Peter Routledge participates in a fireside chat at the National Insurance Conference of Canada

Speech - Vancouver -

Climate

Moderator:

Property and Casualty (P&C) insurers have been thinking about climate change and the risks of climate change for some time and have long flagged this as a legitimate risk. What is the industry teaching the world about climate risk? Are there early results from the Climate Scenario Exercise that you can share?

Superintendent Peter Routledge:

  • P&C industry is teaching the world that there are real financial costs associated with climate risk. This is because we are now seeing how the physical risks of climate change are impacting financial institutions in Canada.
  • For example, high severity events are increasing in frequency, and this has impacted reinsurance coverage and net retentions of P&C insurers that could result in potential earnings or even capital volatility.
  • As most of you likely know, Canada experienced an estimated $7.6 billion in insured losses driven by severe weather so far in 2024, according to the Insurance Bureau of Canada (IBC) and CATIQ. That means that 2024 is the worst year for losses in the nation’s history, and that the four costliest years on record have all occurred within the last decade.
  • We released the final version of the Standardized Climate Scenario Exercise, or SCSE as we call it, on September 10. The SCSE will shed light on the nature of the risks that financial institutions face on their balance sheets and beyond vis-a-vis climate risk.
  • While we don’t have any early results to share at this time, OSFI and the Autorité des marchés financiers (AMF) in Quebec, who is running the SCSE in parallel with their institutions, will report on the aggregate results of the exercise in 2025. We look forward to seeing those results, which will advance climate risk management practices at financial institutions.

Moderator:

This summer in July and August alone, we saw multiple instances of flooding in Toronto and Montreal, wildfires in Jasper and a significant hailstorm in Calgary. In the US, some insurers have withdrawn from Florida and California. In May, State Farm joined other insurers in announcing that it would not renew a considerable number of property owner policies. These are not decisions taken lightly however, withdrawal from a market, or type of coverages, especially where it is because insurers have determined the risk to be too high, has significant consequences for households and individuals.

What steps has OSFI taken or what steps can OSFI take to proactively protect the availability of insurance coverage in Canada?

Superintendent Peter Routledge:

  • Availability of coverage is an important policy question but not part of our mandate as a prudential regulator.
  • This said, the best way OSFI can help is by being proactive – constantly looking to the horizon to identify risks early and ensure that we, and the industries we regulate and supervise, are taking appropriate measures to manage these risks. As you point out, climate is a risk where we need to be proactive.
  • Doing so ensures that banks can continue to make loans and deposits available to Canadians; pension plans can continue to make payments to retirees and in the case of this industry, that insurance companies can make payments to policyholders.
  • Climate risk is first and foremost a financial risk. It is a financial risk that isn’t exactly the same as say credit risk or market risk. But ultimately it recognizes that risks like climate, when not managed appropriately, can materialize as financial risks -it changes cash flows to capital assets and changes valuations.
  • We have taken steps so that insurers are being proactive in the management of climate-related risks such as introducing Guideline B-15: Climate Risk Management. Guideline B-15 sets out a prudential framework including governance and risk management, as well as disclosure expectations for all federally regulated financial institutions (FRFIs) that will help them prepare for, and build resilience to, climate related risks.

Moderator:

Is availability of coverage part of OSFI’s mandate or is it only solvency?

Superintendent Peter Routledge:

  • Availability of coverage is an important policy question but not part of our mandate. Our mandate is to:
    • ensure FRFIs and federally regulated pension plans (FRPPs) remain in sound financial condition
    • ensure FRFIs protect themselves against threats to their integrity and security, including foreign interference
    • act early when issues arise and require FRFIs and FRPPs to take necessary corrective measures without delay
    • monitor and evaluate risks and promote sound risk management by FRFIs and FRPPs
  • We have to make sure that insurers are financially resilient and able to pay claims as they come due by staying well capitalized. OSFI' requires insurers to be well capitalized and manage risk prudently.
  • However, we do not control how insurers deploy that capital. OSFI’s mandate is to make sure the financial system is managing to those risks.
  • The better job we at OSFI can do focusing on climate risk as a financial risk, the more helpful we will be to preparing the system to manage the higher costs that are to come from climate change.

Moderator:

We have a flood program that is moving forward slowly and an earthquake risk study that is ongoing and earthquake remains one of the biggest risks facing the P&C industry. From your perspective, is there anything that industry can do to help move the conversation along?

Superintendent Peter Routledge:

  • OSFI recognizes the significance and importance of insurers being operationally and financially resilient in order to support policyholders following a natural disaster such as an earthquake.
  • Given the potential size of earthquake exposure, we continue to assess the risk and work with financial sector partners to further understand and enhance our prudential frameworks around earthquake risk and ensure policyholders are protected.
  • We recognize that the industry has also been engaged with stakeholders on this issue and I encourage the industry to continue the discussion and work with partners on this important issue.

Moderator:

What does success in dealing with and managing climate risks in the P&C industry look like from your perspective? What does failure look like? What is OSFI doing to try to help the industry get there?

Superintendent Peter Routledge:

  • From our perspective, success ultimately means fulfilling our mandate to contribute to public confidence in the Canadian financial system, which includes protecting the rights and interests of depositors, policyholders, financial institution creditors, pension plan members, former members, and entitled beneficiaries.
  • When looking specifically at climate-related risks in the P&C industry, success means robust management of climate-related risks, which includes continued collaboration between OSFI and institutions to foster a culture of information sharing and transparency, better identifying emerging risks, and addressing them quicker.
  • To help the industry continue to build resilience to climate risks, OSFI has:
    • Set our expectations for climate risk management in our inaugural Guideline B-15 and published updates to the disclosure standards in Annex 2-2
    • Published our final SCSE
    • Extensively consulted with stakeholders on both initiatives
    • Published climate regulatory returns that will collect standardized data on emissions starting in 2025.
  • OSFI will continue on this prudent path to promote robust climate risk management in financial institutions to maintain stability of the Canadian financial system.

