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Insurance Bureau of Canada Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:

Strengthening the Framework

Refining the Legislative Framework for Financial Institutions

June 1, 2005


Table of Contents

Introduction

Property & Casualty: A Distinct Financial Service

P&C insurers are not traditional financial intermediaries

P&C insurers provide three principle services

P&C insurers' risk is on their liability side of the balance sheet and not on the asset side

P&C insurers are subject to more stringent capital requirements

Provincial governments also impose greater regulatory restrictions on P&C insurance

P&C insurers require different underwriting and actuarial expertise

The P&C insurance industry is highly competitive

Catastrophic events require special consideration

Conclusion

Improving Financial Institutions Legislation

General Review of Disclosure Provisions

Increasing Legislation and Regulatory Efficiency

Marine Insurance

Commercial Investment Powers

Federal-Provincial Coordination

Conclusion


Introduction

Insurance Bureau of Canada (IBC) is the national trade association representing the private general insurance industry. IBC members account for almost 90 percent of the non-government, non-life insurance business in Canada. The property and casualty (P&C) insurance industry is one of the largest employers in Canada, providing some 100,000 jobs. Last year the industry paid out close to $20 billion in claims, including rehabilitation to those injured in motor vehicle collisions, replacement of stolen goods and repairs to homes, commercial losses and damaged vehicles. The P&C insurance industry also works to improve the quality of life in our communities by promoting loss prevention, safer roads, crime prevention, improved building codes, and coordinated preparation for coping with natural disasters.

In preparing this submission, IBC undertook an exhaustive survey of our member companies, which represent the full spectrum of P&C insurers operating in Canada. The Canadian P&C insurance industry consists of a diversity of players, and our member companies reflect this diverse composition. In addition to Canadian P&C companies, we also represent foreign companies and branches. While many of our members are stock companies, others have different ownership structures such as mutuals. Our membership includes primary insurers, which deal directly with consumers, and reinsurers, which only do business with other insurance companies. Collectively, our members use the full range of distribution channels: independent brokers, exclusive agents, and direct marketing channels such as the Internet and call centres.

Our membership consultations confirmed no major structural reforms have been identified as integral to the future of Canada's financial services sector at this time. Some of our members noted that the 2001 reforms were very extensive, and while we have begun to see some benefits, such as new entrants in banking, many of the 2001 reforms are still being absorbed by the marketplace. For instance, no banks have to date converted to holding companies and there have been no transactions in which a shareholder of a major bank has acquired in excess of ten percent of voting shares. Some members noted that, as recently as this spring, comments have been solicited on new regulations to implement the 2001 reforms.

In our consultations, we found there is a strong consensus amongst our member companies that the distinct nature of our industry should be taken into consideration in the 2006 review. The P&C insurance industry is unique in that the core function of P&C insurers is not financial intermediation like other financial institutions. In other words, they are in the business of risk protection rather than the intermediation of financial assets. Because of the distinct nature of the business, the P&C insurance industry has a number of characteristics that are not commonly found across the rest of the financial sector. In the course of the 2001 review, the Senate Committee on Banking Trade and Commerce recognized the P&C insurance industry's distinctiveness.

We have also heard from our members that there is a need for more federal-provincial regulatory coordination. For the P&C insurance industry in Canada to remain sustainable, and able to continue to deliver value to our consumers, it is critical that there be a regulatory system that is both effective and efficient. To this end, our members believe much more effort is needed to achieve greater synchronicity between market conduct and solvency regulatory objectives.

We understand taxation issues are generally outside the scope of this review. To that effect, we have not included any specific recommendations on this theme. However, our members have asked us to highlight the excessively high tax burden faced by our industry, which inevitably raises the cost of insurance and restricts availability. P&C insurers paid an estimated $6 billion in taxes of all kinds in 2004. This is the equivalent to 99.3 percent of the industry's income before tax. If all industries paid tax at this rate, it would yield $168 billion, which is more than the total personal income tax collected by all levels of government.

