Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 19 - Evidence - Meeting of November 3, 2005
OTTAWA, Thursday, November 3, 2005
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:50 a.m. to examine and report on consumer issues arising in the financial services sector.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Good morning, gentlemen. Thank you very much for attending on such short notice. I want to welcome you and the members of the Standing Senate Committee on Banking, Trade and Commerce, and the men and women who are watching us in this room and those in the Canadian audience watching and listening on the Internet. We will be viewed as well on a delayed CPAC broadcast. I want to welcome all of you this morning.
Today, we conclude our hearings on consumer issues in the financial services sector and we are pleased to have representatives from the Canadian Institute of Actuaries, the Insurance Bureau of Canada, and the Canadian Life and Health Insurance Association.
Thank you again for coming on such short notice and providing us with very comprehensive material.
This committee as you know has been part of the history of the Senate since Parliament met first in 1867. We are one of the oldest committees in Canada and the oldest and most senior committee of the Senate. We are well known for work in relation to the country's financial system. We have a long policy of examining policies, programs, and initiatives that affect the financial sector as well as other important matters of economic growth and productivity in this country.
We believe that productivity is our goal and our objective. We want the country to be more productive to increase the standard of living for all Canadians. We are well supported by functioning capital markets, a healthy financial services sector and high economic growth that leads to prosperity that we all want.
This year the committee has been active on a number of key issues. In the spring, we completed a study on productivity, published it and put it on our website. Productivity is a word that seems to be on the tip of everyone's tongue. A number of federal ministers, business groups, social policy groups and organizations, premiers, ministers of finance, the private sector, everyone is now using this as a catchword and we hope a real measuring stick of how we improve the standard of living for all Canadians.
The committee heard thought provoking and alarming evidence with respect to demographic changes affecting us in the next decade and how we need to respond now and not later to that evidence. It is clear the demographic changes will have a significant impact on the economy and we must act now to avoid disaster in the future.
Our forthcoming report will recommend actions that the federal government and the private sector should take to avoid what some term a potential ticking economic time bomb.
The committee intends to hear from experts on Canada's domestic and inter-provincial trade barriers. We have heard complaints about our fragmented economy that lacks the efficiency needed to be truly productive.
We will continue our focus on productivity and will report to the Canadian public and to the federal government, the barriers to internal trade in Canada and the changes we need to make our domestic economy truly productive.
Today we are continuing and concluding, I hope, our examination of consumer issues on the financial services sector. The particular focus today is on reinsurance or insurance for insurance companies.
Our particular concerns are about transparency and accounting and whether the undisclosed side agreements which may materially affect and alter the reinsurance contracts and whether they involve little or no transfer risks, should be accounted for as insurance contracts or arrangements and how these relationships affect the choice and the price to consumers.
This issue is important in the context of the current study because some consumers make insurance decisions only after assessing the financial solvency of various insurance companies. We are concerned that the use of reinsurance contracts by an insurance company may limit the ability of consumers to assess accurately the financial solvency of companies.
The committee knows the testimony we receive today will be valuable since we begin our deliberations in the next week or so, to report to the Senate on this topic of consumer issues in the financial sector.
You are the ultimate witnesses and we thank you for coming today.
Before turning to the first witness, I would like to remind all those watching us live over the Internet, around the world and on delayed CPAC that we want your input also. These issues have a significant impact on the lives of each Canadian and the economy as a whole and if you have any comments, we urge you to send us an email.
I understand you will all make brief introductory remarks. We have your written submissions. I apologize for that long introduction but I have been told by our television advisers that each segment is separate and we want people to understand our purpose.
Randy Bundus, Vice-President and General Counsel, Insurance Bureau of Canada: Thank you for the opportunity to address this committee. IBC or the Insurance Bureau of Canada is the trade association that represents Canada's private general insurers. Our members account for 90 per cent of the non-government property and casualty, non-life insurance business in Canada. Private property and casualty, or P&C, insurers provide insurance protection for most of the homes, motor vehicles and commercial enterprises in the country.
On April 21, we appeared before this committee to provide our views on consumer issues facing the financial services industry. We are here today at the committee's request to provide additional information related to the use of finite risk reinsurance in the Canadian insurance industry.
Mr. Fredette is Senior Vice-President and General Manager of Caisse Centrale de reassurance and is Chair of the Reinsurance Research Council of Canada. Mr. Fredette is prepared to address any technical questions related to Canada's reinsurance industry and its products.
He will be soon joining the board of the Insurance Bureau of Canada as the RRC representative.
Finite reinsurance is a complex financial product that has generated a great deal of discussion in the United States over the past year. Regulators in Australia and Europe are also reviewing this issue. To be clear, the discussion has revolved over how these complex transactions are communicated to investors in financial statements. The issue is not the product, but how to best account for these products.
The purpose of my presentation is to provide the committee with background on Canada's reinsurance industry and to allow the technical issues to be placed in their proper context. Reinsurance is insurance for insurers. It is an integral part of the Canadian P&C insurance industry. Reinsurance is one of the many tools used by insurers to guarantee that they have the financial resources to pay their claims. Under a normal reinsurance contract, an insurer limits the amount of risk in its portfolio by passing off the excess risk to the reinsurer.
For example, a common role for reinsurance is to provide insurers additional protection from natural disasters. Imagine an insurer that sells insurance to every house on a street. If a tornado, a hurricane or an earthquake were to occur, it would likely impact the whole street. The insurer uses reinsurance to manage this exposure. They could purchase "cat cover," or catastrophe cover. Under this common reinsurance arrangement, if a natural disaster occurs, the reinsurer would provide additional financial resources to the insurer in order that the insurer can settle those claims. The reinsurer accepts the risk of a catastrophic loss in return for a portion of the premium. Reinsurers are generally international organizations that spread their risks globally.
In recent years, reinsurers have helped Canadian insurance companies pay claims for several major events across the country. These include the 1998 ice storm, the 2004 fires in British Columbia, and the impact of Hurricane Juan in Atlantic Canada.
I would like to stress that a healthy reinsurance industry is vital to the long-term success, viability, and resiliency of the Canadian economy. Of the many products offered by reinsurers, one product has caused regulators in New York State to take a second look at how reinsurance arrangements are reported in financial statements. This product is finite risk reinsurance.
Finite risk reinsurance is slightly different from the normal reinsurance described earlier. Under a finite risk reinsurance arrangement, a portion of the risk remains with the insurer. The details of how much and what type of risk varies with each contract. Finite risk reinsurance is a legitimate, legal, ethical and appropriate financial product that can assist organizations to manage the risk of contingent losses like natural disasters. The issues arising in the United States focused on the accounting regarding these products. Eliot Spitzer, the Attorney General of New York State was the first person to raise the concern over the alleged improper accounting practices respecting finite reinsurance contracts.
When properly accounted for on financial statements, finite risk reinsurance arrangements can provide investors and management with valuable information on the risks facing the organization. They allow investors to note that management has moved to address the possibility of large contingent losses that could place the entire organization at risk. In essence, they take off-balance-sheet risks and place them into the financial statements. This is a valuable practice that can provide investors with additional information.
In New York, the key issue was that some insurers may have dealt with these products in their financial statements in a way that miscommunicated the amount of risk they retained in their business. It is alleged that they claimed to have transferred risks in contracts where no real risk had been transferred. It is not the use of finite reinsurance that is the issue, but the accounting for it.
Concern also relates to the alleged lack of disclosure from company management to their boards of directors. In the U.S., this is a financial reporting issue; it is not a reinsurance issue.
The U.S. experience has caused both regulators and Canadian insurance industry stakeholders to review our practices to ensure the protection of Canadian policyholders' interests. The Office of the Superintendent of Financial Institutions, OSFI, regulates the solvency of insurers in Canada. OSFI sent out a survey on June 6, 2005, to a number of P&C insurers and reinsurers about the use of and accounting for finite reinsurance.
For information on the results of this survey, one would have to ask OSFI. OSFI requested that the company's board of directors receive a copy of the survey response and that the company's relationship manager from OSFI receive a copy as well.
IBC has had informal discussions with our members about the OSFI survey. The primary finding of these discussions is that we have reason to believe that finite risk reinsurance is not commonly used in Canada. Canadian P&C insurers have tended to purchase other simpler types of reinsurance. Therefore, we do not believe that finite risk reinsurance poses a significant risk to policy holders. However, we recognize that the final word on this issue remains with OSFI.
The International Association of Insurance Supervisors released a paper on finite reinsurance earlier this year that contains a number of recommendations on how supervisors should address finite reinsurance.
It is our understanding that OSFI's existing practices are consistent with those recommendations. OSFI has also asked the Canadian Institute of Actuaries, the CIA, to examine this issue. The CIA has established a task force to provide guidance on how finite risk reinsurance contracts should be reported in Canada and IBC is participating in these discussions. Our goal is to ensure that financial reporting standards in these areas reflect the distinct nature of the P&C insurance product.
The CIA is appearing before you today and should be able to provide more information on the work of this task force.
We expect that a number of the members of the committee are familiar with an article published in the October 6, 2005 issue of The National Post entitled "Canada's insurers must reveal data: OSFI reinsurance move." OSFI has informed us that this article contains inaccuracies, and we would encourage this committee to speak directly with OSFI to confirm that statement.
Thank you very much for the opportunity to appear before this committee. We welcome any questions you may have on the topic.
The Chairman: Thank you for drawing that article to our attention. We will certainly look at it very closely.
OSFI is not with us today because their representatives had to attend another hearing and we had to proceed because of our schedule. However, they submitted detailed memorandum. We can make that available to you.
Mr. Bundus: I appreciate that.
