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OSFI ANNUAL REPORT 2013-2014

Office of the Superintendent of Financial Institutions Canada

255 Albert Street, 16th floor, Ottawa, ON K1A 0H2Telephone: 613-990-7788 Facsimile: 613-952-8219Toll-free line: 1-800-385-8647 Web site: www.osfi-bsif.gc.caat. No. IN1-2014E-PDF ISSN 1701-0810© Minister of Public Works and Government Services

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• OSFIwasestablishedin1987tocontributetopublicconfidenceintheCanadianfinancialsystem.ItisanindependentagencyoftheGovernmentofCanadaandreportstoParliamentthroughtheMinisterofFinance.

• OSFIregulatesandsupervisesover400banksandinsurers,andsome1,200federallyregisteredprivatepensionplans.

• TheOfficeoftheChiefActuary,whichisanindependentunitwithinOSFI,providesactuarialvaluationandadvisoryservicesfortheCanadaPensionPlan,theOldAgeSecurityprogram,the CanadaStudentLoansProgramandotherpublicsectorpensionandbenefitplans.

• OSFIrecoversitscosts,whichin2013-2014totalled$141.9million.OSFIisfundedmainlythroughasset-based,premium-basedormembership-basedassessmentsonthefinancialservicesindustryandauser-payprogramforselectedservices.AverysmallportionofOSFI’srevenueisreceivedthroughanappropriationfromtheGovernmentofCanadaforactuarialvaluationandadvisoryservicesrelatingtovariouspublicsectorpensionandbenefitplans.

• AsofMarch31,2014,OSFIemployed697peopleinofficeslocatedinOttawa,Montréal,TorontoandVancouver.

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OSFI at a Glance

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Superintendent’S MeSSage

Thecurrentglobaleconomicenvironmentremainsfarfromnormal.Interestratesarestillathistoricallylowlevelsandgrowthinseveraladvancedeconomiesisstillnotatpre-crisislevels.Potentialvulnerabilitiesintheglobalfinancialsystem

remainasourceofuncertainty.

WhiletheCanadianfinancialsystemcontinuestobenefitfromapproachestakeninCanada,OSFIanddomesticbanksandinsurancecompaniesneedto avoidcomplacency.

In2013-2014,OSFIintroducedorfinalizedseveralguidelinesintendedtopromoteandmaintainconfidenceinCanada’sfinancialsystem.Theseincluded:LiquidityAdequacyRequirementsthatreflectinternationallyagreedminimumstandardsforthemeasurementofshort-termliquidityunderastressscenario;OwnRiskandSolvencyAssessmentandRegulatoryCapitaland

InternalCapitalTargetstostrengthentheinsuranceindustry’senterprise-wideriskmanagementprocess;and,aGuidelineonMortgageInsuranceUnderwritingasafollow-uptotheGuidelineonResidentialMortgageUnderwritingPracticesandProceduresissuedin2012.

Thefinancialservicesindustryalsofacesincreasingoperationalrisksfromongoingcyberthreats.ThistouchesnearlyallbusinessconsumerrelationshipsandpotentiallythesafetyandsoundnessoftheinstitutionsOSFIregulates.Inresponse,OSFIreleasedCyberSecuritySelf-AssessmentGuidanceinOctober2013toassistinstitutionsinassessingtheirowncyberriskand preparedness.CybersecuritywillbeanissueofcontinuingfocusforOSFIgoingforward.

In2013,Canada’sfinancialsector,includingOSFI,wassubjecttoanInternationalMonetaryFund(IMF)FinancialSectorAssessmentProgram(FSAP)review.TheFSAPreportidentifiedOSFI’sclosetouchsupervision,ourclearandstraightforwardmandate,andourabilitytoattractandretainfinancialsectorspecialistsassomeofthefactorsthathelpedCanadawithstandthecrisiswell.

TheFSAPteamnotedthatstresstestsOSFIconductedin2013showthatmajorfinancialinstitutionswouldcontinuetoberesilienttocredit,liquidity,andcontagionrisksarisingfromaseverestressscenario.TheFSAPassessorsalsoconcludedthatOSFIcontinuestobeeffectivewithahighlevelofcompliancewithinternationalstandards.OSFIbelievesthereisalwaysroomtoimproveandwillbeconsideringtherecommendationsmadeintheFSAPreportandhowwemaybeabletoaddressthem.

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Attheinternationallevel,wetookpartinongoingpeerreviewsbytheFinancialStabilityBoard(FSB)andtheBaselCommitteeonBankingSupervision(BCBS),astheseareimportantbarometersofhowwearedoing.

TheG20retainsitsfocusoninternationalregulatoryreforminordertobetterinsulatetheglobalfinancialsystemfromfutureshocks.In2013-2014,OSFIcontinueditsinvolvementinthedevelopmentofinternationalrulesthatcontributetoastrongandstableglobalfinancialsystem.OSFIchairedtheFSBSupervisoryIntensityandEffectivenessGroup,whichconductssignificantworkinrelationtothesupervisionofsystemicallyimportantfinancialinstitutions.

OSFIalsolookedinward,tostrengthenitshigh-performingandeffectiveworkforcebyprovidingmorefocusonteamsresponsibleformanagingdomesticsystemicallyimportantbanks,whileatthesametimecreatingastaffpositionthatwillfocusontherequirementsofthesmallerfinancialinstitutionsunderOSFI’spurview.Wealsomadeinvestmentsincorporateinfrastructure,particularlyinrenewingourInformationTechnologysystems.

Strongcooperationandcommunicationwithourfederalpartners,suchastheBankofCanada,theDepartmentofFinance,CanadaDepositInsuranceCorporationandtheFinancialConsumerAgencyofCanada,wasalsoacontributingfactorinallowingOSFItomeetitsgoalsin2013-2014.

ThiswillbemyfinalyearasSuperintendentofFinancialInstitutions.Duringmytenuretheworldhasgonethroughoneofitsmostdifficultfinancialcrises,theeffectsofwhicharestillbeingfelttoday.IamproudofthewaytheCanadianfinancialsystempulledtogethertoworkourwaythroughthenumerouschallengesthatwerepresented.Regulators,lawmakersandfinancialinstitutionsallplayedaroleinCanadaemerginginrelativelygoodshapewhencomparedtootherpartsoftheglobe.

ThecontributiontopublicconfidenceintheCanadianfinancialsystemthatOSFIhasbeenabletomakecomesdown–asalways–totheindividualcontributionsofouremployees.

Ourpeoplearethemostimportantelementofoureffectiveness.Ithasbeenanhonourandpleasuretoworkwiththemthesepastsevenyears.Iknowthatmysuccessor,andallCanadians,willbeabletocountontheongoingdedicationandprofessionalismofOSFI’speople.

Julie Dickson

perforMance againSt prioritieS 2013-2014

OSFI’sroleistocontributetothesafetyandsoundnessoftheCanadianfinancialsystem,whileallowingfederallyregulatedfinancialinstitutions(FRFIs)andprivate

pensionplanstotakereasonablerisks.Withafocusonprudence,webalanceinternationalruleswithCanadianmarketplacerealities,andefficiencywiththoroughness.Lastyear’sAnnualReportlistedfourprioritiesthroughwhichOSFIsoughttoachieveitsstrategicoutcomesfor2013-2014.Thissectionreportsmajoraccomplishmentsundereachofthosepriorities.OSFIachieveditsgoalsforthereportingyearandcontinuestoworkonthesemulti-yearpriorities.Moredetailsareavailableinvariouschaptersofthisreport.

PRIORITYA–Respondingto RisksEmanatingfromthe Economy

Steps Taken

• Respondedtoconcernsaboutlowinterestratesandhighhouseholdindebtednessviaenhancedmonitoring,reviewsofretaillendingandstresstesting

• Conductedsignificantcross-sectorreviewsintheareasof

• Cybersecurityandinformationtechnologyoperationalrisk

• Retailcreditcards• Corporategovernance• Catastrophicrisk• Reinsurancerisk

• Issuednew/revisedguidelines,advisoriesorletterson• ResidentialMortgageInsuranceUnderwriting

(draft)• LiquidityAdequacyRequirements(draft)• OwnRiskandSolvencyAssessment,and

RegulatoryCapitalandInternalCapitalTargets• MinimumContinuingCapitalandSurplus

Requirements(MCCSR)update• MinimumCapitalTest(MCT)update

• IssuedCyberSecuritySelf-AssessmentGuidancetohelpFRFIsassesstheirownabilitytorespondtotherisingoperationalrisk

• ParticipatedinanInternationalMonetaryFund(IMF)FinancialSectorAssessmentProgram(FSAP)updateforCanada,whichincludedmacrostressteststhatconsideredtheimpactofhighconsumerdebtandotheradverseshocks

• Continuedtoconduct• Riskmanagementseminars• Supervisorycolleges• Crisismanagementandindustryinformation

sessions

• Participatedactivelyonvariousinternationalcommittees,including

• FinancialStabilityBoard(FSB)• BaselCommitteeonBankingSupervision

(BCBS)• SeniorSupervisorsGroup(SSG)• InternationalAssociationofInsurance

Supervisors(IAIS)

PRIORITYB –RespondingtoRisksEmanatingfromRegulatoryReform(includingbanking,insurance,pensionsandaccountingreforms)

Steps Taken

• ReleasedanupdatetotheLifeInsuranceRegulatoryFrameworkoutliningOSFIinitiativesthrough2018

• WorkedwithIAIStodevelopaglobalframeworktoguidethesupervisionofinternationallyactiveinsurancegroups(ComFrame)aswellasabasiccapitalrequirementforglobalsystemicallyimportantinsurers(G-SIIs)

• Workedwithbanksandinsurancecompaniestogatherdataandassesstheimpactofnewcapitalrequirements,andwithbanksonnewliquidityrequirements

• TookpartintheRegulatoryConsistencyAssessmentProgramme(RCAP)ofBCBS,whichreviewsnationalimplementationofBaselminimumprudentialstandards,bycompletingaCanadaRCAPassessmentandparticipatinginAustralia,SwitzerlandandSingaporeRCAPs

• MonitoredInternationalAccountingStandardsBoardandFinancialAccountingStandardsBoarddecisionsastheyimpacttheCanadianbankandinsurancecapitalframeworks

• Providedcommentson,orparticipatedin,domesticauditqualityinitiativesoftheCharteredProfessionalAccountantsofCanadaandtheCanadianPublicAccountabilityBoard

PRIORITYC–AHigh-PerformingandEffectiveWorkforce

Steps Taken

• FinalizedimplementationofanewHumanResourcesservicedeliverymodelwithappropriatepolicies,processesandcontrols

• ImplementedorganizationalchangesintheSupervisionSectortoprovidemorefocusonteamsresponsibleformanagingdomesticsystemicallyimportantbanks

• ContinuedenhancementstothecorporateplanningprocessestofurtherintegrateHRplanningandenterpriseriskmanagement(ERM)processes

• Continuedtoensureindividualandgrouplearningplansweredrivenbybusinessneeds

PRIORITYD–AnEnhancedCorporateInfrastructure

Steps Taken

• MetallprojectmilestonesaspartofourInformationTechnologyrenewalprogram,including

• UpgradedOSFI’sexternalwebsiteandHumanResourcesManagementsystem

• LaunchedPhase1ofanewsystemforreturnsprocessing(RegulatoryReturnsSystem)inpartnershipwiththeBankofCanadaandtheCanadaDepositInsuranceCorporationandanupgradedBusinessIntelligencesolutionfordeposit-takinginstitutions

• Implementedanintegratedenterpriseresourceplanning(ERP)softwaresolutionforfinance-relatedprocesses

• Developedcorrespondenceandinquirymanagementanddocument/recordsmanagement/collaborationsystems

• ImplementedtheRegulatoryDataGovernanceFrameworktoensureOSFIeffectivelycapturesandsharesFRFIinformationenterprise-wide

Thefollowingfiveprioritieswillguidetheachievementofstrategicoutcomesfor2014-2015

1. AnticipatingandRespondingtoRisksEmanatingfromtheEconomyandFinancialSystem

2. EnhancingSupervisoryProcesses

3. AnticipatingandRespondingtoRisksEmanatingfromRegulatoryReform

4. AHigh-PerformingandEffectiveWorkforce

5. AnEnhancedCorporateInfrastructure

DetailscanbefoundonOSFI’swebsiteunderReportsandAccountability/OSFIPrioritiesfor2014-2017.

OSFI AnnuAl RepoRt 2013-20146

corporate overview

Role And MAndAte

OSFIwasestablishedin1987byanActofParliament:theOffice of the Superintendent of Financial Institutions Act (OSFIAct).OSFIsupervisesand

regulatesallbanksinCanadaandallfederallyincorporatedorregisteredtrustandloancompanies,insurancecompanies,cooperativecreditassociations,fraternalbenefitsocietiesandprivatepensionplans.UndertheOSFIAct,theSuperintendentissolelyresponsibleforexercisingOSFI’sauthoritiesandisrequiredtoreporttotheMinisterofFinancefromtimetotimeontheadministrationofthefinancialinstitutionslegislation.

OSFI’smandateisto:

• Supervisefederallyregulatedfinancialinstitutionsandprivatepensionplanstodeterminewhethertheyareinsoundfinancialconditionandmeetingminimumplanfundingrequirementsrespectively,andarecomplyingwiththeirgoverninglawandsupervisoryrequirements;

• Promptlyadviseinstitutionsandplansintheeventtherearematerialdeficienciesandtake,orrequiremanagement,boardsorplanadministratorstotake,necessarycorrectivemeasuresexpeditiously;

• Advanceandadministeraregulatoryframeworkthatpromotestheadoptionofpoliciesandproceduresdesignedtocontrolandmanagerisk;

• Monitorandevaluatesystem-wideorsectoralissuesthatmayhaveanegativeimpactoninstitutions.

Fromitsmandate,OSFIhasidentifiedtwostrategicoutcomes:

1. AsafeandsoundCanadianfinancialsystem

2. AfinanciallysoundandsustainableCanadianpublicretirementincomesystem

OSFI’slegislationacknowledgestheneedtoallowinstitutionstocompeteeffectivelyandtakereasonablerisks.Italsorecognizesthatmanagement,boardsofdirectorsandplanadministratorsareultimatelyresponsibleandthatfinancialinstitutionsandpensionplanscanfail.

OSFIworkswithanumberofkeypartnersontheFinancialInstitutionsSupervisoryCommittee(FISC),whichtheSuperintendentchairs,includingtheDepartmentofFinance,theBankofCanada,theCanadaDepositInsuranceCorporationandtheFinancialConsumerAgencyofCanada.Together,theseorganizationsconstituteCanada’snetworkoffinancialregulationandsupervisionandprovideasystemofdepositorandpolicyholderprotection.

TheOfficeoftheChiefActuary(OCA),whichisanindependentunitwithinOSFI,providesactuarialvaluationandadvisoryservicestotheGovernmentofCanadaintheformofreportstabledinParliament.WhiletheChiefActuaryreportstotheSuperintendent,

heissolelyresponsibleforthecontentandactuarialopinionsinreportspreparedbytheOCA.HeisalsosolelyresponsiblefortheactuarialadviceprovidedbytheOCAtotherelevantgovernmentdepartments,includingtheexecutivearmofprovincialandterritorialgovernments,whichareco-stewardsoftheCanadaPensionPlan(CPP).

RESOURCES

Financial Resources

OSFIrecoversitscosts,asstipulatedundertheOSFIAct.Theorganizationisfundedmainlythroughasset-based,premium-basedormembership-basedassessmentsonthefinancialservicesindustryandauser-payprogramforselectedservices.AverysmallportionofOSFI’srevenue(0.7%)isreceivedthroughanappropriationfromtheGovernmentofCanada,primarilyforactuarialvaluationandadvisoryservicesrelatingtotheCanadaPensionPlan,theOldAgeSecurityprogram,theCanadaStudentLoansProgramandvariouspublicsectorpensionandbenefitplans.

Human Resources

AsatMarch31,2014,OSFIemployed697peopleinofficeslocatedinOttawa,Montréal,Torontoand Vancouver.

ACCOUnTABILITY

Auditing

OSFI’sAuditCommitteemetfivetimesin2013-2014.TheCommitteeiscomprisedofthreeindependentmembers,oneofwhomistheChair,andtheSuperintendent.ThemandateoftheCommitteeistoprovideobjectiveadviceandrecommendationstotheSuperintendentregardingtheadequacyandproperfunctioningofOSFI’sriskmanagement,controlandgovernanceframeworksandprocesses,includingaccountabilityandauditingsystems.During2013-2014,theAuditCommitteereceivedinformationand,asappropriate,providedadviceandguidanceonkeyactivitiesincludingbutnotlimitedto:EnterpriseRiskManagement;QuarterlyandAnnualFinancialStatements;IM/ITStrategy;PerformanceMeasurement

Katie Brown, Manager, Corporate Planning, Performance and Risk ManagementFinanceandCorporatePlanningCorporateServicesSector

Nadim El-Hage, Release / QA ManagerApplicationManagementCorporateServicesSector

Reporting;InternalControloverFinancialReporting;ValuesandEthics;InternalAuditReports;andInternalAuditoperations.

Surveys and Consultations

OSFIregularlyconductsanonymoussurveysofknowledgeableindustryobserverstohelpassessitsperformanceandeffectivenessasaregulator.SurveyresultsaredisclosedonOSFI’swebsite.

Inthefallof2013,TheStrategicCounsel,onbehalfofOSFI,conductedaseriesofconfidential,one-on-oneinterviewswithasampleofseniorexecutivesrepresentingacross-sectionoflifeinsurancecompaniesregulatedbyOSFI.TheresultsindicatethatoverallsatisfactionwithOSFIisstrongandlargelyattributabletoperceptionsofhowOSFIinteractswiththoseitregulates.Someareasforimprovementwerealsoidentifiedthroughtheconsultationand,whereappropriate,OSFIhasdevelopedactionplanstoaddressthese.ThesurveyreportisentitledLife Insurance Sector Consultation 2013-14 Report of Qualitative Research Findings.

BEnEFITSTOCAnADIAnSOSFI’sstrategicoutcomes,supportedbyourplansandpriorities,areintrinsicallyalignedwithbroadergovernmentpriorities,specificallystrongeconomicgrowth,andincomesecurityandemploymentforCanadians.AproperlyfunctioningfinancialsystemthatinspiresahighdegreeofconfidenceamongconsumersandotherswhodealwithfinancialinstitutionsmakesamaterialcontributiontoCanada’seconomicperformance.

Connecting with Stakeholders

During2013-2014,OSFIagainregularlycommunicateditsplansandactivitiestoawiderangeofstakeholdersviaitswebsiteandothermeans.Asinpreviousyears,OSFIreceivedmanyrequeststoaddressexternalconferencesandevents.TheSuperintendentandseniorOSFIofficialsdeliveredpresentationstoindustryandregulatoryforumsacrossCanadaandinternationally.SeniorOSFIofficialsappearedbeforetheHouseofCommonsStandingCommitteeonFinanceandtheSenateStandingCommitteeonnationalFinance.

OSFI’sexternalnewsletter,The Pillar,waspublishedfourtimesin2013-2014.Itservestoremindkeystakeholdersofthelatestguidelines,notices,publicstatements,andotherpertinentinformationreleasedby theOffice.

Sharing OSFI’s Expertise

Throughout2013-2014,OSFIshareditsexpertisewithinterestedCanadians,includingmembersofthegeneralpublic,industry,regulators,legislatorsandthenewsmedia,asfollows:

• Served1,344,216visitorstoOSFI’swebsite

• Respondedto11,679publicenquiries,101enquiriesfromMembersofParliamentand166enquiriesfromrepresentativesofthenewsmedia

• Deliveredover70presentationstoindustryandregulatoryforums,including13keyspeechesthatwerepostedtoOSFI’swebsite

• Processed20accesstoinformationrequestsand32 consultationswithinpermittedstatutorytimelines,asperthe Access to Information Act,and4privacyrequestswithinpermittedstatutorytimelines,asperthePrivacy Act.

Gary Walker,AssistantSuperintendent,Corporate ServicesSector• Andrew Kriegler, DeputySuperintendent,SupervisionSector• Julie Dickson,SuperintendentofFinancialInstitutions• Mark Zelmer,DeputySuperintendent,RegulationSector

OSFI AnnuAl RepoRt 2013-201410

federally regulated financial inStitutionS

Risk assessment and Intervention

OSFIsupervisesfederallyregulatedfinancialinstitutions(FRFIs),monitorsthefinancialandeconomicenvironmenttoidentifyissuesthatmayhaveanegativeimpacton

theseinstitutions,andintervenesinatimelymannertoprotectdepositorsandpolicyholdersfromloss.OSFIdoesthiswhilerecognizingthatmanagementandboardsofdirectorsareultimatelyresponsibleandthatfinancialinstitutionscanfail.

During2013-2014,domestichouseholdindebtedness,interestratelevels,andongoingglobalfinancialuncertaintycontinuedtobeseenassourcesofpotentialsystemicvulnerability.OSFItookactiontoaddressthepossibleimpactofthesechallengesandachieveitsstrategicprioritiesbycommunicatingitsexpectationsforriskmanagementtoFRFIsandconductingsignificantreviewsinseveralareas,includingstresstesting,cybersecurityandinformationtechnologyoperationalrisk,retailcreditcards,catastrophicrisks,andcorporategovernanceandriskappetiteframeworks.WecontinuedtodevelopsupportingguidanceforOSFI’sSupervisoryFrameworkandinitiatedareviewofoursupervisoryprocessesandtools.

REVIEWBYSECTOR

Deposit-Taking

TheCanadianbankingindustryperformedsatisfactorilyin2013;solidprofitabilitywasdrivenbycontinued

revenuegrowthandastablecreditenvironment.Averagereturnonequityforthebankingsectorof16.2%(comparedto17.2%in2012)reflectsincreasedcapitallevels.

TheCanadianbankingindustryiscomprisedofsixlargedomesticbanksandmanysmallerdeposit-takinginstitutions(DTIs).Thesixlargestbanksaccountforapproximately90%oftotalassetsamongCanada’sfederallyregulatedDTIs.Theirdiversifiedbusinesslinesextendbeyondtraditionaldeposit-takingandlendingactivitiesintotrading,investmentbanking,wealthmanagementandinsurance.Inadditiontotheirprimarydomesticfocus,theselargebankshaveoperationsinmanycountriesacrosstheglobe.

Theremaining10%ofCanadianbankingassetsareheldbysmallerinstitutionswithnichemarketandbusinessstrategies,suchasmortgagelending,commercialrealestateorcreditcards.

OSFIfullyimplementedtheBaselIIIcapitalrules,andbanksbeganreportingthenewCommonEquityTier1(CET1)capitaladequacyratiosin2013.Canadianbanksremainabovethetargetlevelof7%forCET1.Further,OSFIwillapplya1%capitalsurchargeaboveminimumBaselrequirementstothesixlargedomesticbanksinCanada(identifiedasdomesticsystemicallyimportantbanksorD-SIBs),targetedbyBaselforJanuary2016.Aswell,OSFIobligesCanadianD-SIBstomeetenhanceddisclosurerequirements,andtohaveinplaceadvancedpracticesintermsofthedesignandoperationofoversightfunctionsandinternalcontrols.D-SIBsarealsosubjecttomoreintensesupervisionthanotherfinancialinstitutions.

ThebankingindustrybenefitedfromtherelativelystableCanadianeconomyin2013-2014.Whilecreditperformanceforretaillending(mortgages,autoloans,creditcards)remainsacceptable,vulnerabilitiescontinuerelatedtohighhouseholddebtlevels,theriskofasharpriseininterestratesandweakglobaleconomicconditions.GrowthcontinuedincorporateandcommerciallendingincludingCommercialRealEstate,whereascreditperformancehasbeenstable.

OSFI,inconjunctionwiththeBankofCanada,conductedanothermacroeconomicstress-testingexercisein2013,inthecontextoftheInternationalMonetaryFund(IMF)FinancialSectorAssessmentProgram(FSAP)updateforCanada.Thisinvolvedprescribingacommonscenariotoparticipatingbanksinordertobetterunderstand,andtoincreaseawarenessinfinancialinstitutionsabout,potentialsystem-widerisksandvulnerabilities.OSFIsharedtheindividualresultsofourreviewwithparticipatingbanks,andhasusedthefindingstoinformourassessmentofbankriskexposuresandtheirabilityto withstandadverseevents.

Life Insurance

ThecapitalpositionoftheCanadianlifeinsuranceindustryremainedacceptableand,indeed,improvedin2013.OSFI’ssupervisorytargetratioforboththeMinimumContinuingCapitalandSurplusRequirement(MCCSR)foroperatingfederallyregulatedCanadianlifeinsurancecompaniesandtheTestofAdequacyofAssetsandMargin(TAAM)forbranchesofforeigncompaniesoperatinginCanadais150%.TheaggregatecapitalratioforCanadianlifeinsurersin2013was242%(218%in2012)withallcompaniesreportingcapitalratiosaboveOSFI’stargetcapitallevel.Highercapitalratiosreflectimprovementintheeconomicenvironment,asavailablecapitalincreasedwithearningsandrequiredcapitaldeclinedduetotheimpactofhigherinterestratesandstrongequitymarkets.

