OSFI releases updated Earthquake Exposure Guideline

Revised Guideline comes into effect January 1, 2014

The Office of the Superintendent of Financial Institutions (OSFI) has released the revised version of its Earthquake Exposure Sound Practices (Guideline B-9), following a public consultation that began in August 2012.

In 2010, OSFI, its provincial regulatory partners — British Columbia Financial Institutions Commission (FICOM) and Quebec’s Autorite des marches financiers (AMF) — and the Insurance Bureau of Canada (IBC), formed a working group to review the original guideline, first developed in 1998.

Read: OSFI to update Earthquake Exposure Guideline

According to OSFI, the Guideline has been revised to:

  • Emphasize and strengthen the principles-based approach to managing earthquake exposure;
  • Remove references to outdated Default Loss Estimates;
  • Update the description of best practices in earthquake exposure management;
  • Increase OSFI’s flexibility in the collection of relevant data; and
  • Remove the details of the capital formula from Guideline B-9. The Minimum Capital Test (MCT) Guideline will include the updated capital formula. In the transitional period, please refer to Appendix A for Earthquake Reserve Requirement.

“OSFI will continue to work with provincial regulators and the IBC on related financial requirements and will incorporate any future changes made to the Minimum Capital Test (MCT) Guideline,” states an OSFI release.

Read: OSFI to update Corporate Governance Guideline

“OSFI has refreshed its guidance to reflect the lessons learned and technological changes that have occurred over the past fourteen years,” said Mark Zelmer, assistant superintendent, regulation sector, in a press release. “The revised guideline will help Canadian insurance companies continue to be well prepared for the financial consequences if a major earthquake were to occur in Canada,” added Zelmer.

Insurers are expected to complete a self-assessment of their practices by September 30, 2013 to assess their preparedness for full implementation of the new Guideline. “If significant gaps are identified, they should be discussed with the insurer’s Relationship Manager,” states OSFI.

The Guideline comes into effect January 1, 2014.

The new Guideline addresses the common industry concern that the costs associated with catastrophic risk management might be too great for smaller insurers. The Guideline states, “These policies and procedures should form part of an insurer’s overall catastrophe risk management. OSFI recognizes that individual Federally Regulated Financial Institutions (FRFI) may have differing earthquake exposure risk management depending on, among other factors, their: size; ownership structure; nature, scope and complexity of operations; corporate strategy; and risk profile.”

The Guideline also sets out the factors to be considered when calculating probable maximum loss (PML). “This information, when compared to the level of financial resources available, will enable an insurer to assess its capacity and financial preparedness to handle claims that may arise from a major earthquake. As further described in the Guideline, insurers are expected to report certain earthquake exposure information to OSFI on an annual basis.”

The new Guideline is available here.

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