Federal financial regulators published proposed measures that will require property & casualty (P&C) insurers to recalibrate their exposure to earthquake risks.
The Office of the Superintendent of Financial Institutions (OSFI) issued a memorandum Wednesday outlining its proposed new measure of earthquake exposure, and the formula to be used for setting firms’ capital requirements.
OSFI notes that it is concerned that the historical approach to calculating earthquake exposures understates the risk for some insurers. And so, it has been conducting consultations and revising its guidance to ensure that earthquake risk is appropriately measured and accounted for in its guidelines.
“Catastrophic losses from exposure to earthquakes may pose a significant threat to the financial well-being of many P&C insurers and reinsurers,” it notes. “Insurers need to ensure that they have an adequate level of financial resources to successfully manage through a major earthquake.”
Today’s publication follows a consultation paper issued last year by the regulator regarding the financial resource requirements for earthquake exposure. OSFI reports that it received a number of comments on that paper, and agreed to continue discussions with the industry to finalize the methodology to measure earthquake exposure. These new measures are to become effective January 1, 2015; although the requirements won’t be fully phased in until 2022.
In the meantime, it is seeking comments on the proposed changes by August 31.