Property & Casualty Insurance: A Distinct Financial Service

The P&C insurance industry holds a position of prominence in the Canadian financial services sector and plays a vital role in the Canadian economy. A study commissioned by the MacKay Task Force noted, "Without this ability to replace the unknown with the known, it is almost certain that our economy could never have developed to its present size, sophistication and complexity: lenders and shareholders would continuously be exposed to the possibility that all could be lost through some catastrophic event, doubtless constraining the investment of capital."

In December 1998, the Senate Committee on Banking, Trade and Commerce recognized the uniqueness of the P&C insurance industry when it noted in a report that P&C insurance is a pure risk protection product, which does not fit into the services provided by the banking and life insurance industries.

P&C insurers are not traditional financial intermediaries.

The P&C insurance industry does not perform an intermediation function but instead "spreads and absorbs risk." P&C insurers' core function does not involve transmitting savings to investments, as is the case for other financial institutions. It does not aid policyholders to accumulate wealth, but rather mitigates the pain of those impacted by unexpected and widely fluctuating losses. There is really no financial gain to policyholders as P&C insurance is designed only to indemnify and compensate them for their losses. P&C insurance substitutes a known premium for an unknown possible loss. P&C insurers enable individuals and businesses to operate from day to day with crucial protection against the financial impact of unforeseen events. They protect the public, for example, from the ravages of hurricanes, earthquakes, automobile accidents and liability suits.

P&C insurers provide three principle services.

Risk-pooling and risk-bearing: From the Chinese farmers pooling their crop shipments on Sampans down the Yangtze 4000 years ago to the commercial insurance companies of today, the primary function of the P&C insurance industry has been risk-pooling and risk-bearing. Insurance provides a mechanism for consumers and businesses exposed to property-casualty losses to engage in risk reduction through the diversification effect of pooling of resources. Insurers collect premiums from their customers and redistribute most of the funds to those policyholders who sustain losses. Sometimes the risk-bearing is shifted to the capital of shareholders, the unused surplus of policyholders or to other parties holding the debt of the insurance companies. While developments in new technology enhance the ability of P&C insurers to manage risks, this function itself nevertheless remains fundamentally unchanged. Because of the competitive nature of the P&C insurance industry, the value of innovations in risk management will inevitably be passed to consumers.

Services relating to insured losses: Insurers provide a variety of services for policyholders. These include surveys to identify unusual loss exposures, the design of programs to cover these and other risks and recommendations regarding deductibles and policy limits. Insurers provide advice to consumers on safety and security products, and offer discounted premiums to consumers who install these products. Insurers offer a variety of loss prevention services such as fire safety evaluations and risk management software tools. For automobile drivers, insurers provide road assistance such as towing services. Insurers also provide loss settlement services and legal representation for liability claims.

Limited intermediation: Insurers collect premiums in advance of loss payments and hold the funds in reserve until claims are paid, similar to corporate debt. The funds are invested primarily in marketable securities to ensure funds are readily available to meet claims payments. Generating investment income off these funds enables P&C insurers to price their policies lower.

P&C insurers' risk is on their liability side of the balance sheet and not on the asset side.

Deposit-taking financial institutions have their greatest risk on the asset side. This accounts for the very different investment practices of P&C insurers vis-à-vis other financial institutions. Liquidity is important for P&C insurers because if a large claim is incurred, the insurer must be able to provide funds to the policyholder without undue delay. In 2004, 85 percent of P&C insurer investments in Canada were in either government or corporate fixed income securities, 14 percent were in preferred and common equities and less than a quarter percent of investments were in real estate. Neither banks nor other financial institutions carry such conservative investment portfolios.

P&C insurers are subject to more stringent capital requirements.

Their distinct risk profile necessitates much higher capital requirements. It is not possible to directly compare regulatory capital requirements because they are arrived at differently, but leverage ratios show that for P&C insurance companies equity capital finances over 27 percent of assets whereas for banks, capital finances less than five percent. While the nature of P&C insurer balance sheets necessitates more capital to safeguard against unexpected losses, setting regulatory requirements is a tricky balancing act. While low requirements may result in inadequate levels of capital for solvency purposes, the capital costs of too high a threshold impair the ability of P&C insurers to generate new capital and make affordable insurance available to consumers.

P&C insurers also have regulatory restrictions on their investment activities, including a restriction on commercial lending. These restrictions are justified by government on the basis of not wanting P&C insurers to take on further risk on the asset side.

Equity / Assets - 2004 Investments

Provincial governments also impose greater regulatory requirements on P&C insurance.

P&C insurers and their products receive greater regulatory attention than do other provincially-regulated financial products and institutions. For example, in auto insurance (the P&C insurance industry's largest line), provincial regulatory frameworks cover rates, underwriting criteria, and claims coverage.

The level of regulation reflects the overall importance of P&C insurance to Canadians in their day to day lives. P&C insurance plays vital roles for Canadians by assuming part of the financial risk inherent in driving a car, owning a home, or operating a business.

P&C insurers require different underwriting and actuarial expertise.

The nature of the pooling and the risk bearing functions of P&C insurers requires an underwriting and actuarial knowledge and training that is very different from banking and other kinds of financial intermediation. P&C insurance actuaries must exercise much more judgment than do life insurance actuaries or pension actuaries. For example, to price automobile insurance, actuaries must use data from the past and combine it with industry projections to determine a price to charge the consumer today for possible claims incurring at some future date. The challenges for P&C insurers in setting prices include: the frequency and severity of losses, the long term nature of liability losses, the high proportion of expenses (such as loss adjustment expenses), and the tendency of P&C insurance markets to follow hard and soft market cycles every six to ten years.

The P&C insurance industry is highly competitive.

There are over 200 insurers actively competing for the P&C insurance business in Canada. Despite recent transactions, in 2004, no one company had more than a 15 percent market share and together the top ten P&C insurance groups account for slightly more than half of the total premiums. These groups consist of over thirty P&C insurers, many of which have their own marketing and distribution strategies. In contrast, the banking sector is still concentrated in a number of its key markets. A recent analysis by the Canadian Bankers Association shows that in 2003, the five largest banks controlled 86 percent of all Canadian personal deposits held by banks and 63 percent of Canadian personal deposits held by all deposit takers including banks, credit unions, trust and loans, and government savings institutions. The same analysis also showed that the five major banks controlled 64 percent of the consumer loan and 69 percent of the residential mortgage markets (excluding securitized assets).

Top Ten Company Groups Share of Net Premiums Written - Herfindhal/Hirschman Index 2004

The P&C insurance industry is also competitive across product lines and regions. The Herfindahl-Hirschman Index (HHI) is used in a number of jurisdictions to measure industry concentration. In the US, the Department of Justice (DOJ) classifies markets with an HHI higher than 1800 as concentrated. Between 1000 and 1800 points is considered to be moderately concentrated, and markets under 1000 are considered to be unconcentrated. Applying the HHI by class and province, shows that most provincial sub-markets are unconcentrated.

Only two provinces are above the DOJ threshold for concentration in some insurance lines. In Saskatchewan, a provincially owned company, which does not operate under the same solvency regime as private insurers, dominates the personal property insurance market with a 54 percent market share. For Newfoundland, which experienced a departure of P&C insurers in the mid-1980s, the HHI index shows concentration.

The ability of new entrants to easily enter a market also contributes to competition. While some entry barriers exist for the P&C insurance industry, such as regulatory approvals, there continues to be significant new entry. Since the beginning of 2001, 26 new P&C insurers have entered the Canadian market.

Number of New Entrants - 2001 Market Share by Distribution Line

In addition, there is extensive competition in the marketing of P&C insurance. P&C insurance is distributed by independent brokers, who represent multiple insurers; exclusive agents, who represent only one insurer; and direct response marketing. Agents and brokers are often small businesses and are to be found in every city, small town and neighborhood in Canada. Despite the inroads made by direct response marketing through new technologies such as the Internet, the independent brokerage system continues to dominate P&C insurance sales.

Catastrophic events require special consideration.

The Canadian P&C insurance industry presently has adequate capital and surplus to meet not just the frequent day-to-day individual claims that come with underwriting insurance, but also the rare catastrophic events, such as a severe earthquake, that may occur once every five hundred years. Special reserves exist for P&C insurance companies to address these events.

Conclusion

The P&C insurance industry continues to be highly competitive and retains its own unique risk- pooling and risk-bearing functions. Hence, it remains vital that the distinct nature of the industry be taken into consideration in the current and future reviews of federal financial institutions legislation.

Improving Financial Institutions Legislation

General Review of Disclosure Provisions

IBC recognizes the value of having informed and knowledgeable consumers and believes that financial institutions should play a pivotal role in educating consumers about complaints handling procedures and protocols. For example, the Code of Consumer Rights and Responsibilities, which IBC introduced in Ontario in November 2004, states, "Your insurer, agent or broker can provide you with information about how you can ensure that your complaint is heard and promptly handled."

The P&C insurance industry is robustly regulated at the provincial level in market conduct issues including the areas of disclosure and complaints handling processes. We are concerned that incrementally expanding market conduct regulation of the P&C insurance industry at the federal level would be a step towards costly regulatory overlap that would serve no useful purpose and, most importantly, increase the complexity of the system for consumers. The P&C insurance industry has an integrated dispute resolution system in place that begins with internal procedures within P&C insurance companies themselves, and also includes consumer information centers and the General Insurance OmbudsService. The P&C insurance industry is unique within Canada's financial services sector in that its dispute resolution system provides external mediation services at no charge to consumers.

In the case of disclosing complaint procedures, the Canadian Council of Insurance Regulators' Consumer Protection Principle #4 specifies consumers can expect "easily accessible information on how to seek a remedy, including redress, for problems arising out of interactions with insurance companies or intermediaries." A number of provinces have explicit requirements for disclosure of complaints protocols, although these requirements differ from province to province. The Financial Services Commission of Ontario (FSCO) requires insurance companies to make consumers aware of their complaints protocols. In Quebec, when an insurance company receives a complaint, it must provide the customer with an acknowledgement that includes the main elements of the company's complaint examination policy. In Alberta, an insurer must provide to its policyholders information about its complaint resolution process including the person to whom and how complaints may be made.

While we recognize the importance of transparency for consumers with regards to complaints handling processes, we believe the current provincial system adequately meets the spirit of your proposals, and additional requirements should not be imposed on the P&C insurance industry at the federal level.

Increasing Legislative and Regulatory Efficiency

Lowering Barriers to Entry; Levels of Assets, Capital and Liquidity

We are strongly supportive of efforts to foster more competition through reducing the regulatory burden on foreign banks seeking entry. We have one recommendation aimed at facilitating greater entry into not just banking, but our own industry as well.

The P&C insurance industry believes low entry barriers are integral to facilitating a competitive marketplace, which favors consumers. Under financial institutions statutes, including the Bank Act and the Insurance Companies Act (ICA), the Superintendent has the discretionary power to direct financial institutions to increase their assets, capital or liquidity. We recognize the need for the Office of the Superintendent of Financial Institutions (OSFI) to have such tools available as part of its early intervention regime. However, while we believe OSFI has been reasonably measured in its use of this discretionary power, our members have expressed concern over the open-ended nature of OSFI's powers, and the uncertainty this creates. In addition to being a valid concern of existing financial institutions in Canada, we believe the open-ended nature of these provisions discourages new entrants, particularly foreign institutions less familiar with OSFI's early intervention regime. We recommend more transparency by having specific criteria be set out in regulation for Superintendent decisions to direct financial institutions to increase levels of capital, liquidity or assets, and requirements for written reasons to financial institutions for these directions.

Transactions

We are pleased the Government is further exploring how to streamline regulatory approvals. According to the OSFI's 2003-2004 annual report, the P&C insurance industry generated more Ministerial transactions and more transactions over all (Ministerial and Superintendent) than any other sector. Hence, we recognize the value of streamlining the approvals process, which generates a number of costs for the industry including legal expenses and delays, and we look forward to providing comments as the Government develops specific proposals.

There are currently some types of approvals for which the policy rationale seems dated that could be eliminated. For example, there are some services that have become common industry practice but which require the Minister's consent under ICA Section 441(1). These include services that are reasonably ancillary to the business of insurance, such as providing safety and risk prevention services, and services respecting risk management and claims adjustment.