During2013,thelifeinsuranceindustrybenefitedfromimprovingequitymarketsandmodestincreasesinlong-terminterestrates.Withasoundcapitalbaseandstrongreservelevels,thelifeinsuranceindustrywashealthygoinginto2014;however,challengesremainwithcurrentlowinterestrates,andsensitivityto potentialequitymarketdeclinesandvolatility.

Recognizingthatinvestmentportfoliosaregeneratinglowerearningsinthewakeoflowyieldsonfixed-incomeinvestments,somelifeinsurancecompanieshavebeenexploringalternative,higherrisk/returninvestments.OSFIwillcontinuetocloselymonitorboth

conformanceto,andchangesin,riskappetitepoliciesamongfederallyregulatedcompanies.

Thelifeinsuranceindustrynetincomeafterextraordinaryitemsanddiscontinuedoperationsfor2013increased9%over2012,to$8.1billion(78%fromthethreelargestlifeinsurancecompanies).Thiscompareswitha2012performanceof$7.4billioninnetincome(73%fromthethreelargestcompanies).Returnonequityfortheindustrywas9.9%in2013comparedto9.8%in2012.

Creditexperienceinlifeinsurerinvestmentportfolioswasstablein2013.Inaggregate,nosignificantchangeswererecordedinthelevelsofcreditprovisionsattheconglomeratecompanies.OSFIcontinuestomonitorthecreditenvironmentandindustrypracticesrelatingtocreditriskmanagement.

OSFIaskedaselectnumberoflifeinsurersandlifereinsurerstocompleteamacroeconomicstresstestin2013,aswedidin2012,alsointhecontextofthe

Alexander Kim, Senior ManagerDeposit-takingGroupSupervisionSector

IMF-FSAPupdateforCanada.Acommonscenariowasprescribedtoparticipatinginsurersinordertobetterunderstand,andtoincreaseawarenessinfinancialinstitutionsabout,potentialsystem-widerisksandvulnerabilities.OSFIsharedtheindividualresultsofourreviewwiththeparticipatingcompanies,andwillusethefindingstoinformourassessmentofthecompanies’riskexposuresandtheirabilitytowithstandadverseevents.

Property and Casualty Insurance (excluding mortgage insurance)

Thefinancialperformanceofthepropertyandcasualty(P&C)industryinCanadawasimpactedbythecatastropheclaimsarisingfromtheCalgaryfloodinJuneandtheTorontorainstorminJulyof2013.Asaresult,underwritingincomewaseffectivelybreak-even,withinvestmentreturnsbeingthemaincontributortooverallearnings.netincomefortheP&Cindustryof$2.4billiondecreased37.5%overthepreviousyear’snetincomeof$3.9billion,whilereturnonequityfellto7.4%,from11.4%ayearearlier.

Akeymeasureoftheindustry’scoreprofitabilityisthe‘combinedratio’,whichmeasurestherevenuefrompremiumsrelativetothesumofclaimsplusexpenses.Acombinedratiounder100%indicatesthatpremiumincomeexceedsclaimsandexpensesandthatanunderwritingprofithasbeenearned.In 2013,thecombinedratiowas100.2%,consistentwithanapproximatebreak-evenunderwritingincome.Thisisadeteriorationcomparedtothepreviousyear’scombinedratioof96.2%.

FortheP&Cindustry,investmentincomebeforerealizedgainsof$2.5billionin2013wassimilartothatreportedlastyear,butthereturnoninvestmentsbeforerealizedgainscontinuedtodecline,fallingto2.64%in2013from2.71%in2012.Realizedgains(fromthesaleofhigheryieldingassets)fellto$290millionin2013comparedwith$862millionin2012.Theseresultsreflecttheloweryieldsavailableastheportfolioisreinvested.Thiscontinuingdeclinehighlightstheimportanceofcoreunderwritingtoachieveandsustainfinancialresults.

Jennifer Marsan, Senior SupervisorMontrealRegionalOfficeSupervisionSector

Sylvia Quenum, Senior Supervisor MontrealRegionalOfficeSupervisionSector

TheMinimumCapitalTest(MCT)isthecapitalmetricforCanadianP&CcompaniesandtheBranchAdequacyofAssetsTest(BAAT)isusedforforeign-ownedP&CoperationsinCanada.CapitalratiosfortheP&Cindustryin2013werestablerelativeto2012,with anindustryweightedMCT/BAATratioof258%—wellaboveOSFI’ssupervisorytargetof150%.

WithnearlyhalfoftheCanadianP&Cinsuranceindustry(bypremiumvolume)beingforeignowned(ultimateparentsaretypicallylocatedintheUnitedStatesorEurope),marketconditionsinthehomejurisdictioncanaffectCanadianoperations;henceOSFImonitorsparentcompanyconditions.Globally,withalowerlevelofcatastrophiceventsin2013,underwritingresultsweregenerallyfavourableandcapitallevelsweremaintained.

Domestically,personalautoinsurancecontinuedtobethemajorunderwritingchallenge.ReformsrelatedtoaccidentbenefitsimprovedprofitabilityinOntario,thelargestautoinsurancemarket.However,thelegislatedtargetof15%ratereductionsinOntariobyAugust2015(with8%reductionstoberealizedbyAugust2014)maynegativelyimpactOntariopersonalautoinsuranceunderwritingprofitabilityiftheadditionalclaims-relatedmeasuresintroducedinthe2013Ontariobudgetaredelayedinimplementation.Thepropertyinsurancesegmentcontinuedtoseeincreasesincatastrophe-relatedclaimsfromsevereweatherevents.With$3.5billionininsuredlossesinCanada,2013wastheworstyearonrecordforinsuredcatastrophelosses.Thecommercialliabilityinsurancemarketremainscompetitivewithpricingremainingsoftinsomesegments.P&Cproductlinesareexperiencingsignificantinnovationandstructuralchange.

Mortgage Insurance

ThemortgageinsuranceindustryinCanadacontinuedtoexperiencefavourablefinancialresultsduring2013,withimprovementsinnetincomeover2012,mostlyreflectingareductioninclaimsexpenses(excludingaone-timegainduring2012).Investmentsgeneratedamodestincreaseinaverageyield.TheMCTcapitalratioincreasedoverthatof2012,largelyreflectingtheone-timegainduetothecancellationofguaranteefunds,whichwereeliminatedwiththeintroductionoftheProtection of Residential Mortgage orHypothecary Insurance Act andarenowrecognizedintheMCT.notwithstandingthecurrentlyfavourablefinancialresults,mortgageinsuranceremainsvulnerabletoconsumerdebtlevels,housingprices,interestratesandunemploymentrates.

SUPERVISORYTOOLS

Managing Risk Effectively

In2013-2014,OSFIcontinuedupdatinginternalguidancetosupportitsrisk-basedSupervisoryFramework,whichconsidersaninstitution’sinherentbusinessrisks,riskmanagementpractices(includingcorporategovernance)andfinancialcondition.

OSFIagainheldannualriskmanagementseminarsin2013-2014fortheindustriesitregulates(DTIs,lifeinsurance,andP&Cinsurance)toreinforcetheneedforstrongriskmanagementandtosharelessonslearned.ThegoalistocommunicateOSFI’sexpectationsrelatedtokeyriskmanagementareasbasedondetailedworkOSFIhasundertakenduringtheyear,andtoshareinformationonissuesbeingdiscussedinternationallybyregulators.TheseminarsalsoprovideparticipantswiththeopportunitytoaskquestionsofOSFI’sseniorsupervisoryandregulatoryteams.

ContinuingthepracticeoforganizingCollegesofSupervisors,in2013-2014OSFIhostedacollegeforeachofCanada’sfivelargestbanks.InlinewithFinancialStabilityBoardrecommendations,thecollegesbroughttogetherexecutivesfromeachbankwithsupervisorsfromjurisdictionswheretheydobusiness.OSFIalsohostedasupervisorycollegeforalargelifeinsurancecompany.Crisismanagementandindustryinformationsessionswereagainheldforthesevenlargestdeposit-takinginstitutions,inconjunctionwiththeCanadaDepositInsuranceCorporation.

Composite Risk Ratings

TheCompositeRiskRating(CRR)representsOSFI’soverallassessmentofaninstitution’ssafetyandsoundness.Beginningin2013-2014,aBranchRiskRating(BRR)wasassignedtoForeignBankBranches(FBBs)operatinginCanada,ratherthanaCRR,reflectingOSFI’slimitedaccesstotheinformationneededtoassesstheFBB’ssafetyandsoundness.Therearefourpossibleriskratings:‘low’,‘moderate’,‘aboveaverage’and‘high’.TheCRRisreportedtomostinstitutionsatleastonceayear(certaininactiveorvoluntarywind-upinstitutionsmaynotberated).SupervisoryInformationRegulationsprohibitinstitutions(orOSFI)frompubliclydisclosingtheirrating.AsattheendofMarch2014,OSFIhadassignedCRRratingsoflowormoderateto91%andaboveaverageorhighto9%ofallCRR-ratedinstitutions.Incomparison,asatMarch31,2013,89%ofallratedinstitutionswereassessedaslowormoderateCRR,and11%wereassessedaboveaverageorhighCRR.

Intervention Ratings

Financialinstitutionsarealsoassignedanintervention(stage)rating,asdescribedinOSFI’sguidestointerventionforFRFIs,whichdeterminesthedegreeofsupervisoryattentiontheyreceive.Broadly,theseratingsarecategorizedas:normal(stage0);earlywarning(stage1);risktofinancialviabilityorsolvency(stage2);futurefinancialviabilityinseriousdoubt(stage3);andnon-viable/insolvencyimminent(stage 4).AsatMarch31,2014,therewere35stagedinstitutions.Withafewexceptions,mostofthestagedinstitutionswereintheearlywarning (stage1)category.

Regulation and Guidance

OSFIprovidesaregulatoryframeworkofguidanceandrulesthatmeetsorexceedsinternationalminimumsforfinancialinstitutions.Inadditiontoissuingguidance,OSFIprovidesinputintothedevelopmentoffederallegislationandregulationsaffectingfederallyregulatedfinancialinstitutions(FRFIs)andcommentsonaccounting,auditingandactuarialstandardsdevelopment,whichincludesdetermininghowto

incorporatethemintoourregulatoryframework.OSFIalsoparticipatesinanumberofinternationalanddomesticrule-makingactivities.

Domestic Rule making

REVISIOnSTOFInAnCIALInSTITUTIOnS LEGISLATIOn

ThegoverningstatutesapplicabletoFRFIsarereviewedeveryfiveyears(mostrecentlyin2012)toensuretheyremaincurrentandpromoteanefficient,competitiveandprudentfinancialservicessector.During2013-2014,OSFIcontinueditsconsultationsrelatedtotheeventualrevisionofthe Assessment of Financial Institutions Regulations, 2001.Aspartoftherequirementsunderthefederalgovernment’sRedTapeReductionexercise,OSFIreleaseditsForwardRegulatoryPlanfortheperiodof2014-2016.Theseplans,whichareabi-annualexercise,describeregulatorychangesorproposalsthatadepartmentoragencyexpectstointroduceovera24-monthperiod.TheplansareintendedtoimprovetransparencyandpredictabilityfortheinstitutionsOSFIregulates.

Neil Colligan, Senior Financial AnalystRisks,Surveillance,andAnalyticsDivisionSupervisionSector

Victor Adesanya, Manager, OperationsPropertyandCasualtyInsuranceGroupSupervisionSector

ACCOUnTInG,AUDITInGAnD ACTUARIAL STAnDARDS

OSFIisamemberoftheCanadianAccountingStandardsBoard’s(AcSB)UserAdvisoryCouncilandanobserverontheInsuranceAccountingTaskForce.OSFIisalsoanobserverontheReportingonSupplementaryMattersArisingfromanAuditorReviewEngagementTaskForceoftheCanadianAuditingandAssuranceStandardsBoard(AASB).Additionally,OSFIisanon-votingmemberoftheAuditingandAssuranceStandardsOversightCouncil,whichoverseestheactivitiesoftheAASB.OSFIworkscloselywithCharteredProfessionalAccountantsofCanada(CPACanada),formerlytheCanadianInstituteofCharteredAccountants(CICA),andtheCanadianPublicAccountabilityBoard(CPAB)ondomesticaccountingrulesandinitiativestoimproveauditquality.In2013-2014,OSFIprovidedpositionsonthe followinginitiatives:

• AcSBExposureDraft:InsuranceContracts

• JointCPACanadaandCPABdiscussionpaperonEnhancingAuditQuality:TheRoleoftheAuditCommitteeinExternalAuditorOversight

• CPACanadaExposureDraftontheindependencestandardcontainedintheRuleofProfessionalConduct204Independence

• CPABdraftProtocolforAuditFirmCommunicationofCPABInspectionFindingswithAuditCommittees

Inadditiontoprovidingpositionsondomesticauditqualityinitiatives,OSFIissuedanindustry-wideletteroutliningexpectationsregardingearlyadoptionof:

• amendmentstoIFRS9–GeneralHedgingandOwnCreditRisk

• amendmentstoIAS36–RecoverableAmountDisclosuresfornon-financialAssets

OSFIworkscloselywiththeCanadianInstituteofActuaries(CIA)andtheActuarialStandardsBoard(ASB)toensurethatactuarialstandardsareappropriateandleadtoacceptablepracticeinareassuchasvaluation,riskandcapitalassessmentatentitiesregulatedbyOSFI.In2013-2014,wecontinuedtoparticipateonseveralCIApracticecommitteesandtoconsultwiththeCIAondevelopmentsrelatedtoourworkonanewsolvencyframeworkforlifeinsurance companies.

CAPITALAnDLIQUIDITYGUIDAnCE

Banks and Trust and Loan Companies – Capital Adequacy Requirements

Innovember2013,OSFIreleaseditsDraftLiquidityAdequacyRequirements(LAR)Guidelineforpublicconsultation.Thedraftguidelinereflectsinternationallyagreedminimumstandardsforthemeasurementofshort-termliquidityunderastressscenariothatwillbeappliedtoallbanks,bankholdingcompanies,andtrustandloancompaniesinCanada.ThefinalguidelinewasissuedinMay2014andwillcomeintoeffectasofJanuary2015.

InAugust2013,OSFIprovidedadditionalguidanceontheapplicationofitsCapitalAdequacyRequirements(CAR)Guideline’screditriskcapitalrequirementsforCreditValuationAdjustments(CVA).Thisguidancewasintendedtoensureaphased-intransitionprocesscomparabletothatputinplaceinothermajorjurisdictionstomeetBaselIIIstandardsonCVA.

Life Insurance Companies

Innovember2013,OSFIreleasedanupdatetotheLifeInsuranceRegulatoryFramework,whichprovideslifeinsurancecompaniesandindustrystakeholderswithanoverviewofregulatoryinitiativesthatOSFIwillbefocusingonovertheperiodending2018.ItoutlineshowtheregulatoryframeworkwillevolvetoensureCanadianscontinuetobenefitfromastronglife insuranceindustry.

During2013-2014,OSFIcontinuedtoconsultstakeholdersinthelifeinsuranceindustry.OSFIundertookitsannualupdateoftheMinimumContinuingCapitalandSurplusRequirements(MCCSR)Guidelineduring2013,withtherevisedversioncomingintoeffectforthe2014fiscalyear.Withstakeholderinputconsidered,theguidelinewasupdatedtoclarifycertainelementsand/ortomaketheguidancemorerisk-based.AfifthQuantitativeImpactStudy(QIS)wasissuedinOctober2013togatherinformationrelatedtopotentialmethodsfordeterminingthecapitalrequirementsforkeyrisks.Industrysubmissionswerereceivedinearly2014and theresultsarebeinganalyzed.

Property and Casualty Insurance Companies

During2013-2014,OSFIcontinueddevelopinganewcapitalframeworkforitsstandardizedMinimumCapital

Test(MCT)approachinconsultationwiththepropertyandcasualty(P&C)insuranceindustry.OSFIissuedadiscussionpaperinMay2013outliningintendedmodificationstoitscapitalframework,aswellasaQIStoassesstheimpactoftheproposedchanges.Basedoncommentsprovidedbyvariousstakeholders,OSFImadesomeadjustmentstotheproposedcapitalframeworkandadraftMCTguidelinewasissuedinDecember2013forfurtherpublicconsultation.ThisinitiativeisinkeepingwithOSFI’slong-termplanandprioritiestoensuretheMCTremainsasensitiveandforward-lookingriskmanagementtool.

TheP&CMCTAdvisoryCommitteecontinuedtodevelopaframeworkfortheuseofcompany-specificmodelstodeterminecapitalrequirementsforP&Cinsurancecompanies.

OTHERGUIDAnCE

Own Risk and Solvency Assessment Guideline

Inordertostrengthentheinsuranceindustry’senterprise-wideriskmanagementprocess,innovember2013,afterpublicconsultation,OSFIissueditsfinalguidelinesforfederallyregulatedlifeinsurersand

propertyandcasualtyinsurers:GuidelineE-19:OwnRiskandSolvencyAssessment(ORSA)andGuidelineA-4:RegulatoryCapitalandInternalCapitalTargets.

Thesetwoguidelinesrequireinsurerstoconductacomprehensiveforward-lookinginternalassessmentthatincludesidentifyingmaterialrisks,assessingtheadequacyoftheirriskmanagementanddeterminingcurrentandlikelyfuturesolvencypositions.Theseassessmentsaretobedoneinamannerproportionatetothenature,scaleandcomplexityof theinsurers’ownbusinessandriskprofile.Theseguidelinesassistinsurersinself-assessingtheadequacyoftheinsurers’internalcapitalpositionand ifitislikelytoremainsointhefuture.

Mortgage Insurance Underwriting

OSFIissuedGuidelineB-20onResidentialMortgageUnderwritingPracticesandProceduresinJune2012.Followingreleaseoftheguideline,OSFIindicatedthatitwouldfollowupwithaseparateguidelineonmortgageinsuranceunderwriting.During2013-2014,OSFIdevelopedtheunderwritingguideline,B-21,withadraftforcommentissuedinApril2014andthefinalversionanticipatedinthefallof2014.

Christa Sanders, Senior Supervisor VancouverRegionalOfficeSupervisionSector

Michael Chan, Senior Supervisor VancouverRegionalOfficeSupervisionSector

Anti-Money Laundering (AML) and Anti-Terrorism Financing (ATF)

Attheinternationallevel,workonstrengtheningthefinancialsystemagainstmoneylaunderingandterrorismfinancingisledbytheFinancialActionTaskForce(FATF).During2013-2014,OSFIcontributeditsAML/ATFsupervisoryexperiencetothedevelopmentofFATFguidanceonmoneylaundering/terroristfinancingrisksandriskmanagement.AsamemberoftheBaselCommitteeonBankingSupervision’sAMLExpertsGroup,OSFIparticipatedinupdatingandpublishingguidanceonAML/ATFriskmanagement.

OSFIisalsoamemberofthePublic/PrivateSectorAdvisoryCommittee(PPSAC),establishedbytheDepartmentofFinanceforongoingdiscussionswiththeprivatesectoronCanada’sAML/ATFregime.Duringtheyear,OSFImadeapresentationonitsapproachtoML/TFriskmanagementforthebenefitof thePPSAC.

During2013-2014,OSFIcontinueditsAML/ATFsupervisoryassessmentprogramandregularfollow-upworkatawidevarietyoflargeandsmallfinancialinstitutions.AsAML/ATFprogramshavebecomemoremature,wehaverespondedwithagreateremphasisonmonitoringimprovementstoFRFIs’AML/ATFcontrols.Weidentifiedissuesrelatedtofinancialinstitutions’abilitytoidentifyhighriskcustomers,applyenhancedscrutinytothemandtheiractivities,andprovideeffectiveauditingoftheirprograms.OSFIfurtherintensifieditsprocessesrelatingtothereviewofAML/ATFriskassessmentsandproceduresrequiredofthoseapplyingtoestablishnewFRFIs.

OSFIcontinuedtoshareAML/ATFsupervisoryfindingswiththeFinancialTransactionsandReportsAnalysisCentreofCanada(FInTRAC)asauthorizedundertheOSFIAct.During2013-2014,OSFIandFInTRACsuccessfullyrolledouttheirconcurrentexaminationmethodology,designedtostreamlineprocessesandreducethesupervisoryburdenon FRFIs.

Viaitswebsite,OSFImaintaineditsroleasleadcommunicatorinhelpingtoensurethattheCanadianfinancialsectorispromptlynotifiedofsanctionsimposedbytheUnitednationsSecurityCouncilandtheGovernmentofCanadaondesignatedindividualsandorganizations.OSFIisparticipatingininter-departmentaldiscussionsaimedatstreamliningthepublicationprocessandmakingiteasierforthefinancialsectortoobtaininformationquicklyon sanctionedentitiesandindividuals.

inteRnational activities

InternationalorganizationsplayakeyroleinthedevelopmentofregulatoryframeworksforbanksandinsurersandOSFIisanactiveparticipantinanumberofthesegroups.

Financial Stability Board

TheFinancialStabilityBoard(FSB)wasestablishedinApril2009tocoordinate,attheinternationallevel,theworkofnationalfinancialauthoritiesandinternationalstandardsettingbodies.Itdevelopsandpromotestheimplementationofeffectiveregulatory,supervisoryandotherfinancialsectorpolicies.

CanadianrepresentationontheFSBissharedbytheDepartmentofFinance,theBankofCanadaandOSFI.During2013-2014,OSFIcontinueditsinvolvementwiththeFSBthroughmembershipontheFSBPlenary,SteeringCommittee,StandingCommitteeonSupervisoryandRegulatoryCooperation,andRegionalConsultativeGroupfortheAmericas.OSFISuperintendentJulieDicksonchairedtheSupervisoryIntensityandEffectivenessgroup,whichcontinuestoconductsignificantworkinrelationtothesupervisionofsystemicallyimportantfinancialinstitutions.

SomeoftheworkinwhichOSFIanditsCanadianpartnersparticipatedduring2013-2014included:

• actionstostrengthentheintensityandeffectivenessofthesupervisionofsystemicallyimportantfinancialinstitutions

• actionstostrengthenoversightandregulationofshadowbanking

• worktoimplementtheG20financialsectorreforms,includingintheareasofresolutionregimesandover-the-counterderivatives

Basel Committee on Banking Supervision

OSFIisanactivememberoftheBaselCommitteeonBankingSupervision(BCBS),whichprovidesaforumforinternationalrulemakingandcooperationon bankingsupervisorymatters.

TheBCBSprovidesregularupdatesontheprogressofmembercountriesinimplementingBaselstandards.OSFIhasactivelysupportedtheinternationalworkdonetodeterminewhetherinternationallyactivebanksarecalculatingtherisk-weightedassetsportionofminimumcapitalratiostandardsinaconsistentmanner.

In2013-2014,OSFIparticipatedinquantitativeimpactstudiesandmultipleworkstreamson:liquidity,additionalcapitaladequacyreforms,afundamentalreviewofcapitalrulesfortradingbookactivitiesandthedesignofappropriatelimitsonconcentratedcreditexposurestosinglecustomers.

OSFIalsostrengthenedrelationshipswithforeignsupervisorsduring2013-2014byparticipatingintheRegulatoryConsistencyAssessmentProgramme(RCAP)ofAustralia,SwitzerlandandSingapore.TheRCAPbringstogetherteamsdrawnfromtheBaselCommitteecountriestoreviewnationalimplementationofBaselminimumprudentialstandards,startingwiththestandardforminimumcapital.ACanadaRCAPassessmenttookplaceinlate2013(resultstobepublishedbyBCBSinJune2014),andOSFIisleadinganEU-RCAPcurrentlyunderway.Inadditiontotheseefforts,OSFItookaleadershiproleinbenchmarkingstudiestogaugeconsistencyacrossjurisdictionsforthetreatmentofrisk-weightedassetsinthedeterminationofcapitalratiosofglobalbanks.Thisworkisbeingconductedwiththegoalofachievingmoreconsistentimplementationofinternationalrisk-basedcapital standards.

