engagement letter

Question 5

How often does the reinsurer have the right to audit the insurer?

Answer 5

The reinsurer will determine how often based on its own internal guidelines.

Question 6

What is the most important objective of a reinsurer audit?

Answer 6

. To become aware of any substantive change to the book of business, including rating,
coverages, and types of business

Question 7

What is it called when an insurer writes business that is excluded from the reinsurance treaty?

Answer 7

Non-compliance

Question 8

What is the reinsurer’s motivation in conducting an insurer audit?

Answer 8

To help mitigate the amount of exposure the insurer represents to the reinsurer

Question 9

Who would perform the audit on an external partner?

Answer 9

Combination of an in-house auditor and outside consultant

Question 10

Why would an insurer audit the book of business of another insurer before a merger or an
acquisition?

Answer 10

To identify any major concerns with the transaction and make an informed decision

Question 11

What would an outside consultant look at during a due diligence review of a prospective candidate
for merger or acquisition? (5 marks)

Answer 11

An outside due diligence review of a candidate for merger or acquisition:
 Operational capabilities
 Functional capabilities
 The quality of the candidate’s business
 The profitability of the candidate’s business
 The existence and projections of liability for latent exposures

Question 12

Services provided by outside consultants (any five of the following):

Answer 12

A comparison of the insurer’s underwriting practices against industry best practices
 Actuarial consulting for product development
 Validation of reserve projections
 Modelling of different reinsurance structures and their financial impact on the insurer
 Analysis of the impact of economic conditions on loss trends, regulatory requirements, marketing
goals and corporate objectives
 Projection of future underwriting and investment earnings

Question 13

List five concerns an audit can identify that are unrelated to staffing or organizational concerns. (5
marks)

Answer 13

Concerns that an audit can identify unrelated to staffing and organizational concerns:
 An opportunity for training; for example, to improve underwriting expertise
 A necessary extension or restriction of the underwriters’ authority
 The need for additional or redesigned MIS reports to allow management to better manage the
business
 The requirement for additional or modified control procedures, if real or potential non-compliance
issues are identified
 A change in business processes to increase efficiencies and reduce expenses

Question 14

What are five developments that OSFI regulators watch for that could jeopardize an insurer’s
financial solvency and viability if left unattended? (5 marks)

Answer 14

Developments that can jeopardize an insurer’s financial solvency and viability (any five of the
following):
* Concerns over the insurer’s ability to meet capital and surplus requirements
* Poor earnings, operating losses, or deterioration of profitability
* Less-than-satisfactory management quality or deficiency in management controls
* A financially weak or troubled owner
* Non-compliance with regulatory requirements
* Systemic exposure to insurance catastrophes
* An auditors’ report that implies some reservations about the insurer’s financial health

Question 15

List five powers of enforcement that OSFI has the ability to use if necessary. (5 marks)

Answer 15

OSFI’s powers of enforcement (any five of the following):
* Have the insurer’s auditor expand the scope of its financial audit, perform other actions as requested,
and prepare a report for OSFI
* Bring in an outside auditor (not the insurer’s auditor) to review the insurer
* Direct the insurer to increase its capital or post additional reserves if OSFI considers the insurer’s
reserves inadequate
* Order senior management or the board to restructure the insurer
* Demand that the insurer provide OSFI with an acceptable business plan that addresses the remedial
actions necessary to rectify any substantive problems
* Require an external review of the insurer’s actuarial methods and assumptions if there is concern
about the appropriateness of the actuarial reserves
* Impose business restrictions such as restrictions on new business submissions and writings
* Take control of the insurer and, if warranted and in the direst of situations, begin winding up the
insurer

Question 16

List five insurer practices provincial and territorial regulatory frameworks address in their insurance
acts. (5 marks)

Answer 16

Insurer practices addressed by provincial and territorial insurance acts:
* Disclosure requirements
* Marketing of products
* Rating and underwriting of products
* Claims processing and payments
* Marketing activities