Scope of Consumer Provisions

The ICA's consumer provisions encompass all federal P&C insurance companies including those with no interaction with consumers. For example, reinsurers, which deal strictly with primary insurers, are subject to these provisions as well as to oversight and assessments by the Financial Consumer Agency of Canada (FCAC). While the regulatory burden for these companies has not been overly onerous, we believe it is nevertheless inappropriate for insurers that do not have direct relationships with consumers to be subject to the consumer provisions and FCAC oversight. This change is consistent with the P&C insurance industry's view that a risk-based approach to market conduct regulation is more effective. It would benefit the FCAC in its ability to undertake its mandate by narrowing its focus to those areas that would benefit most from its supervision without adversely affecting any consumers.

Restriction on Debt Obligations

P&C insurance companies are restricted under section 476 of the ICA in raising capital through preferred shares, bonds and other debt obligations to a maximum of two percent of assets, which effectively prevents P&C insurance companies from using these instruments for any proportion of their capital requirements. Allowing P&C insurers more flexibility to raise capital through these instruments would create several public benefits.

Debt is believed to be an effective form of market discipline for financial institutions, which need to convince both the holders of that debt and rating agencies of their financial soundness. In addition, allowing P&C insurance companies more flexibility in raising capital can also contribute to the financial soundness of the industry by allowing companies to reduce their cost of capital.

But most importantly, capital raised through subordinated debt and preferred shares benefits policyholders by creating additional buffers of capital that would protect consumers from undue loss in the event of a company failure. This is recognized by OSFI in its Minimum Capital Test (MCT) Guideline, which allows capital raised through subordinated debt and preferred shares (whose redemption is subject to regulatory approval) to be included as "capital available."

The two percent restriction is unique to Canada amongst industrialized countries. Where restrictions exist in other jurisdictions, these restrictions only limit the extent to which debt and preferred shares can be used as a proportion of total regulatory capital, which is consistent with the International Association of Insurance Supervisors' (IAIS) Principles on Capital Adequacy and Solvency. In the US and Europe, P&C insurers commonly carry debt and preferred share financing above two percent of assets.

P&C Insurer Debt & Pref. Shares/Assets

Royal & Sun Alliance PLC (UK) 5.7%
Allstate (US) 3.6%
CNA (US) 4.3%
St. Paul Travelers Companies (US) 6.1%
Source: 2004 Annual Reports

For banks and life insurers, OSFI allows tier 2 capital to be used for up to 30 percent of total regulatory capital. The P&C insurance industry believes section 476 of the ICA should be eliminated and that OSFI should amend its MCT Guideline to limit the use of subordinated debt and preferred shares to 30 percent of total regulatory capital.

Privilege

OSFI has been moving towards a more risk-based supervisory approach that relies on institutions' control and governance processes which are verified by OSFI's supervisory staff. The P&C insurance industry believes this is an effective approach to regulation and has been encouraging provincial regulators to also move in this direction with respect to market conduct regulation. We believe a risk-based approach would significantly enhance the value of market conduct regulation to consumers.

An integral element of this approach is rigorous self-assessments by financial institutions of their own policies and procedures. These self-assessments are evaluated for specific regulatory purposes. For a risk-based approach to be effective, it is critical to ensure that financial institutions that conduct these rigorous self-assessments will not be penalized by allowing these self-assessments to be used for non-regulatory purposes. The industry needs assurance that self-assessments will not become a tool for plaintiffs. We believe that self-assessment should be privileged, and not admissible as evidence in civil or administrative proceedings at both the provincial and federal court levels. We encourage the Government to both establish privilege at the federal level, and take a leadership role in encouraging similar action by the provinces.

Administrative Monetary Penalties and Definition of an Entity

One situation that does not appear to be covered by the Administrative Monetary Penalties (AMP) provisions in the Office of the Superintendent of Financial Institutions (OSFI) Act is one where a group of companies that are commonly controlled all make the same contravention for the same reason (e.g., the group comprises three different insurance companies which are separate corporations but which operate under the same ownership control). In our view, it would be reasonable to view this situation as one contravention with one penalty and not as three contraventions, each with its own penalty. The OSFI Act refers to an "entity" as defined in the Bank Act as follows: "entity" means a body corporate, trust, partnership, fund, an unincorporated association or organization, Her Majesty in right of Canada or of a province, an agency of Her Majesty in either of such rights and the government of a foreign country or any political subdivision thereof and any agency thereof." It is unclear whether this definition would apply to this situation. We recommend that the definition in the OSFI Act be amended accordingly to provide more clarity.