International Accounting and Auditing Standards

SinceallFRFIsinCanadaarerequiredtofollowInternationalFinancialReportingStandards(IFRS)andInternationalStandardsonAuditing(ISA),OSFIinterpretsandassessesinternationalrulesthatmayapplytoCanadianfinancialinstitutions.OSFIworkswiththeInternationalAccountingStandardsBoard(IASB)andInternationalAuditingandAssuranceStandardsBoard(IAASB)throughactiveparticipationandleadershipintheAccountingExpertsGroupoftheBCBSandtheAccountingandAuditingIssuesSubcommitteeoftheInternationalAssociationofInsuranceSupervisors(IAIS).In2013-2014,OSFIworkedthroughtheBCBSandtheIAIStoprovideitspositionson:

• IASBrevisedExposureDraft:InsuranceContracts

• IASBDiscussionPaper:AReviewoftheConceptualFrameworkforFinancialReporting

• IASBExposureDraft:FinancialInstruments:ExpectedCreditLosses

• IAASBExposureDraft:ReportingonAuditedFinancialStatements:ProposednewandRevisedInternationalStandardsonAuditing

Inaddition,OSFIcontributedtofinalizationoftheBCBSguidanceentitledExternalAuditofBanks,whichsetsoutsupervisoryexpectationsregardingauditqualityandhowitrelatestotheexternalauditor’sworkinabank.

Activeparticipationinthedevelopmentofthesestandardspromotesasetofhigh-qualityglobalstandardsandenhancesourunderstandingofkeyIFRSandISAthatimpactFRFIs.Significantchangestoaccountingstandardsrequireearlyinvolvementandcloseconsultationandcommunicationwithstandardsetters,otherregulators,andbothinternationalanddomesticfirms.OSFIcollaboratescloselywithallstakeholdersaskeyaccountingandauditingstandardsaredeveloped.

International Association of Insurance Supervisors

OSFIparticipatesintheworkoftheInternationalAssociationofInsuranceSupervisors(IAIS),whichrepresentstheinsuranceregulatorsandsupervisorsofapproximately140countries.IAISobjectivesaretocontributetotheimprovedsupervisionoftheinsuranceindustryfortheprotectionofpolicyholdersworldwide,topromotethedevelopmentofwell-regulatedinsurancemarketsandtocontributetoglobalfinancialstability.

OSFIisamemberoftheIAISExecutive,TechnicalandFinancialStabilityCommittees,theSupervisoryForumandseveralsubcommittees.TheIAIShasbeenworkingonthedevelopmentofasolvencyandsupervisorycommonframeworkforinternationallyactiveinsurancegroups(ComFrame)since2010.OSFIhasbeenengagedinthedevelopmentofComFramethroughmembershipontheSolvencyandInsuranceGroupsSubcommittees.InOctober2013,theIAISannouncedplanstodeveloparisk-basedglobalinsurancecapitalstandardby2016withfullimplementationtobeginin2019.TheIAISwillalsodevelopabasiccapitalrequirementtobereadyforimplementationbyglobalsystemicallyimportantinsurers(G-SIIs)inlate2014.ByjoiningboththeHighLossAbsorbencyDraftingGroupandtheFieldTestingTaskForce,OSFIisplayingakeyroleinthedevelopmentoftheseveryimportantprojects.

AsamemberoftheFinancialStabilityCommittee,OSFIisparticipatinginthedevelopmentofamethodologytoassesswhich,ifany,reinsurancecompaniesmaybeglobalsystemicallyimportantinsuranceinstitutionsandthesupervisorymeasuresthatwouldapplytothosesoidentified.ThisIAISinitiativewillextendthrough2014.

ThroughmembershipontheAccountingandAuditingIssuesSubcommittee,OSFIcontinuestomonitorkeydevelopmentsandcontributetointernationalpolicyworkonissuesofmainconcerntoOSFIsuchastheIASB’skeyinsuranceproject:IFRS4InsuranceContracts(PhaseII).

Joint Forum

TheJointForum,establishedin1996bytheBCBS, theIAISandtheInternationalOrganizationofSecuritiesCommissions(IOSCO),workstoachieveconsistencyofsupervisoryapproachestoissuesofcommoninterestacrossfinancialsectorsandnationalborders.

In2013-2014,theJointForumwasengagedinanumberofreviewsflowingfromthefinancialsectorreformsagendaoftheG20,whichincludesstrengtheningtheglobalfinancialsystemthroughmoreeffectiveoversightandsupervision.OSFIwasinvolvedinthedevelopmentofthefollowingreports:

• Pointofsaledisclosureintheinsurance,bankingandsecuritiessectors–Thisconsultativedraft

report(August2013)identifiesandassessesdifferencesandgapsinregulatoryapproachestopointofsale(POS)disclosureforinvestmentandsavingsproductsacrossthefinancialsectors.

• Mortgage insurance: market structure, underwriting cycle and policy implications –Thisfinalreport(August2013)examinestheinteractionofmortgageinsurerswithmortgageoriginatorsandunderwriters,andmakesasetofrecommendationsdirectedatpolicymakersandsupervisors.

• Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks –Thisfinalreport(December2013)focusesattentionontherisksandissuesrelatedtoemerginglongevityrisktransfermarketssothatglobalpolicymakersandsupervisorscanremainaheadofthecurveasthesemarketscontinuetogrow.

OSFIalsomaintaineditsinvolvementwithanumberofotherinternationalgroups,includingtheIntegratedFinancialSupervisorsandtheAssociationofSupervisorsofBanksoftheAmericas.

Catherine Screeton, Administrative CoordinatorAnti-MoneyLaunderingandComplianceDivisionSupervisionSector

Rose Cosme, Human Resources Advisor HumanResourcesandAdministrationCorporateServicesSector

approvals and PrecedentsTheBank Act,Trust and Loan Companies Act, Insurance Companies Act, andCooperative Credit Associations Act sometimesrequirefederallyregulatedfinancialinstitutions(FRFIs)toseekregulatoryapprovalfromtheSuperintendentofFinancialInstitutionsortheMinisterofFinance(afterreceivingtherecommendationoftheSuperintendent),priortoengagingincertaintransactionsorbusinessundertakings.

RegulatoryapprovalsarealsorequiredbypersonswishingtoincorporateaFRFI,andbyforeignbanksorforeigninsurancecompanieswishingtoestablisha presenceortomakecertaininvestmentsinCanada.OSFIadministersaregulatoryapprovalprocessthatisprudentiallyeffective,responsiveandtransparent.OSFI’sApprovalsteamensuresthatrecommendationsmadetotheSuperintendentandtotheMinisterfollowtherequirementssetoutinthestatutes.

In2013-2014,OSFIprocessed199applicationsofwhich183wereapproved(individualapplicationsoftencontainmultipleapprovalrequests).The183approvedapplicationsinvolvedatotalof406approvals,290ofwhichweregrantedbytheSuperintendentand116bytheMinister.Thisrepresentsadecreaseincompletedapplicationsoverthepreviousyear,when214applicationsinvolving462approvalswereprocessed.Mostapplicationsfor2013-2014relatedtobanks(40%)andpropertyandcasualtyinsurers(38%).(See figure 1)

FIGURE 1ApprovedApplicationsbyIndustry2013-2014

0 Bank t&l/coop* life P&c

*TrustandLoan/CooperativeAssociations

in 2013-2014, oSfi processed 199 applications of which 183 were approved, involving 406 approvals, and 16 were withdrawn.

Themostcommonapplicationsreceivedfromdeposit-takinginstitutionsrelatedtopurchasesorredemptionsofsharesordebentures,assettransactionsinexcessof10%andsubstantialinvestments.Applicationsreceivedfrominsurancecompaniesrelatedmainlytoreinsurancewithrelatedunregisteredreinsurers,amendmentstoorderstoinsureinCanadarisks,andnon-cashconsiderationforshares.

During2013-2014,letterspatentweregrantedincorporatingRogersBankandRedBrickBankasdomesticbanks,andcontinuingtwofederalcompaniesasbanks:TheEquitableTrustCompanyandContinentalCurrencyExchangeCorporation.Inaddition,ordersauthorizingtheestablishmentofaforeignbankbranchinCanadawereissuedtoTheRoyalBankofScotlandplc,BnPParibasandChinaConstructionBank,andordersauthorizingtheestablishmentofaforeigninsurancebranchinCanadawereissuedtoAXAArtInsuranceCorporation,IronshoreInsuranceLtd.,StarrInsurance&ReinsuranceLimited,andBritishInsuranceCompanyofCayman.

Uponrequest,OSFIalsoprovidesadvancecapitalconfirmationsontheeligibilityofproposedcapitalinstruments.Atotalofsevensuchopinionsandvalidationswereprovidedin2013-2014,comparedto 17thepreviousyear.

GUIDAnCEAnDEDUCATIOnInkeepingwiththeobjectiveofenhancingthetransparencyofOSFI’slegislativeapprovalprocessandpromotingabetterunderstandingofourinterpretationofthefederalfinancialinstitutionstatutes,OSFIdevelopsandpublisheslegislativeguidanceincludingadvisories,rulings,andtransactioninstructions.In2013-2014,OSFIpublishedrevisedversionsofthefollowingtransactioninstructions:

• ReinsurancewithanUnregisteredRelatedReinsurer

• GuideforIncorporatingBanksandFederallyRegulatedTrustandLoanCompanies

• GuideforIncorporatingFederallyRegulatedInsuranceCompanies

• EstablishmentofanInsuranceBranch

• AcquisitionofControlof,oraSignificantInterestin, aFRFI

• SubstantialInvestmentsRequiringSuperintendentApproval-PermittedEntities

• SubstantialInvestmentsRequiringMinisterialApproval-PermittedEntities

• AssetTransactionsGreaterthan10%ofAssets

OSFIhasperformancestandardsestablishingtimeframesforprocessingapplicationsforregulatoryapprovalandforotherservices,allofwhichweresurpassedduring2013-2014.MoreinformationonserviceperformancestandardscanbefoundonOSFI’swebsite.

Natalie Young, Administrative Coordinator ApprovalsandPrecedentsRegulationSector

Neville Arjani, Research SpecialistResearchDivisionRegulationSector

federally regulated private penSion planS

OSFIsupervisesfederallyregulatedprivatepensionplansandintervenesinatimelymannertoprotectmembersandbeneficiariesofsuchpensionplansfrom

loss,whilerecognizingthatplanadministratorsareultimatelyresponsibleandthatfundingdifficultiescanresultinalossofbenefits.

Approximately6%ofprivatepensionplansinCanadaarefederallyregulated(StatisticsCanada

dataasatJanuary2012).AsatMarch31,2014,1,234privatepensionplanswereregisteredunderthePension Benefits Standards Act,1985 (PBSA),coveringover639,000employeesinfederallyregulatedareasofemployment,suchasbanking,inter-provincialtransportationandtelecommunications.BetweenApril1,2013andMarch31,2014,federallyregulatedprivatepensionplanassetsincreasedby10%,toavalueofapproximately$171billion(see figure 2).

Laurence Frappier, ActuaryPublicPensionsOfficeoftheChiefActuary

Gordon Mosher, Senior Supervisor PrivatePensionPlansDivisionRegulationSector

FIGURE 2FederallyRegulatedPrivatePensionPlansbyType(last4years)*

andoffereddefinedcontributionarrangementsinstead.Thistrendappearslikelytocontinue,withdefinedcontributionarrangementsbecominganincreasinglyimportantpartoftheprivatepensionplanenvironment.

RISkASSESSMEnT,SUPERVISIOnAnD InTERVEnTIOn

In2013-2014,asthefinancialpositionofpensionplansimproved,OSFIfocuseditspensionplansupervisionactivitiesongeneralriskmanagement,includingplangovernance.Inaccordancewithitsriskassessmentframework,OSFImonitoredpensionplanassetmanagementandencouragedplanadministratorstoimplementgoodgovernancepractices,suchasdocumentingadministrativeprocesses,keyactionsanddecisions.

2011 2012 2013 2014

Total Plans 1,396 1,354 1,234 1,234

DefinedBenefit 360 358 347 335

Combination 95 94 100 111

DefinedContribution 941 902 787 788

Total Membership 647,000 646,000 639,000 639,000

DefinedBenefit 376,000 378,000 358,000 353,000

Combination 146,000 144,000 154,000 162,000

DefinedContribution 125,000 124,000 127,000 124,000

Total Other Beneficiaries - - 420,000 430,000

DefinedBenefit - - 265,000 268,000

Combination - - 142,000 147,000

DefinedContribution - - 13,000 15,000

Total Assets $132 billion $142 billion $155 billion $171 billion

DefinedBenefit $93billion $102billion $104billion $112billion

Combination $34billion $35billion $46billion $54billion

DefinedContribution $5billion $5billion $5billion $5billion

*asatMarch31st

PRIVATEPEnSIOnEnVIROnMEnTDuring2013,federallyregulatedprivatepensionplansbenefitedfromstrongequitymarketreturnsandhigherdiscountratesusedtovalueplanliabilities.Thesepositivefactors,combinedwithspecialpaymentsmadebyemployersduringtheyear,contributedtoasignificantimprovementinthesolvencypositionsofdefinedbenefitplansin2013.Althoughfundingpressuresareexpectedtoeaseformostfederallyregulatedprivatepensionplansin2014,theeffectwillbemoderatedbythefactthatminimumrequiredsolvencyspecialpaymentsarebasedonsolvencyratiosaveragedoverthreeyearsinordertoreducefundingvolatility.

Inrecentyearssomeemployershaveclosedtheirdefinedbenefitplanstonewmembers,ceasedfurtherbenefitaccrualsforexistingmembers,

as at March 31, 2014, there were 1,234 private pension plans registered under the Pension Benefits standards act, 1985, covering over 639,000 employees. total other Beneficiaries data is available only as of 2013. the drop from 1,354 plans in 2012 to 1,234 plans in 2013 was largely due to a Supreme court of canada decision that affected the jurisdiction of 110 first nations pension plans.

Approximately47%offederallyregulatedprivatepensionplanassetsareinvestedinequity,40%indebtinstrumentsand13%indiversifiedandotherassets.Equitiesproducedstrongreturnslastyear,compensatingforthenegativeresultsondebtinstruments.Investmentreturnsforfederallyregulatedprivatepensionplanswere12%in2013comparedto9%in2012.

Risk Assessment

OSFI’sriskassessmentsystemanalysesinformationfrompensionplanfilingsandothersourcesandgenerateskeyriskindicatorsforeachpensionplanregisteredwithOSFI,therebyenablingearlyidentificationofissues.Additionally,OSFIconductsin-depthriskassessmentreviewsofplansidentifiedashigherrisk.

Asplansofferingcapitalaccumulationprovisionsarematuringandgrowinginnumberandsize,OSFIhasundertakenareviewtoensurethatithasadequateearlywarningsignalsinplaceregardingrisksforthese plans.

Solvency Testing

OSFItypicallyrunsatestonasemi-annualbasistoestimatesolvencyratios(ratioofassetsoverliabilitiesonaplanterminationbasis)forthedefinedbenefitpensionplansitregulates.ThistestprovidesOSFIwithimportantinformationthatenablesearlierinterventioninhigher-riskpensionplans.AtDecember31,2013,theaverageestimatedsolvencyratio(ESR)forallplanswas0.98,upfrom0.83atyear-end2012 (see figure 3).ESRscalculatedbyOSFIatyear-end2013showedthatapproximately61%ofalldefinedbenefitplanssupervisedbyOSFIwereunderfunded(downfrom90%in2012),meaningtheirestimatedliabilitiesexceededassets,onaplantermination basis.

On-Site Examinations

Aspartofitsrisk-basedsupervisoryapproach,OSFIconductson-siteexaminationsofselectedpensionplanstogatheradditionalinformationandbetterassesstheplan’squalityofriskmanagement.During2013-2014,OSFIperformed15on-siteexaminations,whichwerefocusedonplanadministration,includinggovernance,assetmanagement,andcommunicationtomembers.Certainplansconsideredmoremature(i.e.thathavealargerproportionofretireescomparedtoactivemembership)wereselectedforexaminationtoreviewissuesincludingpensionfundassetmixallocationandretireeauditprocesses.

FIGURE 3DefinedBenefitPlans’EstimatedSolvencyRatio(ESR)Distribution(past8years)

dec Jun dec Jun dec Jun dec Jun dec Jun dec Jun dec Jun dec Jun dec '05 '06 '06 '07 '07 '08 '08 '09 '09 '10 '10 '11 '11 '12 '12 '13 '13

the average eSr increased from 0.83 to 0.98 since year-end 2012.

Watch List

Pensionplansfacinghigherriskduetotheirfinancialcondition,planmanagementorforotherreasonsareplacedonawatchlistandcloselymonitored.ThenumberofwatchlistplansatMarch31,2014decreasedto92from128atMarch31,2013.Ofthe92plans,80weredefinedbenefitplansand12weredefinedcontributionplans.Duringthecourseof2013-2014,14newplanswereaddedtothewatchlistand50wereremoved.Althoughtheestimatedsolvencyratio(ESR)asatDecember31,2013hasimprovedsubstantiallycomparedtotheESRasatDecember31,2012,thewatchlistwilldecreaseasaresultofimprovedsolvencypositionsonlywhensolvencyimprovementsareconfirmedbyfiledvaluationreports.

Intervention

OSFIstrivestoprotectmembers’benefitsthroughcooperationwithplanadministratorsandemployersbeforeexercisingitspowerstoenforcelegislativerequirements.In2013-2014,OSFIinterventionswithrespecttohigh-riskpensionplansincludedissuingadirectionofcompliancerequiringanemployertoremitoutstandingcontributionsand,inanothercase,restrictingportabilityofbenefitsinordertostoptheimpairmentofapensionfund.

RULESAnDGUIDAnCE

Pooled Registered Pension Plans (PRPPs)

ThefederalPooled Registered Pension Plan ActanditsassociatedregulationscameintoforceonDecember14,

2012.OSFI’sresponsibilitieswithrespecttothisnewtypeofpensionplanincludelicensingPRPPadministrators,registeringPRPPsandprovidingongoingsupervision.

Pension Industry Outreach

InMarch2014,OSFIjoinedtheCanadaRevenueAgencyinpresentingajointwebconferenceor“webinar”onPRPPs,focusingontherequirementsandproceduresforregisteringaPRPPwithOSFIandwiththeCanadaRevenueAgency.

Inordertoreachagreaternumberofstakeholdersacrossthecountry,OSFIishostingwebinarsin2014tocommunicaterecentdevelopmentsaffectingfederalpensionplansitregulates,aswellasOSFI’sexpectations,toplanadministrators,advisorsandotherstakeholders.Thesereplacetheannualindustry forum.

Guidance

Inkeepingwiththeobjectivesofpromotingprudentpracticesandatransparentregulatoryframework,OSFIregularlyprovidesguidancetoplanadministratorsonlegislativerequirementsandOSFI’sexpectations.InAugust2013,OSFIissuedaDraftPolicyAdvisoryonLongevitySwapsandLongevityInsuranceforcomment.ThedraftAdvisoryprovidesguidancetofederallyregulateddefinedbenefitpensionplansthatareconsideringenteringthistypeofcontractasameansofhedginglongevityrisk.TheAdvisoryisexpectedtobeissuedinfinalformin2014.Additionally,OSFIreleasedarevisedInstructionGuideforthePreparationofActuarialReportsforDefinedBenefitPensionPlansinMarch2014.keyupdatesinthislatestversionoftheInstructionGuidecoverrecentchangestotheCanadianInstituteofActuariesStandardsofPracticeandOSFI’spositionregardingalternativesettlementmethodsfor solvency valuations.

InfoPensions

OSFIpublisheditsbi-annualnewsletterInfoPensions inMayandnovember2013.Thisnewsletterincludesannouncements,policyinterpretationsandremindersonissuesrelevanttofederallyregulatedprivatepensionplansandtheirstakeholders.BasedontheresultsofasurveyofInfoPensionsreadersin2012,OSFItookstepsin2013toincreasestakeholders’awarenessofthenewsletterandtoimproveitsusefulnesstoreaders.Theseincludedanupdatedformat,improvedvisibilityontheOSFIwebsite,andthesolicitation

ofongoingfeedbackandtopicsuggestionsfromplan administrators.

APPROVALSFederallyregulatedprivatepensionplansarerequiredtoseekapprovalfromtheSuperintendentforseveraldifferenttypesoftransactions,includingplanregistrationsandterminations,assettransfersbetweenregistereddefinedbenefitpensionplans,refundsofsurplus,andreductionsofaccruedbenefits.During2013-2014,thenumberoftransactionsrequiringtheSuperintendent’sapprovalincreasedconsiderablydueinlargeparttoanincreaseinthenumberofrequeststoreduceaccruedbenefits.OSFIprocessed104applicationsforapprovalandreceived89newrequests,comparedto55processedapplicationsand77newrequestsin2012-2013.Thirty-onenewplanswereregisteredwithOSFIin2013-2014(12definedbenefitplansand19definedcontributionplans),while21plansappliedforplantermination(9definedbenefitplansand12definedcontributionplans).

Inadditiontotheapprovalsnotedabove,OSFIisresponsibleforreviewingapplicationsfrom,issuinglicencesto,andregisteringPRPPsforadministratorsunderthePooled Registered Pension Plans Act.In2013-2014,OSFIissuedfivePRPPlicences;noPRPPswereregistered.AcorporationmustholdalicencetobeaPRPPadministratorandmustregisteraPRPPbeforeitcanenterintoacontractwithanypersonstoprovideaPRPP.

FIGURE 4AssetBreakdown*ofPensionPlansRegulatedbyOSFI

($ millions) 2012 2013

Cash $1,159 0.8% $1,266 0.7%

Debt Securities

ShortTermnotes,OtherTermDeposits 4,812 3.1% 5,676 3.3%

GovernmentBonds 39,617 25.5% 36,681 21.4%

CorporateBonds 12,010 7.8% 12,606 7.4%

MutualFunds-Bonds,CashEquivalent&Mortgage 10,530 6.8% 11,883 6.9%

MortgageLoans 627 0.4% 780 0.5%

GeneralFundofanInsurer 172 0.1% 195 0.1%

Total Debt Securities 67,768 43.7% 67,821 39.6%

Equity

SharesinInvestment,RealEstateorResourceCorporation 4,422 2.9% 4,275 2.5%

CommonandPreferredShares 45,825 29.5% 52,710 30.8%

StockMutualFunds 16,496 10.6% 19,825 11.5%

RealEstateMutualFunds 1,103 0.7% 1,504 0.9%

RealEstate 2,647 1.7% 2,922 1.7%

Total Equity 70,493 45.4% 81,236 47.4%

Diversified and Other Investments

BalancedMutualFunds 6,220 4.0% 5,938 3.5%

SegregatedFunds 2,702 1.7% 2,825 1.7%

HedgeFunds 2,301 1.5% 4,879 2.9%

PrivateEquity 776 0.5% 1,272 0.7%

Infrastructure 1,855 1.2% 2,059 1.2%

MiscellaneousInvestments 5,243 3.4% 6,528 3.8%

Total Diversified and Other Investments 19,097 12.3% 23,501 13.8%

Other Accounts Receivables (net of liabilities) (3,372) -2.2% (2,575) -1.5%

TOTAL NET ASSETS 155,145 100.0% 171,249 100.00%

*Representsassetdistributionasreportedinthefinancialstatementsofpensionplansduringrespectiveyears.

office of the chief actuary

TheOfficeoftheChiefActuary(OCA)contributestoafinanciallysoundandsustainableCanadianpublicretirementincomesystemthroughtheprovision

ofexpertactuarialvaluationandadvicetotheGovernmentofCanadaandtoprovincialgovernmentsthatareCanadaPensionPlan(CPP)stakeholders.

TheOCAprovidesstatutoryactuarialvaluationandadvisoryservicesfortheCPP,OldAgeSecurityprogram,theCanadaStudentLoansProgram,EmploymentInsuranceprogram,andpensionandbenefitsplanscoveringthefederalPublicService,theCanadianForces,theRoyalCanadianMountedPolice(RCMP),federallyappointedjudges,andMembersof Parliament.

TheOCAwasestablishedwithinOSFIasanindependentunit.TheChiefActuaryreportstotheSuperintendent;however,theaccountabilityframeworkoftheOCAmakesitclearthattheChiefActuaryissolelyresponsibleforcontentandactuarialopinionsin reportspreparedbytheOCA.

TABLInGOFTHE26THACTUARIALREPORTOnTHECAnADAPEnSIOnPLAn

TheOCAisrequiredbylawtoproduceanactuarialreportontheCPPeverythreeyears.The26thActuarialReportontheCPPasatDecember31,2012wastabledbeforeParliamentonDecember3,2013.ThistriennialreportprojectsCPPrevenuesandexpendituresovera75-yearperiodinorderto

assessthefutureimpactofhistoricalandprojecteddemographicandeconomictrends.

TheCPPprovidesprotectiontomillionsofCanadianworkersandtheirfamiliesagainstthelossofincomeduetoretirement,disabilityanddeath.In2013,morethansixandahalfmillionCanadiansreceivedCPPbenefits,withatotalvalueofapproximately$38billion.CanadianswanttofeelconfidentthattheCPPwillbeabletomeettheirneedsinfutureyears,andtheactuarialreportprovidesthemwiththemostrecentinformationonthefinancialstatusofthePlan.

Thereportfindsthatunderthe9.9%legislatedcontributionrate,assetsareprojectedtoincreasesignificantlyoverthenextdecadeascontributionrevenueisexpectedtoexceedexpendituresoverthatperiod.Assetswillcontinuetogrowthereafteruntiltheendoftheprojectionperiod,butataslowerpace,reachingalevelofsixyearsofannualPlanexpendituresby2050.Thus,despitetheprojectedsubstantialincreaseinbenefitspaidasaresultofanagingpopulation,theCPPisexpectedtobeabletomeetitsobligationsthroughouttheprojectionperiodandremainfinanciallysustainableoverthelongterm,withassetsprojectedtoaccumulateto$300billionbytheendof2020.However,thereportcautionedthatiflifeexpectanciescontinuetoincreaseatthecurrent

Jean-Claude MénardChiefActuary

rate,especiallyforages75to89,itcouldputadditionalpressureontheminimumcontributionratecausingtheratetoincreaseabove9.9%.

EXTERnALPEERREVIEWOFTHE26THCPPACTUARIALREPORT

TheOCAcommissionedanexternalpeerreviewofthe26thCPPActuarialReport.Firstintroducedin1999,externalpeerreviewofOCAactuarialreportsontheCPPbyanindependentpanelofreviewersisintendedtoensurethattheactuarialreportsmeethighprofessionalstandardsandarebasedonreasonableassumptionsinordertoprovidesoundactuarialadvicetoCanadians.

Theindependentpanel’sfindingsconfirmthattheworkperformedbytheOCAonthe26thCPPActuarialReportmeetsallprofessionalstandardsofpracticeandstatutoryrequirements,andthattheassumptionsandmethodsusedarereasonable.ThepanelalsostatedthatthereportfairlycommunicatestheresultsoftheworkperformedbytheChiefActuaryandhisstaff.

TheCanadianInstituteofActuariesstandardonassumptionsrequiresthattheassumptions,individuallyandintheaggregate,shouldbeappropriate.Thepanelhasconcludedthattheassumptionsadoptedforthe26thCPPActuarialReportarereasonable,bothindividuallyandintheaggregate,andarethereforeappropriate.

Theexternalpeerreviewofthe26thCPPActuarialReportispublic,aswerepreviouspeerreviewsoftheCPPActuarialReports,andisavailableontheOSFIwebsiteunderOfficeoftheChiefActuary.

PUBLICSECTORInSURAnCEAnD PEnSIOn PLAnS

In2013-2014,theOCAcompletedfouractuarialreportswithrespecttothepublicsectorinsuranceandpensionplans.ThesereportsweresubmittedtothePresidentoftheTreasuryBoardfortablingbeforeParliament.TheActuarialReportonthePensionPlanfortheRCMPasatMarch31,2012wastabledonOctober16,2013,theActuarialReportontheBenefitPlanfinancedthroughtheRCMP(dependents)PensionFundasatMarch31,2013wastabledonJanuary22,2014,andtheActuarialReportonthePensionPlanfortheFederallyAppointedJudgesasatMarch31,2013wastabledonMarch27,2014.Thesereportsprovideactuarialinformationtodecisionmakers,Parliamentariansandthepublic,therebyincreasing

transparencyandconfidenceinCanada’sretirementincomesystem.

ThePension Reform Act amendedthe Members of Parliament Retiring Allowances Actsothat,bynolaterthanJanuary1,2017,thetotalamountofcontributionstobepaidbymemberswillrepresent50%ofthecurrentservicecost.Inaddition,forserviceafterJanuary1,2016,theageatwhichapensionmaybepaidwithoutareductionisraisedfromage55toage65.ThisActreceivedRoyalAssentonnovember1,2012.ToreflecttheamendmentsbroughtforwardbythePensionReformAct,theOCApreparedanactuarialreportupdatingtheActuarialReportonthePensionPlanforMembersofParliament.ThereportwastabledbeforeParliamentonMay31,2013.

ACTUARIALREPORTOnTHEEMPLOYMEnTInSURAnCEPREMIUMRATE

In2013-2014,theOCApresentedtotheCanadaEmploymentInsuranceCommissionthe2014ActuarialReportontheEmploymentInsurancePremiumRatethatwastabledbeforeParliamentonOctober28,2013.Thisreportprovidestheforecastbreak-evenpremiumratefortheupcomingyearandadetailedanalysisinsupportofthisforecast.

SPECIALEVEnTS,PRESEnTATIOnSAnD SPECIALSTUDIES

Demographicchangessuchasincreasinglongevity,aswellasuncertainfutureeconomicconditions,affectthesustainabilityofpensionsystemsaroundtheworld.Throughouttheyear,ChiefActuaryJean-ClaudeMénarddeliveredpresentationsaddressingthesetopicstoarangeofaudiencesincludingtheBritishColumbiaPublicPensionConference,theSocietyofActuariesLivingto100InternationalSymposium,theBoardofDirectorsoftheCanadaPensionPlanInvestmentBoard,andtheInternationalSocialSecurityAssociationWorldSocialSecurityForum.Further,onJune18,2013,theChiefActuaryappearedbeforetheHouseofCommonsStandingCommitteeonGovernmentOperationsandEstimatesinregardtoReviewofStatutoryPrograms–PublicServicePensionPlan.

Foracompletelistofmeetings,presentationsandspeeches,seeOSFI’swebsiteunderOfficeoftheChief Actuary.

corporate ServiceS

EnHAnCInGCOMMUnICATIOnS

During2013-2014,OSFIlauncheditsredesignedwebsiteatosfi-bsif.gc.ca.Prior tocommencingworkonthenewsite,OSFIconsultedawideselection

ofvisitorsabouttheirneedsandperceptionsofourwebsite.Subsequently,changesweremadetoaddressthestatedneedsofthesewebsiteusersandtopresentinformationinamoreintuitivemanner.

Informationonthewebsiteisnowgroupedbyindustrysegment,withthemostfrequentlyaccessedinformationeasilyreachedthroughquicklinksonthefrontpage.ThisnewiterationoftheOSFIwebsiteisalsoaccessibletothosewithdisabilitieswhomayrequiretheuseofspecial‘readers’inorderto access content.

Afterlaunchofthenewsite,OSFIwebsitesubscribersweresurveyedfortheirinitialimpressions,andfeedbackhasbeenoverwhelminglypositive.

REnEWInGTECHnOLOGY AnDSYSTEMS

2013-2014wasthefourthyearofafive-yearInformationTechnologyRenewalprogram.Bytheendofthefiscalyear,anumberofsignificantsystemswererenewedandarenowinuse.Theseinclude:OSFI’snewwebsite,whichenabledimprovedinformationsearch,navigationandwebaccessibility;and,anewRegulatoryReturnsSystemandupgraded

BusinessIntelligence(BI)toolsetthatimprovedOSFI’sabilitytoanalyzeandreportonregulatoryfilingsfromdeposit-takinginstitutions.

MAnAGInGHUMAn RESOURCESCHALLEnGES

Toachieveitsstrategicoutcomes,OSFI’spriorityistohaveahigh-performingandeffectiveworkforce.

In2013-2014,ongoingrisksposedbythecurrentenvironment,bothattheleveloftheeconomyandwithinthefinancialsector,aswellasinternalfactors,continuedtohaveanimpactonhowwedoourwork.Tomitigatetheserisks,anumberofprioritieswereidentifiedthroughtheHRplanningprocessandthefollowingactionsweretakentoaddressgaps:

• ImplementedanewbusinessmodelfordeliveryofHRservices,supportedbyanupgradedHRsystem

• Updatedand/ordevelopednewHRpoliciesandguidelinestoprovideappropriateguidancetomanagersandemployeesandsupportaconsistentapplicationacrosstheorganization

• FacilitatedorganizationchangesintheSupervisionSectorforteamsresponsibleformanagingdomesticsystemicallyimportantbanks

• Completedsuccessionplansforcriticalpositionsintheeventofretirementsandtookactionstoaddressgaps

• Focusedonemployeeengagementbyconductingbi-annualemployeesurvey

• Providedlearninganddevelopmentopportunitiesforstaffacrosstheorganizationbasedonindividuallearningplansinsupportofsectorbusinessplans

• Implementedacasemanagementapproachfordealingwithcomplexdisabilityandsickleavecasesonatimelybasis

Georges Rochon, Translator/EditorCommunicationsandConsultationsDivisionCorporateServicesSector

Greguyschka Felix, Learning & Development Partner HumanResourcesandAdministrationCorporateServicesSector

financial review and highlightS

OSFIrecoversitscostsfromseveralrevenuesources.OSFIisfundedmainlythroughasset-based,premium-basedormembership-basedassessmentsonthe

financialinstitutionsandprivatepensionplansthatitregulatesandsupervises,andauser-payprogramforlegislativeapprovalsandotherselectedservices.

TheamountchargedtoindividualinstitutionsforOSFI’smainactivitiesofriskassessmentandintervention(supervision),approvalsandprecedents,andregulationandguidanceisdeterminedinseveralways,accordingtoformulassetoutinregulations.Ingeneral,thesystemisdesignedtoallocatecostsbasedontheapproximateamountoftimespentsupervisingandregulatingeachindustry.Costsarethenassessedtoindividualinstitutionswithinanindustrybasedontheapplicableformula,withaminimumassessmentforsmallerinstitutions.

Stagedinstitutionsareassessedasurchargeontheir baseassessment,approximatingtheextrasupervisionresourcesrequired.Asaresult, well-managed,lower-riskinstitutionsbearasmaller shareofOSFI’scosts.

OSFIalsoreceivesrevenuesforcost-recoveredservices.TheseincluderevenuesfromprovincesforwhichOSFIprovidessupervisionoftheirinstitutionsoncontract,federalCrowncorporationssuchastheCanadaMortgageandHousingCorporation(CMHC)whichOSFIsupervisesundertheNational Housing Act,andrevenuesfromotherfederalorganizationstowhichOSFIprovidesadministrativeservices.

OSFIcollectsAdministrativeMonetaryPenaltiesfromfinancialinstitutionswhentheycontraveneaprovisionofafinancialinstitutionsActandarechargedinaccordancewiththeAdministrativeMonetaryPenalties(OSFI)Regulations.ThesepenaltiesarecollectedandremittedtotheConsolidatedRevenueFund.Byregulation,OSFIcannotusethesefundsto reducetheamountthatitassessestheindustryin respectofitsoperatingcosts.

TheOfficeoftheChiefActuary(OCA)isfundedbyfeeschargedforactuarialvaluationandadvisoryservicesrelatingtotheCanadaPensionPlan,theOld AgeSecurityprogram,theCanadaStudentLoansProgramandvariouspublicsectorpensionandinsuranceplans,andbyaparliamentaryappropriation.

Overall,OSFIfullyrecoveredallitscostsforthefiscalyear2013-2014.

OSFI’stotalcostswere$141.9million,a$14.1million,or11.1%,increasefromthepreviousyear.Humanresourcescosts,themaindriverofOSFI’sexpenses,roseby$12.4million,or12.9%.Thiswasaresultof:a $3.0millionreversalofapayequityliabilityin2012-2013,staffingvacantpositionsacrossallsectors;thefullyearimpactofthepreviousyear’sincrementalnewhires;plannedgrowthinemployeecompensationinaccordancewithcollectiveagreementsandperformance-relatedpay,whichisavailabletoemployeesatalllevelswithintheorganization.During2012-2013OSFIsettledapayequityclaimdatingfrom1987to1997thatwaspreviouslyprovisionedfor.Asaresultofthesettlement,anamountof$3.0 million

wasreversedandrecognizedasareductioninHumanResourcesExpensesin2012-2103.

OSFI’saveragenumberoffull-timeequivalentemployeesin2013-2014was666,a4.7%increasefromthepreviousyear.OSFIendedtheyearwithanactualheadcountof697,a5.6%increasefromitsheadcountof660asatMarch31,2013.OSFIaddedresourcestosupervisetheCMHC,addressissuesrelatedtodomesticsystematicallyimportantbanks(D-SIBs)andfurtherstrengthenitsskillsetsinspecializedareassuchaseconomicresearch,creditriskandcapitalanalysisandenhanceitsabilitytoguideandsupervisefederallyregulatedfinancialinstitutionsinmanagingrisks.OSFIalsoenhanceditsspecializationinthepropertyandcasualtyandlifeinsuranceindustriestosupportmoresophisticatedrisk-sensitivecapitalrulesandtofulfillinternational commitments.

