The Office of the Superintendent of Financial Institutions (OSFI) launched a consultation on June 21, 2021 on its changes to the regulatory capital frameworks for life, property and casualty, and mortgage insurers.

These revisions are intended to ensure that the regulatory capital requirements of each insurance industry are aligned with International Financial Reporting Standard 17 - Insurance Contracts (IFRS 17), which is scheduled to take effect on January 1, 2023.

As part of this consultation, OSFI will be submitting proposed changes to the Life Insurance Capital Adequacy Test (LICAT), the Property and Casualty Insurance Minimum Capital Test (MCT) and the Mortgage Insurance Capital Adequacy Test (MICA). 

Insurers have until September 30, 2021 to submit comments, OSFI's Assistant Superintendent, Regulatory Sector, Ben Gully, said in his message to the industry. Three draft documents are being proposed for each insurance sector: the guideline, the quarterly and annual forms, and the accompanying instructions. 

In parallel with the public consultation, OSFI will conduct a third quantitative impact study (QIS) and sensitivity test with life insurers. OSFI will also be doing quantitative impact studies with property and casualty insurers and mortgage insurers. 

New LICAT in 2022... 

OSFI has updated the LICAT guideline for IFRS 17, will deliver the final version in August 2022. Notably, it limits policy changes to the capital framework in order to reduce the implementation burden of the test, the message says. The regulator’s stated goal is to minimize the industry-wide capital impact of adapting LICAT to IFRS.

...segregated funds, a separate case 

OSFI is delaying the implementation date of the new standard regulatory capital methodology for segregated funds until January 1, 2025. The Office is deferring the consultation on this subject to allow insurers "to devote more time and resources for a robust implementation of IFRS.”

“In the interim period, OSFI is retaining the current methodology for the capital treatment of segregated fund guarantee risk, updated to accommodate IFRS 17. The draft LICAT 2023 guideline, forms, and instructions have been revised accordingly,” the regulator explains. 

Revised wording  

In property and casualty insurance, the revisions to the 2023 MCT are also intended to adapt it to IFRS 17. The concepts of contract liabilities are central to the revisions. OSFI points out that in the new guideline, the terms "unpaid claims" and "premium liabilities" have been replaced by "liabilities for incurred claims" and "liabilities for remaining coverage."

The changes will also establish principles for allocation methods used for capital purposes and specify credit risk requirements in a manner consistent with IFRS 9, Financial Instruments terminology. 

Variation of risk during crises 

The revisions to the MICAT include the replacement of terms and consistency with IFRS 9. OSFI also wants to introduce a capital requirement on the loss components of liabilities for the remaining coverage, so that the MICAT ratios better reflect the changes in insurance risk when mortgage insurers are under stress.