The Chairman: We will send that brief to you. Please respond immediately with any comments you wish to make.
[Translation]
Mr. James Brierley, Chairman and President, Munich Re Canada, Canadian Life and Health Insurance Association: Mr. Chairman, the Canadian Life and Health Insurance Association is pleased to have the opportunity to appear once again before the committee.
[English]
Our industry has followed with great interest the committee's study of consumer issues in the financial services sector. CLHIA was honoured to present a submission to the committee in May on the extensive consumer framework that covers our potential customers and life and health insurance policyholders.
Today, we are here to speak to the committee on the role of reinsurance in the life and health insurance business in Canada.
Senator Tkachuk: I am sorry to interrupt, but we will be talking more about finite reinsurance and I did not entirely understand the difference between finite reinsurance and reinsurance. If we are going to talk about that further, I would like to know the difference.
Mr. Brierley: I will address that in my remarks.
Senator Tkachuk: Thank you.
The Chairman: This is a complicated area. We want to ensure that our members and listening audience understand our topic.
Thank you, Senator Tkachuk, for that assistance.
Mr. Brierley: We are here to speak to the committee on this issue and to respond to the committee's questions on finite reinsurance.
In addition to being the Chairman of the CLHIA, I am the President of Munich Re's life and health insurance operations in Canada and the Caribbean and a past president of the Canadian Institute of Actuaries. Joining me at the table is Mr. James Witol, Vice-President, Taxation and Research.
Munich Re is the largest reinsurance company in the world and the largest life and health reinsurance company in Canada, accounting for slightly over one-half of the life and health insurance premiums in the country. We provide reinsurance in a number of lines of business: individual life insurance, disability insurance, critical illness, long-term care and group life and health.
I am in a good position to comment on current reinsurance practices in the life and health business in Canada. However, I will not venture to comment on the practice in other non-life lines of business or in other countries, other than to contrast our financial reporting and accounting regimes to others in an effort to explain why I believe that consumers and shareholders are well served in Canada.
The main function of reinsurance is to spread risk assumed by the direct writing company on behalf of its policyholders. This is the risk that expenses and claims will exceed or income will fall short of what was assumed in the pricing of the product. Losses can result from both the risk of year-to-year claim fluctuations and incorrect estimation of pricing assumptions.
By reducing risk through reinsurance, the insurer is also able to reduce its capital requirements, which are related to the level of risk that it retains. In turn, that means higher solvency ratios for direct writing companies, increased return on equity and greater underwriting capacity. In addition, the reinsurer uses its expertise and knowledge of the marketplace to provide assistance to direct writing companies in product development and pricing. The concept of risk transfer is central to reinsurance.
The CICA Handbook-Accounting states that reinsurance transactions include only those that involve a transfer of risk. Transactions that are in substance a form of financing are excluded.
I understand that the committee's interest in the implications of finite reinsurance, also known as "financial reinsurance" or "structured reinsurance," and how it affects both consumers and investors. All reinsurance, no matter how basic, has finite limits. For example, reinsurers would not share in risks associated with punitive damages or other costs arising from inappropriate actions by the direct writing company or their employees.
The most common form of life reinsurance transfers the mortality risk to the reinsurer, thereby leaving the investment, persistency and expense risks with the direct writer. As well, reinsurance coverage may be limited with respect to the duration of the coverage or the extent to which losses may be passed on to the reinsurer. To my knowledge, gained over 30 years in the reinsurance business, there is no clear or concise definition of "financial reinsurance" because all reinsurance is limited to some extent.
The Chairman: If I may go back to Senator Tkachuk's point, all reinsurance has a limitation to it. Finite reinsurance is a smaller category within the larger category. We are trying to understand the difference between the two and the fee structure based on the two.
Mr. Brierley: It is a little simpler on the non-life side where there is a one-year contract and a basic traditional reinsurance. When you cut back from that, it is called "finite." On the life insurance side, we are dealing with 40-year contracts. We rarely pass all of those risks on to the reinsurer; they are always limited but the defining line is not as clear. There are many, many different structures in life reinsurance. I will try to make the point for you.
Senator Angus: Is that because there are many different structures of life insurance, such as term, whole and the newer investment-type policies?
Mr. Brierley: That is one major reason for the complexity and another is what the company is trying to accomplish. Some companies are more comfortable with their investment risks or with their mortality risks or with their persistency risks. Some risks are more experimental, as you suggested with the newer products. Each company will retain the risks that it thinks it can manage well and will reinsure the risks with which it is not as comfortable. That creates many different structures.
The capital requirements associated with writing life insurance business are quite heavy in this country. If you reinsure enough risks to a reinsurer, you can minimize the capital that you need to be in the business. This kind of financing of new business is a major driver of life reinsurance in Canada.
As my non-life colleagues pointed out, the accounting treatment is the important element.
The Chairman: I apologize for breaking our rules but Senator Fitzpatrick has a question. We are trying to understand the nature of the problem after which we will allow you to complete your presentation followed by more questions.
Senator Fitzpatrick: On the definition of "finance reinsurance," are these limitations spelled out in the policy agreements that people enter into or are they understood only within the industry that these risks can be transferred?
Mr. Brierley: That is a very good question. The consumer's contract with the insurance company requires the insurance company to be completely liable for that entire policy. The reinsurance contract is between the reinsurance company and the direct writer only. The consumer's only concern is with the direct writing company because it is 100 per cent liable to the consumer.
Senator Tkachuk: Would that be even in profit?
Mr. Brierley: I believe that would be the case, although I cannot speak to that side of it.
The Chairman: Mr. Brierley, we have intervened; please forgive us and proceed with your presentation.
Mr. Brierley: Other jurisdictions, most notably the United States, have gone to great lengths to define how much risk transfer is required for a transaction to be counted for as a reinsurance contract. Allegedly this has led to the creation of contracts that may satisfy this risk transfer rule or criteria but the resulting accounting treatment could be considered less than completely accurate and transparent.
It is my strongly held belief that as far as the life and health industry in Canada is concerned we do not have this problem. We do not have a rule-based system in Canada but rather a principal-based system, whereby the appointed actuary and auditor are responsible for ensuring that all risks and all cash flows associated with the reinsurance contract are presented honestly and completely in the financial statements of both the direct writing company and the reinsurance company.
The financial reporting structure in use today is the result of many years of hard work and extraordinary cooperation between the Canadian Institutes of Actuaries and Chartered Accountants, the CLHIA and the then Department of Insurance, now OSFI. I think it is an excellent model for the international community to follow.
Finite reinsurance has been accused of being used in order to mask losses, inflate capital and boost earnings. These are all inappropriate and, to the best of my knowledge, not possible within the Canadian accounting systems. However, there is nothing wrong with income smoothing or earnings management if they are accomplished through spreading the losses but only to the extent that those losses are actually passed to the reinsurer on a prospective basis.
No one would argue that an insurance company should be prevented from protecting their policyholders and shareholders from fluctuating or deteriorating results by passing the losses on to a reinsurer. This can become a problem when the losses are passed to the reinsurer after they have been incurred or if the accounting treatment of these contracts is not transparent and honest. However, such contracts would have no value in Canada because the subsequent repayments to the reinsurer would also have to be valued in order to satisfy the principle that all cash flows associated with the contract must be included in the financial statements.
I would like to conclude my opening remarks by saying that all risk transfer is fundamental to reinsurance. It is not the key to proper financial reporting. The key to providing policyholders, shareholders and consumers with accurate and appropriate financial information is to reflect all cash flows associated with a contract, irrespective of the amount of risk transferred.
[Translation]
Mr. Chairman, that concludes my opening remarks.
[English]
The Chairman: Mr. Brierley, I am not sure we totally understand what you have just said because each senator wants to ask you questions. We hope that they will be cogent in their questions and you will be equally cogent in your answers. We want to try to grasp the nature of this problem.
We will start with Senator Angus, who has brought this problem to our attention. We read about it in the newspapers and because of the confusion associated with the subject, we thought we should embark on this brief re-examination of your industry.
Senator Angus: Thank you. It is particularly comforting to see you have the big guns out today. I have always been mystified by the actuarial profession, but I am comforted to know you are here to share your wisdom with us.
I want to emphasize that our study deals with the mechanisms that are in place to protect consumers who are users of our various financial services sector products. When we started on our study, the insurance industry, rightly or wrongly, was under attack by the ambitious Mr. Spitzer.
The two issues we felt were relevant to consumers in your business were those contingent commissions that were highlighted at first. There was a suggestion that the premiums that insurers were paying, especially to Mr. Bundus's association members, might be inflated.
In addition, there might not be the proper, if I can say this, diversity of underwriters providing an opportunity to quote on the business because of the relationship between the brokers and the insurers.
The other concern is the question of security in regards to the solvency level of the insurer who is ultimately underwriting the risk and reinsurance becomes very relevant at that point. I believe the reinsurers dictate the degree of the coverage in the policies especially in hard markets. They say you have to have exclusions for nuclear risks or terrorism et cetera.
We thought we covered most of these questions when you appeared earlier, but then Mr. Spitzer spoke out and we called you back to ask more questions.
Mr. Bundus, is Fairfax Insurance a member of either of your associations?
Mr. Bundus: Yes, Fairfax Insurance has some of its companies within our membership.
Senator Angus: We knew Fairfax to be a Canadian company listed on the Toronto Stock Exchange, the owner of the commonwealth and they have a lot of clientele in Canada. We felt this may have a Canadian dimension to it, or it may not. That is why we have asked you to come here.
I think your description of the various products is helpful. It is a complicated subject for us to grasp. We do not want to unduly complicate it. We just want your collective wisdom.