Regulation and Regulatory Framework

Moderator:

Even though OSFI has designated a priority set of regulatory expectations along with timeline for expected release, the industry remains concerned with the volume, speed and scope of regulation and guidance. In addition to designating priority expectations and a timeline, is there anything further that is under consideration to help institutions manage the volume of regulation/guidance? Are there other tailored or bespoke approaches can the P&C sector expect to see over the next year?

Superintendent Peter Routledge:

  • OSFI is reducing regulatory burden and embarking on an exercise to prioritize policy releases and rationalize our guidance.
  • This work will:
    • prioritize and align efforts, policies and guidance with key risks and clear approach for regular and continuous upkeep of OSFI’s policy instrument suite.
    • further align guidance with our new Supervisory Framework to enable supervisors to focus on the right risks at the right time.
    • enhance predictability, transparency, and clarity around our work for the public, industry and stakeholders.
    • present guidance in a simplified and more usable manner for supervisors and stakeholders.
  • Financial institutions and provincial regulators will be given ample notice and time to adjust when a guideline or advisory will be rescinded or integrated into an existing or new guideline.

Moderator:

I understand there is some skepticism around the availability and reliability of climate risk data and the data being collected by the SCSE. Why is OSFI requiring this?

Superintendent Peter Routledge:

  • The challenge with climate risk data is multifaceted. It involves the complexity, availability, accuracy, and integration of this data into the financial risk management decision-making processes.
    • For example, we have a lot climate data, temperature changes, rainfall, droughts, etc. but the challenge is modeling that to future financial risks accurately.
    • A good example is what would future flood depths look like in a particular geographic area, and how would that impact a bank’s mortgage portfolio.
    • A lot of climate data lacks the necessary resolution or detail to provide actionable insights for specific regions or timeframes. Another challenge is sourcing data.
  • What we heard in our consultations is that institutions wanted guidance on how best to build scenario analysis capabilities in their organizations. That is why the SCSE is a standardized exercise designed to build capacity within the sectors we supervise.
    • For example, companies will be required to consider what it means to geocode individual exposures and merging these with physical hazard maps. They will have to apply climate adjusted expected credit losses to corporate bonds, preferred shares, and corporate and commercial lending exposures. Institutions will also have to apply prescribed equity shocks for the three transition scenarios. We also have prescribed and defined market risk shocks for public and private corporate bonds and publicly listed preferred shares that are in scope.
  • Although the exercise is very prescriptive and complex, it is first and foremost a capacity building exercise. We want institutions to strategically consider the implications of climate change on their business models on longer time horizons.

Moderator:

There is concern over a duplication of mandate between provincial regulators and OSFI. Given Canada’s federal system, this is not unique to the P&C industry but nevertheless poses challenges to the industry with potentially overlapping mandates and requirements. Is there a forum or framework you are aware of that could serve as an example for something that could be established for the P&C federal and provincial regulators (assuming a willingness to engage)? Would you/OSFI be open to participating in something like this?

Superintendent Peter Routledge:

  • Of course, we would be willing to participate. Regulatory coordination is important to OSFI, both internationally and domestically.
  • OSFI already participates in the Canadian Council of Insurance Regulators (CCIR) where information is shared between regulatory authorities and opportunities for coordination are identified.
    • For example, both provincial and federal regulators are interested in the growth in the use of managing general agents (MGAs). Our interest is prudential and the provinces are more focused on the fair treatment of consumers. However, our interest presented opportunities for coordination, in particular with the Financial Services Regulatory Authority of Ontario, including data requests and integrating our approaches to minimize regulatory burden on insurers.
    • We also coordinate with the provinces through the CCIR Forms and Capital Committees on changes to our regulatory returns and capital requirements.
  • Our supervisory and regulation teams also meet bilaterally on a regular basis with many of the provincial regulatory authorities to share information and where appropriate, coordinate or discuss issues.
    • For example, the BC Financial Services Authority financial services tabletop on crisis preparedness in early July of this year that we participated in.
  • Our guides to intervention also clearly identify where we can share prudential information with provincial regulators as part of our intervention process. So, from our perspective, we have a number of points of coordination to support the coordination of our prudential mandate with other Canadian regulatory authorities.

Moderator:

The 2023-2024 financial institutions survey for OSFI completed by the Strategic Council indicates results were generally lower on many of the guidance metrics compared to 2021. This was especially true for insurance companies in the following areas:

  • OSFI’s balancing of prudential and competitive considerations;
  • consulting while developing guidance; and
  • communicating rationale to industry provided feedback when developing guidance

Given these results, how have these survey results been received within OSFI and are there any reflections that you would be willing to share with the industry on those results?

Superintendent Peter Routledge:

  • The Financial Institutions Survey (FIS) provides the industries we regulate and supervise the opportunity to provide their input into the effectiveness of us as Canada’s prudential regulator. It assists us in assessing how well we are achieving our mandate and provides us with insights into the key drivers of satisfaction.
  • We take this feedback back seriously. In response to the FIS results and the feedback provided by the insurance industry, OSFI will host a dedicated set of meetings this fall (November 2024) with insurers to better understand their feedback and concerns.
Date modified: