Issue link: http://clhia.uberflip.com/i/333350
12 vital link is ignored (i.e., we have a system of mark to market assets and mark to model liabilities), the ensuing earnings and capital volatility will negatively impact the ability of insurers to offer long-term products to Canadians at a reasonable cost. The Canadian life and health insurance industry is very concerned that the International Accounting Standards Board's (IASB) latest proposals for measurement of insurance contracts would do exactly that -- break the important measurement link that should exist between the insurers' liabilities and assets. The resulting increase in volatility in both the reported results and regulatory capital of life and health insurers would negatively impact the ability of insurers to attract capital. This, in turn, will significantly reduce the ability of Canadian insurers to offer longer-term guarantee products to Canadians, reducing the range of options available to individuals to mitigate risks and save for retirement. It will also depress the industry's appetite for long-term assets. Therefore, the CLHIA recommends that: • The Canadian Accounting Standards Board not adopt the new International Financial Reporting Standard for insurance contracts unless it is established that: o it is an improvement to the existing high-quality CALM 7 standard, and o full consideration is given to whether the new standard would negatively impact insurance coverage for Canadians at competitive prices, or the flow of funds for long- term funding for the broader economy. 5.2 Prudential Regulation The prudential regulation of insurance companies seeks to protect the interests of policyholders by requiring sufficient capitalization levels to cover a variety of risks. It is important that in setting prudential capital requirements, regulators recognize and distinguish between the range of products in the marketplace and their inherent risks, the investments that support them, and effective risk management activities of the insurers, including portfolio diversification. Capital requirements, therefore, must be appropriately calibrated to reflect the substance of the underlying risks associated with an asset or liability, as opposed to its form. An example is OSFI's treatment of substantial investments. Currently, it is the industry standard to hold infrastructure or other long-term assets through stand-alone special purpose entities. Relative to other potential forms of taking exposure to such assets, this form of investment does not introduce additional risks, and in fact protects the interests of investors, as the entity holds only assets to which investors wish to have exposure. Accordingly, capital requirements should be no greater than what is needed to support the risk associated with having exposure to the underlying asset risk. 7 Guidance for the Canadian Asset Liability Method (CALM) of valuation of insurance contract liabilities is determined by the Canadian Institute of Actuaries and any requirements of OSFI. Under CALM, liabilities are set equal to the balance sheet value of the assets required to support them.