Are there any suggestions that we might usefully put in our report to reassure consumers that indeed there are mechanisms in place to protect them?
There are bad apples in different barrels. There are also abuses, which Mr. Spitzer is going after, and he may have indeed identified them. We have heard about bid-rigging. We heard about the issue of giving reinsurance to businesses and then I will bring you the gravy. All of that stuff is out there in an anecdotal way for consumers to read about and they get scared. They write us letters and send us emails.
We are not here to become actuaries or to have a Ph.D course in reinsurance. We would like to have comfort. Indeed, if there are areas where things could be improved, could you outline them for us?
André Fredette, Chair, Reinsurance Research Council of Canada: You have raised quite a few issues today. Maybe we can touch on some of them.
I am not an expert on the direct side because I am a reinsurer. On the question of contingent commissions and on the question of who owns the agencies, I think work has been done at the IBC level to make that transparent so when the consumer is getting a policy from an agent and if 60 per cent of that agency is owned by one company, that is made clear to the consumers.
On the question of security, OSFI has been a very good watchdog as far as looking at the security of reinsurers in Canada and the requirements to have assets listed to pay the losses.
To go back to the question of finite reinsurance, it is my understanding that 99.9 per cent of your property and casualty reinsurance treaties are traditional types. There may be a small number done on the finite side.
I will give you a layman's explanation of finite. You understand risk transfer where a normal reinsurance transaction is completed.
Senator Angus: It is basically all about risk transfer. The insured has a risk. How does he manage that risk? He transfers it to underwriters who are solvent, and they undertake to take care of that.
Mr. Fredette: By doing that, he smoothes out his balance sheet and cuts out large losses from year to year.
You have a limited risk transfer on the finite side, and one component of that acts like a line of credit. I think you all understand a line of credit. If you want to renovate your house, you take out a line of credit. If you do not use it, it costs you nothing. If you do use it, you owe the bank money plus interest on the line of credit. Your house goes up in value, but on the other side, you have an additional amount owed to the bank.
The Chairman: If you are a businessman, Mr. Fredette, sometimes you have a standby fee to maintain that line of credit. That is part of the accounting process we are interested in.
Mr. Fredette: On the finite side, this is where a clause is written in the contract that says the reinsurer must be paid back if he has a loss over time. That becomes similar to a loan. That is where Mr. Brierley was correct in saying how you account for it is the crux of the matter. You have to say it is a loan and it should appear on your balance sheet as a loan or line of credit, not as a reinsurance transfer.
In my understanding, the reinsurance companies that have done this are aware of how these things should be accounted. If any are done, they run them by accounting firms to make sure they are counted properly. No one wants a loss of reputation for doing something improperly; it is not smart business practice. The companies I know out there on the P&C side are professional and are aware of the regulations.
As to the issues of nuclear risks and terrorism, this issue has been discussed. The Insurance Act says you must provide "fire following" insurance on every policy as a minimum requirement.
Senator Angus: Could you explain that? I happen to know what it means. "Fire following" is when there is an occurrence as a result of an insured peril that is not fire but leads to a fire.
Mr. Fredette: That is correct. The Insurance Act was drafted a long time ago when no one thought about the kind of exposures we have today. When you mention nuclear, we are talking about a nuclear terrorist event.
The reason we have raised the issue as reinsurers is because it puts into question the exclusion. Normally, on reinsurance contracts there is exclusion for nuclear events simply because we do not know how to measure these things. Is it pointless to give a guarantee if you do not have the assets to meet that guarantee? That is fraud.
No one is able to measure nuclear exposure. That has always been excluded. The fact you have to cover fire following means if that event occurred, it could be questionable whether you would have to pay it and put companies into bankruptcy.
Fire following is an issue in British Columbia concerning earthquakes.
The terrorism exclusion is also an issue. If fire follows a terrorist act, will the exclusion apply? We have been trying to clarify this because we do not want to give a guarantee if we cannot meet that guarantee. We have been trying to resolve these issues.
You see the mess in the United States where people say they have coverage for wind and not flood, but what is wind and what is flood?
Senator Angus: I am interested that you use the expression "financial guarantee" because it has huge ramifications in terms of risk transfer. I understand that at Lloyd's of London they are prohibited from writing "financial guarantee," or in other words, disguising a product as being insurance when it is a financial guarantee.
Mr. Fredette: Perhaps I used the word loosely. I should have said the ability to respond to the policies or the ability if there is an insured loss to pay that loss. That is what I meant. It is an insurance guarantee.
The Chairman: You have not given us a recommendation for our report that would ensure that this issue does not become a problem. I am not sure what you could recommend to satisfy the public that this is not a problem in Canada.
Mr. Fredette: OSFI sent a survey to all the reinsurance companies. As far as getting hard data numbers of how many contracts are out there, I would suggest that OSFI is the source that could give you specific information on the type of contracts, at least on the P&C side.
Senator Angus: Does a reinsurer have to be a licensed carrier?
Mr. Fredette: Yes, they do.
Mr. Brierley: They do in order for the company to get accounting credit for the reinsurance. I have a comment for Senator Angus. I caution the committee not to throw out everything that we have done so well in this country. In responds to the issues in the United States, they are looking for rules and how to draw lines based on risk transfer.
It is my experience that companies are very creative when it comes to getting around rules. If you draw a line in the sand, they will go one step past that line in the sand and you will not get honest, clear and transparent accounting treatment.
I am very proud of what we have done in this country to go to a principle-based system. If you transfer 6 per cent of the risk, then the accounts show the risk transfer of 6 per cent. The principles we put in place in this country solve the problem, and if the U.S. used the same system, they could solve their problems too. However, there are many obstacles preventing them from doing so.
We have it right here in Canada. We should be proud of what we have and strengthen what we have as opposed to following other less elegant solutions.
Senator Angus: We have a regulatory regime to govern your industry. I understand you have been going through a process of regulatory reform in the past few years. It is said that unnecessary regulations and red tape makes it costly for the Canadian consumer to purchase insurance. The price of insurance is said to be higher because of the regulatory regime, as opposed to the price in the U.K., the birthplace of insurance.
Is there any truth to that or is it a myth? It seems to run counter, Mr. Brierley, to what you just said.
Mr. Brierley: I was speaking about the accounting regime, not the regulatory regime. I think any industry association would prefer less regulation, but I believe that OSFI is in a class of its own as an international regulator.
OSFI leads the International Association of Insurance Supervisors in the quest for international reinsurance standards and I think we should be very proud of OSFI. That does not mean there are not a few things I would like to see them cut back on, but we have an excellent regulatory system here in Canada.
The Chairman: We heard early on in this consumer study, from many of your colleagues, that recommendations that tightened up consumer protection was something they felt they should have been done sooner rather than later and were, for the first time, commenting positively on the increased regulatory overview by third party bodies. We have heard a balanced viewpoint here about that topic.
Senator Massicotte: I agree with you; different parties can decide as to what they think is the wisest business risk; I have no issue with that. It is for those two parties, who are sophisticated and knowledgeable, to decide how to best negotiate the level of risk they wish to assume and for what price or premium.
I think the issue is disclosure.
How do we ensure that people understand the level of risk you assume and write off?
How can we ensure the public that your financial reports are not misleading and are fully disclosed?
It surprised me to read that the CICA does not have an opinion on this matter at all. You are going internally to your association to decide how to disclose those finite risks.
As I saw in your response to OSFI, the issue is whether it is an insurance risk or some kind of complicated transfer or cash loan or something of that nature.
Why has CICA not developed clear guidelines? I accept that the CICA GAAP rules are principle-based and not rule-based, but I am surprised the industry is not clear on this issue.
Mr. Brierley: On the life insurance side, there was no need to do so as we developed the Canadian GAAP 15 years ago. I cannot speak for the non-life side but on the life insurance side, we have a system that provides full, accurate and honest disclosure of a reinsurance contract by including all the potential cash flows, the side agreements and everything else.
The CICA has it right. I do not know why they would go back and review it now. The industry, and I believe the actual profession, is happy we have it right on the life insurance side.
Senator Massicotte: Does this apply to the property side?
Mr. Fredette: I think the actuaries are working on trying to come up with a definition. In the United States, the actuaries are having issues of a proper definition. They are trying to get to the spirit of the contract rather than a legalistic definition that could be walked around.
I think there are many shades of grey. You have many traditional insurance and reinsurance products where there are formulas that do limit. As an example, on a reinsurance contract you could have one on a sliding is scale where, as the loss ratio goes up, the company gets less commission. It reduces some of the volatility of that contract. Is that to be defined as a finite reinsurance contract?
In other words, I think they are trying to come up with an accurate definition in both Canada and the United States, but because there are different degrees, I do not think there is a black and white definition at this point.
Senator Massicotte: In your respective industry, none of the auditors of your financial statements have raised the issue to say they are not sure they fairly reflect the financial position of the companies?
Mr. Fredette: There is strict control for insurance and reinsurance companies in Canada between the auditors and peer reviews done by actuarial firms. If anything looks strange, it is handled in the most conservative way possible.
Senator Massicotte: On February 22, I believe, OSFI wrote a letter saying they were not sure that they agreed with the reporting. Your association responded in July saying that you are looking into it.
When do you think you will come out with a position paper responding to OSFI's concern?
Mr. Fredette: I cannot speak for OSFI.
Senator Massicotte: The letters I saw indicated that OSFI is waiting from something from your industry.
Mr. Fredette: Are you talking about the Canadian Institute of Actuaries?
Senator Massicotte: Yes.
Mr. Fredette: I cannot speak for the Canadian Institute of Actuaries because I am representing the Reinsurance Research Council. There is a committee working on that, but I do not know their timeline for that report.
