Insurance industry not immune to setbacks

With all the stock market volatility, sub-prime problems and credit tightening issues that have been in the news lately, it might seem as if the whole financial industry is in turmoil. But the insurance industry has remained relatively unscathed through all of this, though that doesn’t mean it’s immune to a meltdown, according to the Office of the Superintendent of Financial Institutions.

“I joined OSFI in 1999 and since that time I have not really seen a major issue affect the life [insurance] industry as a whole,” says Julie Dickson, OSFI’s superintendent. “But we always need to ask the question ‘What could go wrong in this industry?'”

On Thursday, Dickson told a group of people at the Langdon Hall Life Insurance Forum in Cambridge, Ont., that the life industry needs to avoid complacency or there could be problems.

“Sometimes it is useful to take the thing that is perceived to be the least risky and re-examine it,” she says. “Thinking something is low risk can be a risk, as less attention is paid to that area.”

Dickson is specifically talking about reinsurance, which helps mitigate risks in the insurance industry. That doesn’t mean, however, that something can’t go wrong. “A reinsurer failure would be very bad news across the industry,” she says.

A problem with reinsurance is that some reinsurers are not well diversified in their risk profile, so they are exposed to fluctuations in just a single part of the market.

Dickson also points out that there aren’t many life reinsurers in Canada, which exposes the industry to “concentration” risk. “They would never do this in their investment portfolios,” she says, “but in their reinsurance arrangements, this is accepted practice.”

Another issue related to reinsurance is that it’s sometimes used for capital relief without risk transfer. “If this happens, policyholder security is not strengthened and may indeed be weakened,” Dickson explains.

The superintendent also warned against relying too heavily on industry experts. While they are important, she says, there is too great a risk in taking only an expert’s word. “How many people get caught relying on experts when they made a decision to expand into complex areas of structured finance?” she asked. “How many boards really question the experts when the subject matter is tough slogging? I think that the global financial market turmoil tells us that over-reliance on experts is a risk.”

Another potential problem for the insurance industry is the overuse of complicated language. Dickson says that the “marketplace likes simplicity when the going gets tough.”

If the market can’t understand disclosure policies or actuarial explanations, serious issues could arise.

Dickson also warned that if best practices are not constantly reviewed, companies may open themselves up to a host of potential problems. She admits that financial institutions have asked OSFI to do more industry reviews so they can compare themselves to their competition, but in the meantime, companies can conduct their own investigations. “If a board or a CEO has doubts or wants to know how they compare, they can take steps to find out how they rate,” she says. “Many consulting companies have such information based on their in-depth knowledge of the industry worldwide.”

One of the more immediate risks to the industry is the implementation of the international financial reporting standards (IFRS). Dickson says that switching to these new standards is a “long and involved process,” and many companies have said that they don’t have enough time to adopt IFRS. “Accounting changes always represent risk for a company,” she says. “If you [haven’t implemented IFRS yet], it would be advisable for you to seek out the help required now.”

In her conclusion, Dickson said that the industry is strong and successful but added, “The job is never done.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com