Restriction on Investments in Equities

Section 507 of the ICA and section 5(2)(b) Investment Limits (Insurance Companies) Regulations limit a P&C insurance company's investment in equities to 25 percent of the company's assets. This is less than what was permitted under the former section 508(f) of the ICA which set the limit for a P&C insurance company's investment in equities at the "aggregate of (i) 35 percent of the total assets of the company; and (ii) the amount by which the value of the assets of the company, as shown by the most recent annual return filed under section 665, exceeds the amount of assets required to be maintained by the company under section 516."

The P&C insurance industry recognizes the policy rationale for a limit given its risk profile. However, the change in wording, which occurred when the limit was shifted in 2001 from the ICA itself to regulations prescribed under the ICA no longer permits excess assets to be included within the investment limit. Allowing P&C insurance companies, which maintain assets in excess of what is required, to invest these assets in equities should not cause solvency concerns simply on the basis that these assets are "excess", particularly as the current P&C capital requirements guidelines have specific capital charges for equities to address the inherent risk.

Approval of Management Proxy Circular

Section 207(g) of the ICA provides that directors may not delegate the power to approve a management proxy circular. However, there is no specific requirement in section 164.04(1) on management proxy circulars or in section 165 on the duties of directors, that the directors approve a management proxy circular.

We recommend that this gap be filled by amending section 165 so as to include in the directors' duties the approval of a management proxy circular.

Shareholder and Policyholder Proposals

Section 147(5) of the ICA relieves a company of complying with the requirements with respect to circulating a policyholder or shareholder proposal in specific listed circumstances, such as if it clearly appears that the proposal is submitted primarily for the purpose of enforcing a personal claim or redressing a personal grievance against the company or directors. In our view, these same reasons should also restrict the ability of a shareholder or policyholder to "discuss any matter in respect of which the shareholder or policyholder would have been entitled to submit a proposal", as currently outlined in section 147(1). The purpose of an annual meeting is to allow for the discussion of business affairs of the company; it is not intended to allow for discussion of personal claims or grievances of a shareholder or policyholder.

We recommend that section 147 be revised to restrict the types of items that can be discussed at an annual meeting to those relating to business affairs of the company.

Transfer of Business and Reinsurance

There is an obstacle with the implementation of paragraphs 254(2) (a.1), (a.2) and (a.3) of the ICA which are intended to address a problem faced by provincial P&C insurance companies that are effectively restricted from assuming business from a federal insurance company. This issue was raised in the submissions made to the MacKay Task Force in 1996-97 and subsection 254(2) was amended by the addition of (a.1), (a.2) and (a.3) to facilitate these transfers. Under (a.3), the transfer of all the business of a federal insurer to a provincial body is conditional on the Superintendent entering satisfactory arrangements with the appropriate provincial authorities. We understand that there have been discussions between the federal and Quebec authorities regarding an agreement as contemplated by (a.3) but, as of this date, there is still no such agreement. Because of this situation, Quebec provincial insurance companies continue to be at a disadvantage vis-à-vis federal insurance companies that are able to assume business from another federal insurance company.

This is a matter of importance for some of our Quebec supervised members, and we recommend that high priority be given by both federal and Quebec authorities to these discussions.

Public Holding Requirement

Section 411 of the ICA states that an insurer that has more than $1 billion dollars in equity must have voting shares that carry at least 35 percent of the voting rights attached to all of the outstanding shares of the company. Section 414 provides that the Minister may exempt certain types of entities from the requirements of section 411, but the list of entities is limited and does not include a parent (foreign insurance) company that is publicly listed in its home jurisdiction.