The Chairman: Perhaps you can report to us about whether all your members have fulfilled OSFI's requests. We will then try to find out from OSFI what they are doing. Senator Massicotte raises the point that, if there is a problem, we want to ensure that the appropriate parties address it and satisfy the Canadian consumer that the problem has been addressed.
Senator Massicotte: I have a technical question further to earlier questions. For significant properties, the primary insurer as well as any risk passed on to a second insurer is clear.
You said the primary insurer is liable for the whole loss even if the insurance policy makes it clear that the loss is limited to $1 million, for example, and the party contracting for the insurance is clearly aware of that limitation. I was surprised by your answer.
Mr. Brierley: I was speaking on behalf of the life insurance industry only where there is a fixed face amount, and 100 per cent of that face amount is payable by the direct company.
Senator Tkachuk: When you report, is there a percentage of reinsurance that signifies that the company is properly reinsuring?
I am sure it is different in life and in casualty insurance, but in the case of a claim, what is the proper proportion of their future liabilities that would be reinsured?
Is there some industry-wide percentage that you or your analysts would look at when are reporting on the company?
Mr. Brierley: I am asked that question quite often, and it is a very good question.
Again speaking only for the life insurance side, the amount that any direct underwriting company should keep is a function of their capital, their shareholders' appetite for risk and the company's ability to manage that risk, and that varies.
There is no mathematical formula, even though many actuaries have attempted to create one. I am an actuary, but it is my professional opinion that this is a business question rather than a technical mathematical question.
Some shareholders are prepared to take more risk, which means they will have more volatility in their earnings and more downside risk but ultimately more upside risk at the end of the day if they are looking at their business from a long-term point of view.
As to the right correct answer if our clients are doing the underwriting, we want them to keep enough risk so that they will be prudent in that underwriting and not pass bad risks on to us. That is how we look at client retention.
There is one protection offered by the Canadian Institute of Actuaries, and I believe it is legislated in the most recent Insurance Act. The actuary is required to look at the financial condition of the company and in doing so tests future scenarios of adverse events to see how the surplus will stand up to potentially bad things happening in the future. That is, I believe, of significant assistance to the boards when they make the decision regarding retention.
Senator Tkachuk: How do analysts measure it when they are reporting to potential shareholders?
In other words, a person buying insurance company stock may be relying on analysts' reports on the health of the company. How do analysts know whether the company is a volatile, high-risk company? Do they actually say that, or do they have a clue and the shareholder does not know until the big hurricane hits and then they have a problem because their company is not reinsured?
Mr. Brierley: I am speaking from the life side and not the hurricane side.
Senator Tkachuk: Then we will discuss a whole lot of people dying in a big accident.
Mr. Brierley: Our risks are much smaller, but we have many more claims. On the property casualty side, you might have one big hurricane while we might have thousands of deaths with claims for much smaller amounts.
You can look at the past earning statements of the company. If they have been volatile, there is probably less use of reinsurance. You could also ask management what their philosophy is about how much risk is in the organization.
Senator Tkachuk: Is there a time when OSFI would say there is too much risk, that you are not covered with enough reinsurance?
Mr. Brierley: That is a possibility. That would is something OSFI would look at. To my knowledge, they have not said that. Perhaps I might have more business if they did.
Mr. Bundus: Mr. Brierley's comments are largely applicable to the P&C industry. The amount of reinsurance a particular primary carrier takes on is largely a business strategy. Newer companies tend to be more heavily reinsured than more mature companies that have longer experience.
Senator Tkachuk: And perhaps more cash.
Mr. Bundus: That is correct. Often it is the request of the solvency regulator that they be more heavily reinsured to ensure that there is someone with means to back them up to ensure that they survive their initial start-up. It is very much a business strategy for the various companies. The solvency regulators watch closely. If they believe the reinsurance is not sufficient, they may demand extra capital from that company under the minimum capital test to ensure that they have adequate capital to back up their business. In the alternative, they could reduce the amount of writings they do to get their capital to the adequate level.
Mr. Brierley: I might add one other thought to give you some comfort. The minimum capital requirements set out by OSFI are tied to the amount of risk retained by the company. If a company is keeping more risk, OSFI requires significantly more capital to be kept in that company as protection for the consumer.
The Chairman: For the benefit of our listening audience, OSFI is the Office of the Superintendent of Financial Institutions. It is a federal regulatory oversight body.
Gentlemen, you received a letter from the Superintendent of Financial Institutions, and we will be asking some questions about it. It is not a long letter, so perhaps you could glance at it while Senator Moore is asking some questions.
Senator Moore: Mr. Bundus, in your opening remarks you said that a reinsurer accepts a portion of the risk for a portion of the premium. What does that mean? You deal with house insurance and car insurance. If I have a policy on my house and the premium is $1,000, I pay that amount to the insurance company that is covering my property.
Does that insurance company take my $1,000 to a reinsurance company and offer it $200 if it will be responsible for a certain percentage of the risk? How does that work? I do not think the public understands the procedure.
Mr. Bundus: That is how it works. The insurer takes the $1000 paid for the premium and then determines in its internal review that it wants to retain only a certain part of the potential risk. Let us assume that you have $2 million in liability insurance coverage with that policy. The primary insurer might be willing to have $500,000 of the potential liability claim against you funded internally. A portion of the $1,000 premium covers that liability coverage and another portion of it is paid to a reinsurer who agrees to pay the liability amount claimed against you that is in excess of that $500,000 to the primary insurer so that the primary insurer has the funds to pay your claim.
Senator Moore: In that example, the reinsurer is responsible for the amount in excess of $500,000.
Mr. Bundus: Yes, up to the limit on your policy. If the liability coverage of your policy is $2 million, then the reinsurer will pay between $500,000 and $2 million.
Senator Moore: Is this done on a policy-by-policy basis? I believe Mr. Brierley mentioned when speaking to the life insurance side that you said you work on 40-year contracts. What does that mean? Does that mean each time an agent places insurance on a property that a reinsurance company will be called to assume a portion of the risk? Is it done when the agent has a block of policies? How does that work?
Mr. Bundus: The answer is that it depends.
Mr. Fredette: I will try to simplify the response by speaking to your example. There are different forms of reinsurance. Generally speaking, most of the premium that goes to reinsurance is by form of treaty.
Senator Moore: What does that mean?
Mr. Fredette: A treaty is a contract based on a specified portion of that portfolio.
Senator Moore: Is that of the primary insurer?
Mr. Fredette: If it is only a one-by-one risk, it is called "facultative reinsurance," whereby it is one specific risk. Generally, insurance companies enter into contracts with reinsurers on a treaty basis. For example, a small insurance company just starting up with limited capital might have a "quota share treaty" or a "proportional treaty," whereby they will cede a certain pre-agreed percentage of every risk to the reinsurer. It could be 20 per cent or 30 per cent but it helps that small insurance company with its capital limits.
Larger, more mature companies buy excess-of-loss contracts. They understand that they could have a shock loss from an individual risk, for example a total loss due to fire. They want to limit the individual loss and so they will buy an excess-of-loss contract on a per risk basis. However, it will apply to either all of the company's portfolio or to certain agreed segments or classes of that company's portfolio.
Sometimes there can be catastrophic loss due to hurricane, earthquake, storms and forest fires. A company will buy a catastrophic treaty, whereby for any kind of event of that nature they will determine how many millions of dollars they can retain as a net loss and buy protection above that amount through a reinsurance company.
Senator Moore: How many reinsurance companies are there in Canada?
Mr. Fredette: There are approximately 20 licensed domestic reinsurance companies in Canada.
Senator Angus: There are many unlicensed companies.
Mr. Fredette: The ones operating in Canada are licensed because they could not operate otherwise.
An unlicensed company can be offshore but in terms of accounting, you will not receive credit for the transaction. The offshore company might be secure but the clients do not receive the accounting benefit.
Senator Moore: The reinsurance contract could be enforced under Canadian law.
Senator Angus: There is no direct link between the insured and the reinsured. The treaty is the contractual relationship.
Senator Moore: Mr. Brierley, you mentioned that Munich Re Canada is the largest reinsurance company in the world.
Mr. Brierley: The Munich Reinsurance Company in Munich is the largest reinsurance company in the world. Munich Re Canada is the largest reinsurer in Canada.
Senator Moore: Are reinsurance companies insured?
Mr. Brierley: Yes.
Senator Moore: Who insures you?
Mr. Brierley: Retrocessionaires, second level reinsurers insure us. Usually, reinsurance companies insure reinsurers but some direct-writing companies will get into the retrocession business.
The Chairman: You are beginning to shake our confidence.
Mr. Brierley: The Munich Reinsurance Company does not use much retrocession.
Senator Moore: This is akin to a hedge, hedge, and hedge your bets.
Are these retrocession businesses located in Canada? Are some of them international companies?
Mr. Brierley: If a licensed reinsurer operating in Canada wanted to take credit for the retrocession, that reinsurer would have to retrocede or reinsure to a licensed retrocessionaire.
Senator Moore: Does proof of that coverage have to be filed with the Office of the Superintendent of Financial Institutions?
Mr. Brierley: If the retrocessionaire is licensed, then that company is a licensed financial institution in Canada and would have to provide their own financial statements to OSFI in the same way that a reinsurer would have to provide their financial statements to OSFI if they want to remain on a licensed basis.
Senator Fitzpatrick: I am from Kelowna, British Columbia where we experienced a firestorm a couple of years ago. I should make the comment that, generally, the area was handled very well with insurance coverage. I have not heard of any major problems. I have had insurance for many years and the insurance companies do not owe me anything these days.
To say that today's subject is complicated is an understatement and so I have several questions.
How is the consumer to understand this highly confusing system?
If you buy insurance from an insurance company, is it necessary to look behind the company to know its policy in respect of reinsurance or does it matter.
How many insurance company failures occur? How many large insurance claims go unfulfilled?
I would assume that becomes more important in this day of potential major catastrophes.
I thought I heard you say that a small percentage of companies in Canada that use finite reinsurance. Could you clarify that statement?
What is the case with auto insurance companies? Did they participate in this? Of course, there are large public liability bills attached to automobile insurance.
Mr. Fredette: I will try and answer your questions in the same order you asked them. If I miss one, please stop me.
You are asking a question regarding the failure of insurance companies. I think OSFI is doing a good regulatory job overseeing the companies on a day-to-day basis. Given normal patterns of insurance cycles, I do not expect you will find a lot of companies in trouble.
I think the only exposure we may face on the P&C side is if we had a catastrophic loss as the result of an earthquake in Vancouver. That kind of a loss goes beyond the scale of company planning. All companies today use computerized risk modelling, but the trouble is that they are not infallible. You can underwrite for a certain size of loss, but Mother Nature can surprise us. We saw what happened in New Orleans where a loss far beyond the magnitude anyone expected happened.
If you are asking me what exposes a Canadian insurance buyer in Canada, it would probably be a catastrophic loss beyond the magnitude we would normally expect. We have talked about that in the press.
On a normal basis, I expect that business would be on a very even and solid basis as far as the regulations to which insurance companies have to respond. In addition, the actuaries have to take various actuarial and dynamic solvency tests for their companies.
Senator Fitzpatrick: Is the consumer relatively safe in going to any number of insurance companies and buying insurance without having to investigate what is behind those companies with respect to reinsurance?
Mr. Fredette: I will not say all insurance companies are equal. Generally speaking, yes, I would say the regulators are doing a good job here in Canada.
Obviously some companies will have stronger balance sheets than others. If someone is interested, they can look into reports on these companies. A local company does analysis detail on insurance companies. Any analyst can find information on the company's financial strength.
There is no known body of information to tell you the small number of finite treaties in Canada. Typically, if any were done, they were on a direct basis between a reinsurer and an insurance company. Typically, these are kept very quiet because the reinsurer may feel the contract wording is proprietary to the research and development it has done on its own.
If you are looking at how many were done and who is doing them, OSFI is the only source that can give you those answers. I think you had another question on provincial insurance.
Senator Fitzpatrick: Automobile insurance, yes. Do they participate in this process?
Mr. Fredette: In what process?
Senator Fitzpatrick: The reinsurance process at the provincial level.
Mr. Fredette: Yes. Virtually all insurance companies in Canada, provincially or federally licensed, buy reinsurance.
Senator Fitzpatrick: Does that apply to a provincially owned insurance company?
Mr. Fredette: Provincial companies like ICBC and MPIC buy reinsurance.
Mr. Brierley: I would like to quickly address Senator Fitzpatrick's questions from the life insurance perspective. It is an excellent question: How does the consumer understand all of this?
In terms of reinsurance, the consumer does not have to understand it, as long as the accounting treatment is accurate and clear. That does not mean they should not perform due diligence on the companies from which they purchase insurance.
As my non-life colleagues have said, the same thing applies to the life insurance side. OSFI does an excellent job of regulating the solvency of our industry.
We have CompCorp, which is an organization that is in place if a company should go insolvent or be wound up by the superintendent. They guarantee significant amounts of coverage to consumers as well.
Senator Angus: Is that analogous to the Canadian Deposit Insurance Corporation for banks?
Mr. Brierley: Yes. I would like to make another comment from the life insurance perspective. The statement that there is a small percentage of finite reinsurance used in Canada is one that came from the non-life side.
I think it is very difficult in life insurance to say what is finite and what is not. I could put forward a very good argument to say that 100 per cent of what we do is finite, but I could also put forward a good argument to say zero per cent of what we do is finite. I do believe it is accounted for accurately. That is the important thing for the consumer.
Senator Angus: I will cede my question to Senator Tkachuk.
Senator Tkachuk: I have a follow-up question. An October 6 article from the National Post includes an comment from an unnamed analyst complaining that disclosure on reinsurance is thin at best. He informs the readers that reinsurance is big business and that it is a sore spot because there is so little disclosure.
Do you agree with that comment? I know someone can say anything they want, but I want you to comment on that.
Mr. Brierley: I saw that same article and comment. I had trouble understanding it, to be frank.
We provide the same financial reporting statements to OSFI as the direct writing companies provide. We provide complete disclosure. The direct writing companies disclose their results on both a direct gross written basis as well as on a net or the amounts reinsured.
Perhaps this analyst was having trouble understanding a particular reinsurance contract as opposed to how the company in general deals with reinsurance. There is complete disclosure by the licensed reinsurers. The vast majority of the life insurance business written in Canada is licensed.
Senator Tkachuk: If I went to a public life insurance company, SunAlliance for example, and I went to the website and looked up their financial statements, would I be able to ascertain their reinsurance? I am not an accountant, and most other people are not.
Mr. Brierley: The information is there. I suppose it depends on your level of financial sophistication.
The statement will tell you the face value of how much insurance risk that company wrote and how much insurance risk they reinsured. It will tell you how many premiums they wrote on a gross basis and how many premiums they paid for the reinsurance.
Depending on the level of knowledge you are looking for, it is there. It is not hidden. The actuarial reserves on a gross and after reinsurance basis are also disclosed.
Senator Angus: The clerk passed around a letter dated November 2 from the OSFI to us apologizing for not being able to come today. It is signed by the superintendent, Nick Le Pan. On page two, they explain the fact that each life insurance company has a designated actuary that is part of the regulatory process. Each year, there is a memorandum required where certain disclosures are laid out by the company.
I am quoting from the top of page two. It says,
Many changes were introduced this year. Among this year's six changes, OSFI included the need to disclose any finite reinsurance agreements.
That speaks to Senator Tkachuk's question. Perhaps in the past they were not disclosing, and perhaps that is why the unnamed analyst made that rather nasty comment about your business.
Could you outline these six changes? Did they cause you any trouble? Do you agree with them? Are they helpful or unhelpful?
The Chairman: Have they been completed?
Mr. Brierley: I am not aware of the details. Perhaps Mr. Witol or Mr. McLeod from the CIA would be able to give you that answer. I have not read that memorandum. I am not the appointed actuary of the company. What I do know is that our appointed actuary has no concern with any of the questions being asked this year. We have no concern with any questions OSFI asks us. It is their job to know what is going on inside our organization.
That does not concern me in the least. It will be hard to figure out what is finite and what is not.
Senator Angus: As you say, you could refer to all your contracts or treaties as finite reinsurance or none of them. It must be easy to evade.
The Chairman: There is a difference between taking the risk yourself and the ones transferred to a third party risk. When you refer to reinsurance, I expect you mean the scope of reinsurance.
Mr. Brierley: It is very difficult for us to figure out what is finite coming in. We do not use any sending out. We use very little retro session.
There is an annual memo from the superintendent to the appointed actuaries every year. Every year there are minor changes in what they are looking for. These reports can run 100 or 200 pages, and there has never been, to my knowledge, a request from the superintendent that has caused anyone any concern.
Mr. Witol, do you have the details?
James S. Witol, Vice-President, Taxation and Research, Canadian Life and Health Insurance Association: Unfortunately, I do not have the six changes in my head but perhaps Charles McLeod, on behalf of the Canadian Institute of Actuaries, does. There are changes in the capital requirements formula every year, which perhaps the actuary is being asked to comment on.
For example, there were substantial changes to capital requirements for the mortality risk that companies retain. There were changes to the capital requirements for segregated funds. Perhaps the actuary was asked to comment on how he dealt with these changes. Whatever the changes were, they were relatively minor changes.
The Chairman: We have another witness from the actuarial institute and he will be able to respond to some questions. He is in the audience. I hope he is listening carefully. It will save time.
Senator Massicotte: I think it is OSFI's job to make sure the solvency issue is satisfied and consumers are protected.
Some people would say, especially on the life side of the industry, that given some consumers cannot read the financial statements, they cannot get a good assessment of the solvency of these companies. Large companies, therefore, seem to benefit from this fact. How do you recognize names? They give a comfort of security.
There are two comments that some experts would make. One is that it leads to a lack of competition on a particular life side of it, or an oligopoly arrangement, where there is not enough competition and therefore pricing is not always in the best interests of the consumer.
The other comment is that OSFI is concerned about failures that it creates a lack of creativity, entrepreneurship and new companies.
Could you make a comment on both those comments from some experts?
Mr. Brierley: In terms of the competition in the life insurance industry, there is fierce and cut-throat competition.
The margins are extremely thin in that business and that is why reinsurers get used a fair amount. I am speaking as a reinsurer. There is a tremendous competition. There is the risk of a few large companies lacking creativity, but the Canadian industry has always been blessed with a number of small nimble insurance companies as well. They look to reinsurers for their financial support. The smaller companies are very quick to fill a void. Any time the broker or agent — it is not the consumers so much — is looking for creative products and services for their clients and they are not getting it from the big companies, they will be quick to go to the smaller companies, because they know full well the financial strength of the reinsurer is behind those small companies.
I think that the Canadian consumer is served very well in terms of both having competitive life insurance products and creative ones. Comparing what we have here to what is in Europe and other countries, we have a very sophisticated life insurance industry with sophisticated products.