FEDERALLYREGULATEDFInAnCIAL InSTITUTIOnS

Revenues

Totalrevenuesfromfederallyregulatedfinancialinstitutionswere$127.0million,anincreaseof$13.1 million,or11.5%,fromthepreviousyear.Base assessmentsonfinancialinstitutions,whicharerecordedatanamountnecessarytobalancerevenueandexpensesafterallothersourcesofrevenuearetakenintoaccount,increasedby$11.8million,or11.0%,fromthepreviousyear.

Revenuesfromcostrecoveredservicesincreasedby$1.6million,or64.6%,fromthepreviousyearasaresultofOSFI’ssupervisionofCMHC.

Totalcostswere$127.0million,anincreaseof$13.1 million,or11.5%,fromthepreviousyear.Theincreaseisduetotheaforementionedgrowthinhumanresourcescosts.

Base Assessments by Industry

BaseassessmentsaredifferentiatedtoreflecttheshareofOSFI’scostsallocatedtoeachindustrygroup(baseassessmentsarethecostsallocatedtoanindustry,lessuserfeesandchargesandcost-recoveredservicesrevenues).Thechartbelowcomparesthecumulativegrowthofbaseassessmentsbyindustrygroupoverthepastfiveyears,using2008-2009asthebaseyear.

Theincreaseinbaseassessmentsonthedeposit-takinginstitutions(DTI)industryduring2009-2010waslargelydueto:growthinsupervisorystaffandthehiringofemployeeswithcurrentindustryexperienceincredit,marketandoperationalrisksinordertofocusmoreeffortonhigherriskinstitutionsandproducts;theearlydetectionofproblemloanportfolios;and,meetingtheincreasingnumber,frequencyandintensityofinternationalcommitments.In2010-2011and2011-2012,increasedassessmentsweredrivenbygrowthinourcomplementofspecializedskillsinresearch,creditriskandcapitaltoenhanceOSFI’sabilitytoguideandsupervisefederallyregulatedfinancialinstitutionsinmanagingrisks.Whilebaseassessmentsstabilizedin2012-2013,theyincreasedin2013-2014asaresultofworkrelatedtoD-SIBs.

Theincreaseinassessmentsonthepropertyandcasualty(P&C)insuranceindustryin2009-2010reflectsOSFI’sgreaterfocusonthissectorduetoweakeningindustryandmarketconditions,identificationofemergingrisks,focusontheIFRSimplicationsforthisindustry,anditseffortsontheMinimumCapitalTest(MCT).Theincreasein2010-2011through2013-2014reflectsOSFI’scontinuedeffortstoenhanceitsspecializationintheP&Cindustry,supportmoresophisticatedrisk-sensitivecapitalrulesandtofulfillinternationalcommitments.

Theincreaseinassessmentsonthelifeinsuranceindustryduring2009-2010isattributedtotheindustry’sshareofincrementalOSFIresourcestoaddresseconomicandmarketconditionsandemergingrisks.Theincreasein2010-2011through2013-2014reflectstheadditionofstaffwithspecificexpertiseinlifeinsurance,OSFI’seffortsondevelopinganew

Base Assessments by Industry CumulativeGrowthRatesfromFiscalYear2009

0%2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014

Fiscal Year

dti industry p&c industry life industry

frameworkforthestandardizedMinimumContinuingCapitalandSurplusRequirements(MCCSR)approach,anditscontinuingfocusonreviewingandrevisingtheframeworkusedtodeterminethecapitalrequirementsforsegregatedfundguaranteeproducts.

Inadditiontotheseindustry-specificcostdrivers,othergenericfactorscausedincreasesinbaseassessmentsonallindustries:OSFI’sdevelopmentandimplementationofanInformationManagement/InformationTechnology(IM/IT)strategyandrenewalprogramfrom2010-2011to2013-2014contributedtooverallgrowthinexpendituresandassessments;and,slightdecreasesduring2010-2011and2011-2012inthenumberofstagedinstitutionsacrossallindustries,andhenceinsurchargeassessments.Thisinturnhadtheeffectofincreasingbaseassessments.In2012-2013,therewasafurtherdecreaseinthenumberofstagedinstitutions;however,surchargeassessmentsincreasedslightlyasaresultofchangestothemixofstagedinstitutions.

FEDERALLYREGULATEDPRIVATE PEnSIOn PLAnS

Assessments

OSFI’scostsforregulatingandsupervisingprivatepensionplansarerecoveredfromanannualassessmentchargedtoplans,basedonthenumberofplanbeneficiaries.PlansareassessedafeeuponapplyingforregistrationunderthePension Benefits Standards Act, 1985(PBSA)andannuallyontheduedateoftheirannualinformationreturn.

TheassessmentrateisestablishedbasedonOSFI’sestimateofcurrentyearcoststosupervisetheseplans,adjustedforanyexcessorshortfallof

assessmentsintheprecedingyears.Theestimateisthendividedbytheanticipatedassessablemembershiptoarriveatabasefeerate.Therateestablishedfor2013-2014was$10.00perassessablebeneficiary,unchangedfromthepreviousyear.Totalfeesassessedduringthefiscalyearwere$6.8million,upfrom$6.5millionin2012-2013.

Theexcessorshortfallofassessmentsinanyparticularyearisamortizedoverfiveyearsinaccordancewiththeassessmentformulasetoutinregulations.Priorto2003-2004,accumulatedsurpluseshadkeptassessmentratesdown;in2003-2004and2004-2005,however,OSFIincurredunplannedexpensesrelatedtoproblempensionplansthatdepletedthesurplusposition.SubsequentassessmentratesweresettorecovertheaccumulatedshortfallandtheannualcostofadministeringthePBSA.TherateestablishedandpublishedintheCanadaGazettefor2014-2015issetat$10.00perassessablebeneficiary,unchangedfrom 2013-2014.

ThecostofadministeringthePBSAfor2013-2014was$7.2million,anincreaseof$0.3millionor4.2%fromthepreviousyear.TheincreaseoccurredasaresultofnormaleconomicandmeritincreasesandincreasedamortizationmainlyrelatedtoRASP,anewsystemforpensionsdeployedin2012-2013.

ACTUARIALVALUATIOnAnD ADVISORY SERVICES

TheOCAisfundedbyfeeschargedforactuarialvaluationandadvisoryservicesandbyanannual

FY 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014

FeesAssessed 7,927 8,578 7,866 7,949 6,477 6,842

Expenses 5,931 6,529 6,555 6,701 6,905 7,196

BasicFeeRate*perassessablemember 24.00 24.00 22.00 22.00 10.00 10.00

*Theminimumandmaximumannualassessmentperplanisderivedbymultiplyingtheannualassessmentby50and20,000respectively.Withanannualassessmentof$10.00permember,theminimumannualassessmentis$500andthemaximumis$200,000.

Fees Assessed and Expenses for Fiscal Years 2008-2009 to 2013-2014($000,exceptBasicFeeRate)

parliamentaryappropriation.Totalcostswere$7.6 million,anincreaseof$0.7millionor10.7%fromthepreviousyearduetothefullyearimpactoffillingpreviouslyapprovedpositions,andnormaleconomicandmeritincreases.The2013-2014triennialCPPreviewalsocontributestotheincreaseincosts.

CHAnGESInACCOUnTInGSTAnDARDS

OSFIappliedIAS19-EmployeeBenefits(Revised2011)(“IAS19”)retrospectivelyinthecurrentperiodinaccordancewiththetransitionalprovisionssetoutintherevisedstandard.Asaresultofthischange,actuarialgainsandlossesonDefinedBenefitPlansarenolongerrecognizedinOSFI’s Statement of Operations butinaseparateStatement of Other Comprehensive Income(OCI).Thesecoststotaling$1,251thousandin2012-2013havebeenreclassifiedtotheStatementofOCI.Thecurrentyeargainof$5thousandisalsopresentedseparatelyonthisstatement.

Historicallythesecostswerepresentedaspartofhumanresourcescostsinnote13tothefinancialstatements.Theyarestillincludedinnote12ofthefinancialstatementsinthecostsbybusinessactivity,astheyareapartofthecostofregulationandsupervisionoftheindustriesOSFIregulates.

TherehasbeennochangetotheOSFIfinancialpositionasaresultofadoptingthischangeinpresentationnorhastherebeenachangeinOSFI’stotalexpenses.However,prioryearcomparativeshavebeenrestated.FurtherdetailsaboutIAS19canbefoundinnote4totheFinancialStatements.

appendix

disclosure of information

UndertheOSFIAct,theSuperintendentisrequiredtoreporttoParliamenteachyearonthedisclosureofinformationbyfinancialinstitutionsandtheprogressmadein

enhancingthedisclosureofinformationinthefinancialservicesindustry.

OSFIpromoteseffectivedisclosureby:publishingselectedfinancialinformationonOSFI’swebsiteandthroughBeyond20/20Inc.(seetheirwebsiteformoreinformation);providingguidancetofederallyregulatedfinancialinstitutions(FRFIs)ontheirdisclosures;and,participatingininternationalsupervisorygroupswithsimilarobjectives.

Public Disclosures Associated with Building a More Stable Future

PublicdisclosuresofriskmanagementpracticesandriskexposuresmadebyFRFIshavebecomeasignificantfocustoachievingtransparency,financialstabilityandrestoringmarketconfidencesincetheglobalfinancialcrisis.Publicationsreleasedbyinternationalorganizations,suchastheFinancialStabilityBoard(FSB),theEuropeanBankingAuthority,andtheBaselCommitteeonBankingSupervision(BCBS),havestressedtheneedtoenhanceriskdisclosures.OSFIbelievesthatstrongdisclosuresandmarketdisciplinearekeyelementsforeffectivecorporategovernanceandsoundriskmanagementpracticeswithinaninstitution.

During2013-2014,OSFIfocusedonissuingguidanceonseveraldisclosureprojectsincluding:

• July2013–finaladvisoryonpublicdisclosurerequirementsinrespectofBaselIIIdefinitionof capital

• March2014–completedconsultationonrevisionstoBaselIIIdefinitionofcapitaladvisory,toaccommodateCreditValuationAdjustment(CVA)phase-in

• March2014–finaladvisoryonpublicdisclosurerequirementsforBCBSglobalsystemicallyimportantbanksframework(G-SIBFramework)

• March2014–beganconsultationonimplementingpublicdisclosurerequirementsonBCBSfinalizedframeworkforLiquidityCoverageRatio(LCR)andLeverageRatio(LR)

Financial Stability Board Guidance

In2012,theFSBestablishedtheEnhancedDisclosuresTaskForce(EDTF)toexaminehowthedisclosureofinformationonbankriskexposuresandriskmanagementpracticescouldbeenhanced.TheTaskForceconsistedofagroupofseniorprivate-sectorexecutivesfromleadingassetmanagementfirms,investorsandanalysts,globalbanks,creditratingagenciesandexternalauditors.Afterconsultingextensivelywithregulatorsandindustrygroups,theTaskForceprovided32recommendations.In2013-2014,OSFIworkedcloselywiththesixmajorbanks(designatedasdomesticsystemicallyimportantbanks)inCanadatoimplementthe32EDTFrecommendations.OSFIperformedquarterlyreviews

ofthesixbanks’disclosurestomonitortheprogressofimplementationandsawthattheymadesubstantialimprovementstoriskdisclosuresandtooksignificantstepstoachievingfullcompliancebytheendof2014.OSFIexpectsthesixmajorbankstoadoptfuturedisclosurerecommendationsinthebankingarenathatareendorsedbyinternationalstandardsettersandtheFSB,aswellasevolvingdomesticandinternationalbankriskdisclosurebestpractices.

International Accounting Standards Board (IASB)

TheIASBcontinuestoimproveseveralaccountinganddisclosurestandards.AsanactivememberintheAccountingTaskForceoftheBCBSandtheIAISAccountingandAuditingIssuesSubcommittee,OSFIparticipatesinimprovingdisclosuresinfinancialreportingunderinternationalstandards,includingworkonFinancialInstrumentsandInsuranceContracts.

OSFIiscommittedtocontinuingtoimprovepublicdisclosuresinordertopromotesafetyandsoundnessinthewayinstitutionsconductbusiness,andcontributetopublicconfidenceintheCanadianfinancialsystem.OSFIwillcontinuetosupportdisclosureinitiativesthroughitsmembershipintheBCBSandthroughreviewingourdomesticdisclosurerequirementsandpractices.

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Revised Transcript of the 2016 OSFI Pension Industry Forum · Revised Transcript of the 2016 OSFI Pension Industry Forum . Toronto, ON . March 31st, 2016 . 1 Revised Transcript of

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