In contrast, the equivalent provision in the Bank Act, section 388, does not list the types of entities which may be exempted from the requirement, but instead states that the Minister may exempt the bank "subject to any terms and conditions that the Minister considers appropriate."

We recommend that section 414 of the ICA be amended to provide the same flexibility as found in section 388 of the Bank Act.

Marine Insurance

IBC believes appropriate government regulation reduces the risk of company insolvency and enhances public confidence in the financial system. In that regard, IBC is supportive of solvency regulation for all P&C insurance companies operating in Canada.

We understand that some international marine insurers see OSFI's inability to register them as an impediment to entering the Canadian marketplace. We support legislative changes that facilitate new entrants and more competition in P&C insurance while ensuring adequate protections for consumers.

Commercial Investment Powers

We do not believe Canadian federally regulated financial institutions should be provided with broad commercial investment powers. There was a very clear policy rationale behind permitting upstream links in 2001 – facilitating new entry into the Canadian banking market in order to foster new competition, which in IBC's view is a very laudable objective. The new rules are based on size, with widely-held requirements continuing to apply to the largest banks, where the concerns regarding the impact of failure on depositors and the wider economy are greatest. Increasing downstream commercial powers for financial institutions will not contribute to further competition in Canada's financial services sector. Furthermore, the policy implications associated with broad commercial powers extend beyond the solvency of individual institutions, to the stability of the financial system, and even the structure of the economy as a whole. Hence, we believe that any extension of commercial powers to financial institutions should be measured, and restricted to activities ancillary to the relevant financial activity.

Federal-Provincial Coordination

The P&C insurance industry supports appropriate balance between government regulation and complete reliance on the regulatory forces of the market. We support a regulatory system that is both efficient and effective, and delivers good value for both the industry and consumers. This system should support the financial health of industries within the sector, reduce the risk of insolvency, and enhance public confidence in the financial system. To this end, IBC has been seeking improvements in the fairness, effectiveness and efficiency of government regulation.

The Department of Finance has been actively engaged in improving Canada's current securities regulatory regime. It is important to bear in mind the federal-provincial framework is one that presents challenges not just to securities regulation, but across the financial sector. In particular, despite being in a world where there is a need for greater harmonization of rules internationally, we continue to struggle with a lack of harmonization internally.

The P&C insurance industry has chosen to take a proactive approach to these challenges and strives to work effectively within the existing shared jurisdiction between the federal and provincial governments for prudential and market conduct issues. For example, IBC is currently working with FSCO, the Autorité de marches financiers, and the Canadian Life and Health Insurance Association to improve complaint data monitoring through standardization of reporting across provinces.

While our experiences with federal-provincial coordination have been positive, our industry would like to see this coordination greatly enhanced and for the federal government to take a leadership role. We are concerned that federal and provincial regulatory requirements are reducing the competitiveness of our industry and resulting in unnecessary costs and frustrations for consumers.

We encourage federal leadership on the solvency side. In June 2003, IBC released a position paper, Rationalization of Solvency Regulation in Canada, in which we called for a single organization responsible for solvency supervision of Canadian insurers – OSFI. While critical elements of provincial prudential supervision practices have been converging with OSFI practices, important differences remain in examination practices and standards. We believe the resulting rationalization and standardization of examination and solvency procedures would improve regulatory outcomes for the benefit of consumers, foster competition and promote financially sound P&C insurers.

In our experiences through the P&C insurance earnings cycles, it is evident to us that often market conduct and solvency regulatory objectives are out of sync. Our members have sometimes found themselves under pressure by provincial market conduct regulations to take on unacceptable risks at the same time that OSFI, in pursuit of solvency objectives, is pushing insurers to reduce their exposures and improve their capital base. Improved federal-provincial coordination would contribute towards more cohesion across regulatory objectives.

Conclusion

IBC is pleased to be participating in this review of federal financial institutions legislation. Our members see this as an opportunity to refine the legislation as there are no major reforms necessary at this time. In reviewing financial institutions legislation, it is important to recognize the distinctiveness of P&C insurance. Our members have raised a number of issues where changes can be made to enhance the operating environment of P&C insurers. More attention needs to be paid to better synchronization of the efforts of federal and provincial regulators.