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ED_6C3
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Summary of recommendations
- encourage good risk management and capital planning
- measure assets, liabilities and capital consistently, reflecting risk on going concern basis using comparable risk measures (VaR, CTE)
- use TAR approach to ensure prudent capital
- consider international principles, be transparent and use reliable processes
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encourage good risk management
- internal model approaches should recognize companies that manage risk properly
- models used for required capital calculations should also be used internally
- same internal model should be used for all risks (no cherry picking)
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encourage capital planning
- avoid pro-cyclicality
- create high quality capital buffers
- minimize pro-cyclicality; micro-prudential impact should be considered
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create sufficient capital in P&C industry to encourage systemic stability
- consider all risks: insurance, market, credit, liquidity, operational
- reflect risk mitigants, reinsurance, interrelationship and diversificationrisks should be aggregated
- no diversification until evidence confirm it holds in stress
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determine assets, liabilities and capital requirement on a consistent basis
- be practical, yet technically sound
- there should be a standard approach to every risk
- framework should have two components:
- standard approach
- internal models
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reflect existing risks on going concern basis and consider winding-up and restructuring
- reg capital should allow institutions to absorb losses and protect policyholders
- risks should not be double-counted
- existing risks include all current commitments, whether on- or off-balance sheet
- future new business and renewals have to be considered
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use measures that are comparable across risks and products (VaR, CTE)
- risk measure should be based on statistically credible data
- risk measure should establish a time horizon common to all institutions
- company should hold capital above target because of economic cycles, desired ratings and differences in risk management
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use a total asset requirement (TAR) approach
- current capital level and reserve margins should be considered on integrated basis
- measurement process should be comprehensive
- expected TAR losses should include margins for misestimation and deterioration
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ensure that capital is prudent
- meaning and methodology for regulatory capital should be transparent
- regulatory capital covers unexpected losses in stress conditions
- although using TAR approach, capital is independently set at prudent level
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consider international principles and best practices
- should be adapted to reflect the market, risks and products of Canadian companies
- capital requirement should be risk-based
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allow comparison of similar risks across financial institutions
- comparable to banks, life insurers
- still recognize differences in nature of business and operating environment
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be transparent, validated and based on credible data
- model and inputs must be disclosed in sufficient details
- credible data can be audited
- professional standards (both current and future) should be considered
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use reliable processes with assumptions sustainable in times of stress
- rules for using models should be clear
- review process should be implemented
- results of models should be replicable
- be part of intervention levels for supervisory action
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