Adoption of big regulatory changes must avoid unintentional harm

The insurance industry should get used to greater regulation and expect requirements to continue to evolve, said Neville Henderson, assistant superintendent, insurance supervision sector with the Office of the Superintendent of Financial Institutions (OSFI), at KPMG LLP’s 25th annual insurance issues conference in Toronto on Wednesday.

“The whole environment for insurance has gotten a lot more complex,” Henderson said. “There’s a lot more regulation, and my gut feeling is that regulation is going to continue to change and evolve and perpetuate.”

There are many risks facing the insurance industry, he noted, and regulators are focused on ensuring that insurers are managing those risks appropriately.

Henderson acknowledged that with growing regulation comes higher costs for companies — and small firms, in particular, are likely to struggle with these increasing expenses.

“The cost of doing business has really increased, and I think it is inevitable that this is going to continue to increase,” Henderson said. “It is going to put stress on the smaller companies.”

To adapt to this environment and manage risks effectively, Henderson said insurance companies need to work on placing greater focus on the long-term time horizon.

“[Insurers’] focus has tended to be on the short-term, rather than the long-term. And the long-term is changing so dramatically,” he said. “We have to address those issues, and the only way to address them is to really look forward.”

As an example, Henderson said there are indications that the low interest rate environment reflects a long-term structural shift in interest rates rather than a short-term phenomenon, as many companies believed when interest rates dropped initially.

“We can no longer say that interest rates are cyclical,” he said. “We’re in a position where it looks like there is a structural change in interest rates, and they will remain low for some time in the future.”

If low interest rates are here to stay, insurance companies must consider what that means for their long-term capital positions and make the necessary adjustments, Henderson said.

“Companies should be thinking ahead,” he noted. “Being prepared in advance is 90% of the battle.”

Henderson also acknowledged that innovation is important for the insurance industry. In response to a question about whether OSFI would consider creating a “regulatory sandbox” to help companies experiment with new products and technologies — similar to the Ontario Securities Commission’s (OSC) recently introduced LaunchPad — he said that’s not likely.

“We haven’t really seen the need for that in Canada,” Henderson said, adding that OSFI is satisfied with the existing process of auditing new products and with its current level of discourse with the companies it regulates.

“We have very good contact with the industry,” he added, “and we are quite comfortable with the status quo at this point.”

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