Regulators accepting a high degree of volatility, augmenting the impact of IFRS

Internationally, regulators appear to have accepted a high degree of volatility inherent in the global markets, and are focusing more on creating cushions against more severe bouts of volatility rather than on creating rules to decrease volatility.John R.V. Palmer, a former superintendent of financial institutions for Canada, made the observation while chairing a panel discussion at KPMG’s 19th Annual Insurance Issues Conference in Toronto on Nov. 30.  Palmer qualified that some rules in Basel III seem to mitigate against the “deep pro-cyclicality” of Basel II. “But in the main, the rules are going to be looking at exaggerate the volatility sector, in my view,” he said. “So instead of creating rules that significantly reduce volatility, the focus is on creating cushions to absorb the higher volatility – higher levels of capital, higher levels of liquidity.”In this context of accepting market volatility, the IFRS proposals for both life and property and casualty insurance companies – which would separate the discounting of assets and liabilities, as well as impose a risk-free discount rate on the evaluation of liabilities – would have a profound impact on the insurance industry, Palmer warned.  “It [current IFRS proposals] will increase volatility and pro-cyclicality of insurance industry results, particularly those with long-tail businesses,” Palmer said. “I think if those rules come to pass, you will be amazed at the degree of volatility those rules will create. You’ll see quarters when capital disappears.”That, in turn, will have important implications for the way in which insurance companies do their business in the future, he predicted. This includes “implications for the future viability of companies, implications for product design and implications for the ability of society to save for the future.”Craig Pinnock, chief financial officer for Northbridge Financial Corporation, said the issues related to discounting would have a greater effect on the results of life insurance companies than P&C companies. In addition, he reminded regulators in his remarks not to treat life insurance companies in the same manner as P&C companies, since they are not the same.