Senator Massicotte: If the industry were as competitive as the theory suggests, the returns to the investors would be an adequate fair return relative to the risk they must take. If you look Canada and the United States, some of our savviest investors, owners of life insurance companies, obviously believe that it is a very good return. They have received, in the last 15 years, a phenomenal return upon their investment.
If the competition is so fierce and so tight, why is it that in at least two or three cases some of the most internationally highly recognized investors own these companies?
Mr. Brierley: You put your finger on it when you used the word "international." The capital requirements in Canada are quite strict. That restricts the earnings potential or return on equity for companies operating in Canada.
The major Canadian life insurance companies have very active international organizations. It is because of the sophistication and good and competitive markets we have here in Canada that Canadian companies have been so successful on the international markets where the competition is not quite as difficult and the regulatory capital requirements are not as strong.
Most of our large companies are looking outside of Canada for their future growth and earnings.
Senator Massicotte: Having said that, should we be concerned with the risk these Canadian companies might assume abroad? Could that risk imperil our consumers' reliance on these companies?
Mr. Brierley: OSFI regulates the international operations of Canadian companies, not just the Canadian portion of Canadian companies — not branches but certainly Canadian companies.
The Chairman: If there is a Canadian company that has an offshore company as a holder of subsidiaries, is that regulated by OSFI or overseen by OSFI included in the capital requirements and the overview? In other words, it is a wholly owned sub, but it is offshore.
Senator Angus: Let us take Manulife in Bangkok as an example.
Mr. Brierley: I believe that is accounted for in an equity basis in the Canadian statement. I do not think OSFI would regulate the Bahamian, U.S. or Chinese policies; that would be the purview of the local regulator. The International Association of Insurance Supervisors looks at these questions to have cross-border regulation and OSFI should be congratulated for taking a very strong leadership role in that organization.
The Chairman: We received very good evidence from Mr. Le Pan about their participation and their look into the Canadian industry. Our organization is looked on as a leader in that international organization.
Senator Massicotte: A very important American investor wrote a number of books on this subject. What is the name of the company?
Mr. Fredette: I believe it is Gen Re.
Senator Massicotte: His principle interest in this is that life insurance companies have a lot of cash. People are paying premiums for payments much deferred. Obviously the game to be played is to get a return on that cash in excess of the assumed actuarial rate on that risk. If the investor is very savvy and can get an incremental return on that leverage, the owner makes a lot of money.
With higher returns usually comes higher risk. You are saying in Canada we regulate and supervise that accurately, but one has to acknowledge the high risk/high return potential. Some people could be left online when they paid a premium for a service or premium they never get in the future. Can you comment on that?
Mr. Brierley: You are right. Life insurance companies take in money today and pay it out in claims 20, 30, 40 years from now. The actuary is required, in calculating the actual liabilities, to take into account the actual assets that are in place. If you know you are going to make a payment of $100,000 in one year from now and if you have a bond maturing for $100,000 you have no real risk other than perhaps a credit risk on that bond. If your bond matures six months from now, you have a reinvestment risk associated with that. You will have to reinvest that money for the last six months, and the actuarial profession requires this mismatching of asset and liability cash flows. If they are not matched up, further actuarial liabilities are set up in the accounts.
It is all part of our GAAP accounting. We look at all the risks and all the cash flows and ensure they are in the financial statements. It is an excellent system.
Senator Moore: Mr. Brierley, when you were talking about the life insurance side you said that you base your work on 40-year contracts. What does that mean?
Mr. Brierley: When you buy a life insurance contract, you are normally buying it for your lifetime. The company is promising to provide you coverage for the next 40 years, or however long you live, and usually guaranteeing your premium for that whole period of time as well. When you buy house insurance or car insurance, it is usually for a year. They do not necessarily promise to cover you next year. If they do, they do not guarantee the rate.
A claim on a P&C policy can be made during that one year. On a life insurance policy, the claim can occur any time in your lifetime, and I used 40 years as an example. Therefore, we have to ensure that our pricing will be satisfactory over that 40-year period and that the premium we guarantee today that you will pay for the 40 years will be adequate.
Senator Moore: That would be for policies with a fixed premium.
Mr. Brierley: Yes, although your premium could increase.
Senator Moore: Some are reviewed each five years or at certain stages of your life, but some are fixed for the full term of the policy.
Mr. Brierley: That is correct. For the vast majority of products sold in Canada, the premium may be step rated so that every five or 10 years you pay more, but how much more you pay is guaranteed at the time the contract is issued.
The one exception to that is a contract that is linked to a certain investment vehicle. You could have a variable contract whereby, if interest rates go up, your premium would go down and vice versa.
The Chairman: Thank you so much. If you would like to clarify any of your answers after you receive the transcript, please feel free to do so. If you wish to comment on the evidence of the next witness or on the paper we received today from OSFI, please feel free to do that as well.
We want to ensure that there is due process here so that people can get their views across. This is an area of some concern to us and we have not yet grappled with it. Any comments you have will be helpful. We hope to conclude our work within the next three or four weeks.
Welcome, Mr. McLeod. We are to continue our study on the consumer issues arising out of the financial sector. We are focusing on insurance, finite insurance, and the complexity of those subjects. As you heard earlier today, we are more confused about the scope and nature of finite insurance and its affect on consumer choice.
Charles McLeod, President, Canadian Institute of Actuaries: The position I hold with the Canadian Institute of Actuaries is an elected, unpaid position and I am retired from full-time work. In the interests of disclosure, I will point out that until March of last year I was employed by RGA Reinsurance Company, which is a large multinational life reinsurance company. I still do a limited amount of part-time work for RGA on a contract basis, and they provide me with office space to help me carry out my position as President of the Canadian Institute of Actuaries.
The Chairman: How big is RGA Reinsurance Company in terms of the overall industry? Is it a major player?
Mr. McLeod: Unlike Munich Re, it writes only life reinsurance business and it is probably about the third largest writer of life reinsurance in the world.
The Chairman: Where does it stand in Canada?
Mr. McLeod: It is the third largest writer in Canada.
The Canadian Institute of Actuaries, CIA, is the national organization of the actuarial profession in Canada. There are about 2,750 fellows of the Canadian Institute of Actuaries.
Actuaries are professional business people who are skilled in the application of mathematics to financial problems. Actuaries employ their specialized knowledge of mathematics, finance, statistics, and risk theory on problems faced by insurance companies. Actuaries specialize in life and P&C insurance, pension plans, government regulation, social programs and individuals. Most actuaries work in the fields of insurance and pensions.
The Insurance Companies Act of Canada requires each insurance company to appoint an actuary who, amongst other things, "shall value the actuarial and other policy liabilities of the company at the end of a financial year." In layman's words, the actuary determines how much money the company should put aside to pay future claims and other benefits to policyholders.
The Canadian Institute of Actuaries has issued standards of practice that are binding on all actuaries. Parts of these standards cover the valuation of policy liabilities, and some of those standards in turn specifically refer to reinsurance.
The work of a company's actuary is subject to periodic, external review. In addition, starting next year, the work of the actuary will also be subject to the review by the external auditor of the company.
As some of the previous witnesses said, almost all reinsurance treaties are written for financial reasons. Just as an individual buys insurance to protect himself or herself against a possible large financial loss, insurance companies buy reinsurance to protect themselves against large losses. Many insurance companies have decided to reinsure large proportions of their business in order to replace fluctuating claims with known and stable premiums to a reinsurance company. The insurance company is willing to pay the reinsurer in order to be able to report smoother earnings to its shareholders. These are two examples of valid uses of reinsurance. Risk is transferred from the insurance company to the reinsurer.
In the United States, some reinsurance transactions may have been written mainly to make financial results look different than they really are. I would argue, and I believe Canadian actuaries generally would agree, that if there is no transfer of risk, then the reported financial results of the insurer should not change. As you have heard from previous witnesses, many reinsurance transactions are one-of-a-kind and some may be quite complex.
I would like to stress some differences between Canada and the United States. In Canada, the statutory returns of an insurance company, that is the returns that are filed with the government regulator, such as OSFI, are prepared on the same accounting basis as the returns that are filed with shareholders under generally accepted accounting principles.
In the United States and in a number of other countries, the returns filed with the regulator are prepared on a different basis than the returns prepared for shareholders. That difference does not happen in Canada.
Canadian actuarial and accounting standards, particularly with respect to the valuation of the actuarial liabilities, are different from both U.S. statutory returns and U.S. shareholder returns. As previous witnesses have mentioned, Canadian accounting and actuarial standards are more principles-based as opposed to rules-based.
I would like to talk next about how actuarial liabilities are valued in Canada. This is very much a layman's description. When the actuary is working at determining how much money the company should set aside to pay future claims, he asks how much cash will be flowing in in terms of premiums, for example, investment income. He asks how much cash flow the company expects to pay out in the future in terms of payments to policyholders, expenses and commissions, and payments to and from the reinsurance company. There is a specific requirement in the standards to take account of reinsurance undertaken by the company.
If there is no transfer of risk, a reinsurance transaction should have no effect on the size of the actuarial liabilities. If you are paying $100 to a reinsurer and you expect to get back $100 in the future, a loan as some people have talked about, then your net cash flow is zero and there should be no effect on the actuarial liabilities.
There has been some correspondence between the government regulator, OSFI, and the Canadian Institute of Actuaries, and I believe some of this was distributed to members of your committee.
The Chairman: Mr. McLeod, I apologize, I thought you had received a copy of the document from OSFI that we received during our hearing this morning. We gave it to our previous witnesses. A copy will be made available to you if you do not have one.
Mr. McLeod: I do have a copy of the document but I have only glanced at it.
The Chairman: I just want to ensure that you are up to date with everything.
