Consultation summary report

• PACICC
• OMIA
• CAIR

Stakeholders made the following general comments about the Guidance:

• The Guidance is important to a modern insurance solvency regime.
• Insurers conducting/reporting an annual ORSA is consistent with international best practice (i.e. International Association of Insurance Supervisors’ Core Principles and Common Framework). Several Insurers regulated by FSRA are already conducting an ORSA.
• The Guidance creates a more level playing field in the province’s insurance marketplace.
  • All federally regulated Insurers, and most other provincially regulated Insurers, are required by OFSI or their provincial solvency regulator, to conduct and report an annual ORSA.
• The Guidance is well-founded and is appropriate for P&C Insurers operating in Ontario.
• Supports the approach to proportionality in Guidance (i.e. quality, complexity, and frequency of an ORSA be commensurate with its size, complexity, and risk profile).

FSRA welcomes this feedback and is pleased that the principles-based approach in the Guidance was well received by key sector participants.

• PACICC
• PIE
• CURIE
• OSBIE

• Stakeholders commented that the Guidance as well as FSRA’s previously issued Minimum Capital Test Guidance (“MCT Guideline”) is not applicable to Reciprocals.
• Stakeholders noted that the following changes should be made or considered:
  • The Guidance lays out common expectations for an organization’s ORSA process. FSRA should consider the fact that Reciprocals cover specific areas of risk and are better assessed and managed through frameworks developed by Reciprocals.
  • The Guidance could acknowledge such existing frameworks as factors for Reciprocals to consider when it is determining whether an ORSA is needed. While some Reciprocal may decide that an ORSA is indicated in some situations, these and the frequency with which they are undertaken should remain voluntary and at the discretion of the Reciprocal.
  • The Guidance does not recognize Reciprocals unique features. For example, the fact that Reciprocals are not subject to the MCT Guideline is stated in footnote form only. The specific acknowledgement of the differences of Reciprocals and the modifications to address these differences within Guidance should be documented.
• The Guidance will increase costs to the Reciprocals; it will reduce the ability of the Reciprocals to maintain premium stability and to return excess surplus to subscribers.

FSRA appreciates that Reciprocals are subject to distinct requirements under the Insurance Act.  That said, sound surplus management, effective management of operational risk, and promoting resilience are fundamental elements of FSRA’s supervisory approach. This is regardless of the size, complexity, or risk profile of the regulated entity.

FSRA takes an outcomes-focussed approach when deploying its integrated RBSF-I, which allows for flexibility and enables FSRA to make appropriate adjustments for the Reciprocal model. FSRA will continue to consider the unique nature of Reciprocals and adjust its processes as appropriate, while ensuring that the desired prudential outcomes continue to be achieved to protect subscribers.

• OMIA

• A stakeholder noted the need for updating the Guidance so that it is helpful to a range of readers some of whom will not have the depth of experience with technical ORSA concepts.
• The stakeholder suggested: adding commentary/narrative within the Guidance to more explicitly reference the source guidance to understand the inter-relatedness and context of terms such as “Capital Resources”, “Supervisory Target”, etc.
• The stakeholder also suggested including reference to where the defined terms may be found in other guidance documents provided, they are not defined in the Guidance or in an appendix with key terms that are defined by other guidance.

FSRA appreciates these comments and would like to clarify that the intersectionality of the ORSA Guidance with other applicable Guidance documents is addressed in the Rationale and Background section of the Guidance.

• CAIR
• PIE
• CURIE
• OSBIE

• Stakeholders noted that existing risk management practices are already achieving the intended result suggested in the Approach Guidance. Given the size and resource constraints of most, if not all Reciprocals, some of the proposed expectations in the Guidance result in a duplication of efforts.
• Stakeholders also commented that proportionality should be applied given a Reciprocal exchange’s inherently smaller resource base and risk profile.

The Guidance communicates intended outcomes for an effective capital management process.  FSRA will take into consideration whether the intended outcomes are achieved with existing Insurer risk management practices by taking a flexible and proportional manner to accommodate the various unique structures of Insurers in Ontario.

In the Guidance, FSRA communicated that it will apply the Guidance in a proportional manner, considering the size, complexity, and risk profile of each Insurer.

• CAIR
• PIE
• CURIE
• OSBIE

• Stakeholders commented that the ORSA is not applicable to Reciprocals in the current state. However, it is expected that proportionality will be considered when assessing a Reciprocals Enterprise Risk Management (“ERM”) process given the structure and risk profile.

In the Guidance, FSRA communicated that it will apply the Guidance in a proportional manner, considering the size, complexity, and risk profile of each Insurer. The ORSA Guidance, as Approach Guidance, sets out FSRA’s supervisory processes and practices for reviewing an Insurers ORSA. 

