Study 5: The Regulatory Environment Flashcards
What is the main focus of Insurance Regulation? (3)
- Solvency
- Market conduct of insurance companies
- Availability and Affordability
What must insurers practice while also complying with government regulations? (1)
Good Corporate Governance - Must seek a balance between principle and rules. Too much emphasis on rules and regulations can stifle entrepreneurial activity.
What is one of the main goals of the Insurance Bureau of Canada (IBC)? (1) and do they deal with international regulatory bodies? (1)
- To secure legislative efficiency and harmonization and to promote self-regulation.
- Yes, IBC maintains relationships with relevant foreign and international regulatory bodies including the National Association of Insurance Commissioners (American regulator) and the International Association of insurance Supervisors - they deal with solvency
Why is it difficult to practice uniform legislation in Canada?(1) and what approach allows each province to maintain their individuality? (1)
- Provinces have so many individual needs so the luxury of Uniform Legislation is not possible.
- Harmonization allows provinces to maintain individuality while providing a common base of operation for the country.
What is a risk-based regulatory model? (3)
- It is a model where regulators will work with insurance companies to have them solve their own problems.
- Starts with healthy market with consumers’ needs met by products readily available and affordably priced. Everyone is treated fairly.
- Changing the communication model between regulator and insurer is a focus of risk-based supervision. Governments must clearly state goals and key policy objectives to insurance industry.
What are the key objectives of risk-based regulatory models? (5)
- Informed and empowered consumers
- Timely and fair claims management
- Meaningful choice for insurance consumers
- Low system costs
- Market stability
What are some other objectives of the risk-based regulatory model? (5)
- Aim to neutralize the insurance premium rate cycle.(imposing price freezes)
- Considers the effect that a company failure would have on consumers and economy.
- Operates on the theory that different insurers face different risks depending on book of business, growth rate, investment management.
- Must operate within a budget and according to a business plan.
- Regulators Resources are concentrated on riskier institutions.
What information do regulators monitor? (10)
-monitor and analyze key indicators to exercise appropriate stewardship over the system as a whole. (develop info about insurers, its business practices, its significant activities, lines of business written, etc.)
They monitor following info:
- Trends in loss cost developments
- Average length of time that a claim is open
- Cost of fraudulent and other illegal activity
- Changes in average private passenger premiums
- Consumer Price Index
- Premiums for specific demographic profiles
- Reinsurance costs as a percentage of premium
- Profit or loss from a residual market mechanism
- Capital bases of insurers operation in the province
What are the responsibilities of the federal government when it comes to insurers? (3) Are Reinsurers required to be licensed? (3)
- Federal government monitors the solvency of federally incorporated insurers.
- Each Federally incorporated insurer must be licensed in each province where it operates, as well as being licensed for each class of business which it writes.
- Insurers can choose to register with provincial or federal government. (It affects how it can operate)
- Reinsurers are not required to be licensed to operate in Canada, as they are less regulated.
- -Less regulated because they sell to insurers, who are seen as sophisticated buyers.
- -There is limitation on the % of risk that can be placed with an unregistered reinsurer.
Please describe the purpose the Office of the Superintendent of Financial Institutions (OSFI) (4)
**most likely exam question
- Primary regulator of federally chartered Canadian and foreign P&C insurance companies.
- Mission is to protect the interest of depositors, policy holders, pension plan members, and creditors of financial institutions from undue loss.
- Administer regulatory framework that contributes to public confidence in a competitive financial system.
- Supervise and Regulate all banks, insurers, trust and loan companies, etc.
What are the two main functions OSFI can be divided into? (2)
- Regulatory functions: develop and interpret legislation/regulation, Issuing guidelines, approve requests under financial institution legislation.
- Supervisory functions: assess the safety and soundness of the institution under its mandate. Evaluate risk profile, financial condition, risk management, compliance with laws and regulations.
What activities does OSFI perform in order to help insurer overcome possible failure? (7)
- Outlines its best practices or risk management measures
- Informs public of items of general interest
- Publishes warnings for financial sector
- Presents consultation papers to stakeholders
- Continuously monitors insurers financial condition
- Verifies compliance with regulations
- Conducts periodic onsite examinations
What are some regulatory functions OSFI is responsible for?
- Incorporating new Canadian companies
- Issuing orders to Canadian and foreign companies to carry on business
- Review and assess applications for corporate reorganization, changes of ownership, acquisitions of financial institutions, changes in classes of insured risk, withdrawal from Canadian insurance market.
How are the guidelines released by OSFI Categorized? (6)
-Guidelines are the best or prudent practices that OSFI expects insurers to follow.
They are categorized as follows:
- Capital Adequacy Requirements
- Prudent limits and restrictions
- Accounting and Disclosure
- Sound Business and financial practices
- Standards of sound business for life insurers
What are some other things OSFI looks at when it comes to insurers? (3)
- Looks at outsourcing of business activities by insurers. (policy admin, claims, accounting, underwriting)
- Will evaluate risk, carry out a due diligence study, create a business continuity plan, establish process for monitoring and managing outsourced activities
- Assigns a relationship manager to each institution who gets to know the people in the companies, and know how companies operate (this can allow financial downturns to be identified early)