Mr. McLeod: In February of this year, OSFI wrote to the Canadian Institute of Actuaries and said:
OSFI believes that the institute's valuation standards of practice must be revised to include guidance on the treatment of reinsurance.
The Canadian Institute of Actuaries responded to OSFI saying:
We respectfully conclude that the current CIA standards of practice, if properly applied, are adequate with respect to the treatment of reinsurance.
We did two other things. In June, we issued a memorandum to all members, and I think you have copies of it as well, saying, amongst other things, that it was reminding the actuaries for insurance companies that:
If a ceding insurance company is taking a credit for reinsurance, there should be a meaningful transfer of risk. In assessing the degree of risk transfer, both the reinsurance treaty and any side arrangements (side letters) should be considered.
We also set up a task force — and I believe the mandate of that task force had been provided to members of this committee. We asked our task force to look at our standards of practice in light of OSFI's comments. We asked them to determine whether we need to change our standards or provide educational notes.
I will not repeat the mandate. The target date for the report is June 2006.
My conclusions are that there are differences of practice in the treatment of accounting for reinsurance between Canada and the United States. I believe that given the CIA's standards of practice the problems that appear to have happened in the United States should not happen in Canada. I have thought over the last few days as to what could go wrong.
Let us say there was a side arrangement, a side letter, supplementing the reinsurance treaty of which the actuary was unaware. In that situation, he would not be considering those items in his valuation of liabilities. Let us say that was an extreme case of fraud, for example, where a CEO had such a letter in his desk. I have no evidence whatsoever that this exists, but being an actuary I tend to think of what can go wrong.
The Chairman: Early this spring, your organization took the position, with OSFI, that you were satisfied your group had satisfactorily assessed the risk as it applies to reinsurance and therefore you noted that changes were unnecessary. Is that correct?
Mr. McLeod: We believe that our standards of practice are adequate. Despite that, we will look into the matter and see if actuaries should receive additional guidance.
The Chairman: Tell me if I am correct on this statement. OSFI then issued a letter to the appointed actuaries of each company, including all your members, on September 30. In that letter, they asked for the need to disclose any finite insurance agreements, which I assume includes side letters. OSFI sent that letter after CIA said that its procedure was adequate.
Mr. McLeod: The change is not in how the actuary calculates the size of the liabilities, but what the actuary reports to OSFI. In simple terms, the actuary may say, "The liabilities for this company are $100 million."
The Chairman: As I understand it, OSFI was asking for the need to disclose as opposed to the appointed actuary being satisfied that the risks were covered. We do not quarrel with that. Now OSFI is saying, "Wait a second, we want transparency and disclosure." Am I correct?
Mr. McLeod: Yes.
The Chairman: Just to complete the sequence, on October 21, OSFI issued a paper entitled, "Guidance Paper on Risk Transfer Disclosure and Analysis of Finite Insurance."
OSFI is not here and I hope you will correct me if I am wrong. OSFI has now done two things. They have asked for changes. They have gone further and issued a guide paper.
In the third paragraph of that letter, they say that they have issued a supervisory paper to assist actuaries analyzing risk transfer, disclosures and the analysis of risk. Is that right?
Mr. McLeod: I have a small correction. The International Association of Insurance Supervisors issued the paper on October 21.
The Chairman: We heard from Mr. Le Pan that he is an active member of that association. He is trying to establish international guidelines. It came from him. However, as a member of that association, he has issued that as well.
Mr. McLeod: Yes, as a member.
The Chairman: Essentially, it is OSFI making that request, albeit it through urging its membership in the international organization called the International Association of Insurance Supervisors.
Mr. McLeod: The International Association of Insurance Supervisors issues its reports to bodies such as OSFI in other countries of the world. Canadian actuaries are governed by whatever OSFI puts out. OSFI may choose to adopt some of the recommendations of the International Association of Insurance Supervisors. However, that document does not automatically flow directly to Canadian actuaries.
The Chairman: I assume all actuaries are familiar with it because it is on their website.
Mr. McLeod: It is on the IAIS website. I do not know whether actuaries would be familiar with it since it came out fairly recently.
The Chairman: We have the earlier requirement from OSFI for disclosure dealing with finite insurance, which I assume includes side letters. Obviously, if a side letter affects a reinsurance treaty or agreement it would have to be disclosed or considered as well.
Mr. McLeod: Absolutely.
The Chairman: Honourable senators, because we do not have OSFI here, I am trying to clarify the nature of the new requests for information and transparency.
Senator Angus: Thank you for coming here, Mr. McLeod.
You are the non-paid chair of this association of actuaries. Do you employ personnel to run the organization?
Mr. McLeod: Yes, we have an office in Ottawa with a staff with 18 staff members.
Senator Angus: It is a substantial organization. Do you know its budget?
Mr. McLeod: Its budget is about $4 million per year.
Senator Angus: I understand all 2,750 fellows are actuaries. Do you know roughly how many work for OSFI? Is it a big percentage?
Mr. McLeod: It is certainly less than 20 and probably less than 10.
Senator Angus: I have always understood that most actuaries work for life insurance companies and pension consultants. Is that accurate?
Mr. McLeod: Yes, and they work for P&C as well.
Senator Angus: Is that to evaluate claims?
Mr. McLeod: That is one thing they do. The other thing they do is help set premium rates.
Senator Angus: You were here while these other folks testified this morning.
Mr. McLeod: That is correct.
Senator Angus: Was there anything stated or explained with which you disagreed? Is there anything you might add to the picture?
Mr. McLeod: Nothing material.
Senator Angus: Is there enough reinsurance taken out by primary carriers?
Mr. McLeod: My honest answer has to be I do not know. I believe that it is adequate, but I am not the right person to ask.
Senator Angus: Would that be something that one could reasonably assume OSFI would be making a judgment call on in their regulatory function?
Mr. McLeod: I think so, yes. They look at all aspects of a company's business. They would look at the company's reinsurance arrangements.
Senator Angus: We have heard of the difference between the U.S. approach, which is a rules-based approach, and the Canadian approach. This is the Standing Senate Committee on Banking, Trade and Commerce. We are also concerned about the supervisory function of the banking system. Obviously, in the U.K. and Canada, we tend to have principles-based supervisors, whereas the U.S. is rules-based system. We are told it leads to very different results.
I think their system is varied. There are a hundred times more banks in the U.S. and, therefore, I wonder if a principles-based system would work efficiently when there are so many players and institutions to regulate and supervise. Maybe it is necessary to have these rules.
Mr. McLeod: That is an interesting question. I think there are obviously fewer insurance companies in Canada than was the case 10 or 20 years ago. We have had a principles-based system in Canada for a number of years, including 10 or 20 years ago when there were more insurance companies in place. It seems to have worked.
Senator Angus: When we travelled to England a few years ago, Sir Eddie George and the head of FSA explained to us how it worked in realtime. For example, when the Hong Kong and Shanghai Bank purchased one of the major U.K. banking institutions they sat them down, looked them in the eye, and said they would have the head office moved from Shanghai to Manchester. It was quite an interesting process.
Does it work the same way in the insurance business?
Mr. McLeod: I would say that there is a very good relationship between the insurance industry and the government regulator. We have talked about OSFI. There are \provincial insurance regulators as well.
There is a high degree of trust on both sides. The Canadian Institute of Actuaries has developed quality standards over the years. I respect the quality of people who have been at OSFI, not just currently but over my working career. If you have that level of trust, then a principles-based system can work. If you do not have trust, it will not work.
Senator Angus: It seems obvious from Mr. Spitzer's activities that element of trust has been broken in the U.S.
Mr. McLeod: That appears to be true.
Senator Angus: That has led us to carry out this study. We are thinking not only about the poor life insurance policyholders but also of all policyholders. Are we being gouged? Are we paying double what we should be paying? These are legitimate questions.
You were here when I asked my first general question this morning. We do not want to get too technical, but can the Canadian buyers of these insurance products rest comfortably?
Mr. McLeod: There are two parts to that question. Is the company solvent? Are the consumers paying too much?
In terms of whether companies are in danger of getting into financial difficulty, I would say the average member of the public should not be concerned for several reasons.
Firstly, there are government regulators such as OSFI who monitor insurance companies. My background is in life insurance as opposed to property and casualty insurance, but the last failure of a life insurance company was in 1994, Confederation Life. Various safeguards were subsequently introduced that I think would make a repeat of Confederation Life unlikely.
In addition to the regulators, there are rating agencies that analyze a company's results in detail and publish the rates of the major insurance companies.
Senator Angus: I think it was Mr. Brierley who referred to AM Best and Standard & Poor's and others. Are they rating agencies?
Mr. McLeod: That is correct.
Companies like Manulife and Sun Life publicly traded. Analysts monitor the financial results of the company more than when they were mutual companies. They meet with the management of a company and ask difficult questions about results. There are different levels of audit next to the external audit of the company.
I do not think the average member of the public should be concerned about the solvency.
Senator Angus: We have had a spate of demutualizations in recent years with these longstanding big companies such as Manulife and Sun Life, and now Standard Life in the process, a fine Scottish company that you would know well.
Has this demutualization led to better disclosure because they are subject to the stock exchange rules? Are the cushy and quietly run mutual companies of years gone by now under the microscope of the market?
Mr. McLeod: Yes, they are analyzed and studied more closely than was the case when they were mutual companies.
Senator Angus: Is that a key factor in the recent change?
Mr. McLeod: Yes. The second part of your question deals with whether people are paying too much.
I do not deal with the pricing side of insurance, but I think there is enough competition in Canada that price gouging is unlikely. It might happen in occasional niche markets, but the average member of the public has the benefit of competition.