• CAIR
• PIE
• CURIE
• OSBIE

• Stakeholders noted that capital expectations for Reciprocals are laid out separately in the Insurance Act and related Regulations. Therefore, the detailed capital management requirements, including the FSRA MCT Guideline, are not applicable to the Reciprocal industry.
• Stakeholders also noted that given the size and resource constraints of a Reciprocal exchange, it would be impractical for most Reciprocals to monitor Capital Resource levels in real time or to anticipate potential shortfalls within a forward-looking two-year timeframe. Stakeholders also noted that the level, volume and frequency of stress testing outlined in the Guidance is not reasonable for a Reciprocals structure.

FSRA acknowledges that Reciprocals and farm mutuals that are members of the Farm Mutual Guarantee Fund are not required to comply with s. 102(8) under the Insurance Act and O. Reg. 259/04 [which incorporates by reference the MCT Guideline for property and casualty insurance companies and Reciprocals – January 2023].

That said, Reciprocals are required to maintain surplus under the Insurance Act, and reciprocals file their financial statements with FSRA under s. 102 of the Insurance Act. The information filed in these financial statements is used by FSRA to maintain the overall safety, soundness and resilience for all incorporated Insurers.

Principle #3 of the ORSA Guidance sets out FSRA’s approach for evaluating whether Insurers set and maintain adequate capital levels that are commensurate to their size, complexity and risk profile.

• CAIR
• PIE
• CURIE
• OSBIE

• Stakeholders commented that the Guidance notes that “an effective ORSA is clearly and formally documented in an ORSA report at least annually and more often if circumstances warrant”, this expectation is not aligned with other regulators that require stress testing to be completed once in three years. Stakeholders have sought clarification as to why FSRA thinks a different cadence is preferred.

FSRA has considered the Guidance set by other regulators with respect to stress testing and believes its approach is in line with other practices.

Office of the Superintendent of Financial Institutions (“OSFI”) and British Columbia Financial Services Authority (“BCFSA”) cite that, “the ORSA should be performed on a regular basis so that it continues to provide relevant information for an Insurer's management processes. It should be clearly and formally documented in a report at least annually and more often if circumstances warrant, for example when there are changes to the Insurer's risk profile or risk appetite”.

Both Alberta and BCFSA have adopted OSFI’s Own Risk and Solvency Assessment Guidance that considers stress testing as an integral part of the ORSA report that is to be formally documented on an annual basis.  

In Quebec, the Autorité des Marchés Financiers expects the application of the Own Risk and Solvency Assessment mechanism to be the subject of an official report to the board of directors at least once a year, or more often if the financial institution’s risk profile changes significantly. Its Stress Testing Guidance notes that it will also be the responsibility of each institution to choose the type, scope, time and frequency of its stress testing.

• CAIR
• PIE
• CURIE
• OSBIE

• Stakeholders noted that the Guidance is unclear on if periodic objective reviews are a mandatory requirement or voluntary and on the cadence of the periodic objective reviews.
• Stakeholders noted that these requirements will create unnecessary pressure on existing resources and/or require the incurring of additional costs by subscribers to source an experienced individual externally or retain a professional consulting firm to carry out such objective reviews.
• The proposed principle also references the concept of proportionality. If applied to Reciprocals, any supervisory framework should make it clear that benchmarks used in the context of Reciprocal are different than those used for other types of Insurers and consider the nature and built-in protections of Reciprocal exchanges. 
   

The Guidance does not set out requirements for reviews, instead it sets out intended outcomes for an effective capital management process.

FSRA appreciates that not all Insurers may have a dedicated resource in-house for internal audit or other oversight functions.

The presence and nature of this oversight function varies based on the size, complexity, and risk profile of an Insurer and the inherent risks in its significant activities. Where an Insurer lacks a critical oversight function and has engaged external expertise to perform that function, FSRA expects them to maintain accountability for that function (i.e., Insurers can outsource the function’s responsibility but not the accountability and ownership of risks).

Where an Insurer lacks some of the other oversight functions, they are not sufficiently independent, or they do not have enterprise-wide responsibility, in applying proportionality, FSRA expects other functions (for example Senior Management, including the CFO) to provide the independent oversight.

In the Guidance, FSRA also communicated that FSRA will apply the Guidance in a proportional manner, considering the size, complexity, and risk profile of each Insurer.

• CAIR
• PIE
• CURIE
• OSBIE

• Stakeholders commented that there is a need for additional consultations as there are areas in the Guidance that warrant a deeper review, given that Guidance should not apply to Reciprocals because the capital expectations for Reciprocals are already detailed in legislation.

FSRA is committed to continue engagement with the sector to enhance its knowledge of business and transparency between the regulator and regulated entities as we continue to develop the Guidance.

We encourage all Insurers to contact their designated Relationship Manager if they would like to discuss the ORSA Guidance or any related matters.