What the industry says about regulator’s draft corporate culture guidance

Canada’s solvency regulator has refined its proposed guidance on corporate culture for P&C insurers, and it’s now consulting with the industry about its expectations.

The Office of the Superintendent of Financial Institutions (OSFI) was scheduled to have a technical briefing on details of the guidelines with the Insurance Bureau of Canada (IBC). Consequently, IBC told Canadian Underwriter, it’s too soon to answer questions about the regulator’s response to issues raised by industry lawyers and insurers following the initial draft.

Responding last September to OSFI’s first cut of its guidance, P&C industry legal counsel observed OSFI is simply following a trend of international regulators seeking to prevent business culture from undermining an organization’s financial health.

“I feel like this culture conversation in Canada is a bit of a solution in search of a problem,” Stuart Carruthers, a partner at Stikeman Elliott LLP, said last September during a National Insurance Conference in Canada (NICC) panel discussion in Halifax.

“In other countries, usually Canadian FIs [financial institutions] are viewed as having the best culture and governance in the world. So, I don’t [see culture] as a pressing problem.”

He added different business cultures have various risk tolerances, and it’s not easy to say one type of culture is inherently better or worse than another.

OSFI’s latest attempt at the guidance clarifies definitions and terms the financial services industry found vague the first time around. Essentially, OSFI’s defined its expectations as follows:

“Culture [at a business] can influence sound decision-making, prudent risk-taking and effective risk management, which can materially support or weaken the resilience of federally regulated financial institutions (FRFIs),” OSFI says in the latest version of its guidance, released in late February.

“Given the contributions culture can have on the safety and soundness of financial institutions and confidence in the broader financial system, [OSFI] expects FRFIs to:

Define a desired culture and continuously develop and improve the culture to support their purpose, strategy, effective management of risks, and resilience; and,
Continuously evaluate and respond to behaviour risks that can affect the FRFI’s overall safety and soundness.”

OSFI breaks down its detailed guidance into three desired outcomes.

First, it wants P&C insurers and other federally regulated companies “to define the desired culture needed to achieve its strategy and to manage risks effectively. FRFIs should develop and implement a plan to embed the desired culture across the institution.”

Second, OSFI wants companies to show how they’re proactively promoting and reinforcing their desired cultures and expected behaviours. This includes consideration of leadership, talent, performance management and compensation (including how incentives and disincentives influence cultural behaviours).

Finally, OSFI wants P&C insurers “to implement mechanisms and techniques to identify, assess and manage risks arising from behavioural patterns that do not align to the desired culture and expected behaviours. Examples of behaviour risks may include complacency, excessive risk-taking, poor communication, or a lack of speaking up or raising concerns, among others.”

OSFI is inviting public comment on its proposed guidance until the end of May 2023.

At NICC in September, Jill McCutcheon, a partner at Torys, didn’t think OSFI’s desire to provide guidance on business culture was completely off the mark, noting it was intended to address cultural risks related to groupthink, which happens when a large organization lacks a diversity of thought.