Senator Angus: I am aware that risk managers are sophisticated buyers and they know the rating agencies and probably deal more often than not with the large brokers. For example, Marsh Inc., Aon Corporation, Willis North America Inc., the big brokers have had trouble. Risk managers know how to deal with those big brokers, and they insist on high-rated security or solvency levels.
We should also take into account the little person. We call them SMEs in Canada, small- and medium-sized businesses, who must buy fire, theft and fidelity insurance. The French version is called PME's. The small businesses take what the broker tells them to take. How do they know about contingent commissions and finite products? Maybe it is not an issue. If it is not an issue, that is great.
Mr. McLeod: I am moving out of my area of expertise to try to answer your question. It would be better for the previous witnesses to respond to this question.
My personal non-professional view has been that there are a large number of insurance companies in Canada, and that ought to promote competition.
Senator Angus: The insurance business is a complicated business. It is international in scope and has big markets in places like Bermuda and London. The domestic market seems to lack sophistication amongst some of the intermediaries who provide product to the consumers. What kind of protection, if any, could we recommend for them?
Mr. McLeod: Again, I am moving out of my area of professional competence. Anything I say now is as an individual.
My understanding is that the regulation of the intermediaries, at least when selling policies to an individual person, is done by the provincial departments of insurance.
I am not sure how far this committee wishes to go, but you might want to speak to provincial regulators to get their views on this subject.
Senator Angus: That was the answer I hoped you would give. Chairman, we may want to look into that.
Senator Massicotte: Did you deal with the letter of February 22 of this year to Mr. Mark Campbell from OSFI?
Mr. McLeod: I referred to it in my opening remarks.
Senator Massicotte: With regard to the last sentence in the first paragraph, did you deal with that? It says the following:
We are also aware that some aware finite or financial reinsurance agreements may not, in fact, involve a sufficient transfer of risk to justify a reduction of the ceding company's policy liabilities.
Has your association done something about that to satisfy OSFI's concern?
Mr. McLeod: One of the letters you have is the June 2005 response to OSFI. It says,
We respectfully conclude that the current CIA standard of practices, if properly applied, are adequate with respect to the treatment of reinsurance.
The Chairman: You quoted from OSFI's letter where they suggested the need to disclose any finite insurance agreements, and the witnesses advised us that would include side letters.
Senator Massicotte: I was going to raise that next.
The Chairman: We have dealt with that. Thank you.
Senator Tkachuk: Senator Angus asked you about principles-based and rules-based and the health and stability issues, and you four reasons as to why the consumer should be comfortable. Out of those four reasons, what do we have that the United States does not have?
Mr. McLeod: One thing Canada has is a federal regulation of insurance companies as opposed to a state regulation system. Most insurance companies in Canada are regulated at the federal level by OSFI, but not all. There are a number of provincially regulated companies in Quebec and a few in Western Canada.
In the United States, insurance companies are regulated at the state level. There is no federal regulator. A benefit of having a federal regulator is almost like economies of scale in that you can hire more and better-qualified people than if each province were to have its own department of insurance.
Senator Tkachuk: Could you not argue that they would be closer to the action? Is that a problem?
Mr. McLeod: It would be true, if it were an insurance company operating in one state only, that the local state insurance department would be close. That is often the reason given for the state system.
You asked about the difference. I personally think that having a federal system is better because you should be able to employ more highly qualified people, better people and more people to regulate the insurance companies than if you split it between regulatory bodies.
Senator Tkachuk: Would that be the only difference?
Mr. McLeod: There is another difference, but it is hard to quantify. I talked about the level of trust that exists in Canada. I would hope if OSFI were here that they would say they respect the Canadian Institute Of Actuaries. I believe they do. At CIA, we respect OSFI, and we have a good relationship. We are able to raise issues before they become problems.
I am not sure if the same degree of trust exists between the regulators in the United States and the U.S. actuarial profession. That is somewhat subjective, and I would not want you to rely too much on it.
The Chairman: I want to go back to something Senator Moore asked about finite reinsurance. It seems our conversation has gone full circle. We consider finite reinsurance to be a bit of a grey hole or, perhaps we just have a lack of information.
Obviously, OSFI has now said the same thing and is trying to fill in that hole in order to have an express and transparent view about the risk of exposure on finite reinsurance.
Senator Moore raised another fascinating question that none of us was fully aware of, even our great esteemed experts on this committee, namely, the issue of retro-insurance. I am not sure what it is called. Maybe you can tell me.
Mr. McLeod: It is retrocession.
The Chairman: As I understand it, retrocession insurance charges a fee for a risk.
The insurance company in turn takes a portion of that fee and enters into an agreement or a treaty with a reinsurance company for a very precise set of risks that it transfers to this reinsurance company, and the largest of those is Munich Re.
We have now heard, to our surprise — there is, obviously, an easy answer to this, but we do not have it — that reinsurance companies, in turn, pass on the reinsurance risk through this retrocessional risk.
Do OSFI and the CIA, as actuaries, measure that risk? If the risk is laid off to a third party, we measure the first level of risk, or so we think. We do not know about the extent of it. OSFI will find out about that. However, there is another level of risk, which is the reinsurance of the reinsurance.
It troubles us because we wonder whether all the reinsurance would able to satisfy the recouping of those losses if we had a catastrophic series of losses. That is our major concern.
Tell us about the reinsurance of the reinsurance and whether your actuaries cover this off.
Mr. McLeod: I think I can assure you, but I will try to talk you through it with an example.
The Chairman: We are looking for insurance here and reinsurance.
Mr. McLeod: Let us suppose that there is an insurance company called Ottawa Life Insurance Company. It does not exist. Suppose it issues a right to life insurance policy for $50 million on one person. Ottawa Life, because of its capital, decides it only wants to keep $5 million of the risk. It can afford a $5 million charge to its earnings, so it reinsures. It wants to reinsure the remaining $45 million.
Ottawa Life could do one of two things. One, it could go to nine different reinsurance companies and reinsure $5 million with each company to reach the $45 million of reinsurance, but that is time consuming.
It could go to one reinsurance company, such as Munich Re, or my former company, RGA, and reinsure $45 million with that company. If the reinsurance company is licensed in Canada, Ottawa Life can take credit on its financial statements, for the $45 million that is reinsured.
The reinsurer, which at this point is still licensed in Canada, is on the risk for $45 million.
The Chairman: Is Ottawa Life obliged to get a company in Canada to take on that reinsurance?
Mr. McLeod: No, but if Ottawa Life reinsured with Australia Life, for example, which was not licensed to do business in Canada, it would have passed the risk off, but it could not take credit for it in calculating its actuarial liabilities.
Senator Tkachuk: Does that mean it could not show the cash flow for the $50 million?
Mr. McLeod: It would have to report the cash flow, but the actuary would have to assume that if the person died, the company would pay out $50 million, not $5 million. Are you with me?
The Chairman: I think I am with you so far, but continue.
Mr. McLeod: Ottawa Life has written a policy for $50 million, kept $5 million and reinsured $45 million with a Canadian reinsurance company.
The Canadian reinsurance company can maybe absorb $10 million of a claim, but it does not want to take the whole $45 million charge. Therefore, it retrocedes $35 million to a number of different reinsurance companies. Some of those may be licensed in Canada, and some of them may not be licensed in Canada. You have $5 million that Ottawa Life keeps, $10 million that the Canadian reinsurer keeps, and $35 million is retroceded.
Let us suppose that $15 million goes to other Canadian reinsurance companies and $20 million is reinsured with European companies that are not licensed to do business in Canada.
In that case, the Canadian reinsurance company cannot take credit when it is calculating its reserves for that $20 million reinsured with European companies. It must assume that if a death claim occurred it would have to pay out not just the $10 million it keeps but the $20 million that is reinsured.
The Chairman: Is the person pinpointing that action the company appointed actuary?
Mr. McLeod: Yes, that is correct.
The Chairman: So, it is the actuary as opposed to a transparent transaction that OSFI can supervise, regulate or have access to.
Mr. McLeod: The actuary has primary responsibility. OSFI as regulator may observe this, in this part of the investigation, but the primary responsibility is with the actuary of the company.
The Chairman: Mr. McLeod, do you have further comments before we terminate?
Mr. McLeod: I have nothing further to say, thank you.
The Chairman: I want to thank you very much. You will forgive us. We are stumbling around on this. It is an arcane subject matter.
Mr. Macleod we are here to find out about the consumers and not the major companies. We are talking about the ordinary consumer, the unsophisticated small businessperson. We are not talking about major companies that have the staff, the ability to source risk and assess risk.
I cannot remember a time, having in mind the number of policies that I have gone through, that I have ever relied on a stable agent for both automobile and property insurance to make those risks for me.
Is the agent and/or broker in a position to assess the risks on our behalf as part of his or her fee?
Mr. McLeod: I keep moving out of my area of professional competence. There are some very good, very qualified brokers and life insurance salespeople. As in any business, some are probably less qualified than others.
I cannot comment on whether the overall level of quality is adequate or not. I do not have enough information or facts to comment. It is a sensible question to ask. I am not the right person to answer that question.
The Chairman: What we are trying to do is give our consumers an opportunity to get access to information. I can tell you from our experience, many of us are now asking ourselves if we have adequately assessed our own risks when it comes to a crucial question like insurance. It raises questions in our mind.
We want to thank you and the previous witnesses for helping us clarify the nature of the problems we have to address in the future.
Thank you so much. We will terminate. This will be the conclusion, subject to the committee coming back again for our public hearings, on consumer protection within the financial sector.
We thank you for being the ultimate witness and being so kind to show up and help us clarify some of these questions.
The committee continued in camera.