The Office of the Superintendent of Financial Institutions (OSFI) released final insurance capital guidelines July 21, to reflect the implementation of International Financial Reporting Standards 17 (IFRS 17), Insurance Contracts in January 2023.

The international accounting standard affecting all aspects of accounting for insurance contracts, increasing the comparability of risks across the global insurance industry. OSFI says it will enable meaningful comparisons of companies, contracts and industries.

“The accounting transition to IFRS 17 represents the most significant change to accounting requirements in over 20 years,” OSFI states in its overview cover letter to the industry. “Implementation will impact insurance companies by fundamentally changing accounting, actuarial, and reporting practices, and by significantly impacting supporting systems and practices,” they acknowledge. “While a great deal of effort has gone towards a robust implementation, IFRS 17 is a new standard, and we expect insurers to act conservatively when making decisions that would result in changes to their levels of capital,” they add in the cover letter and in each of the three accompanying letters addressed to federally regulated insurers and stakeholders, including life insurers, property and casualty (P&C) insurers and mortgage insurers.

LICAT guideline 

The accompanying documentation includes a final Life Insurance Capital Adequacy Test (LICAT) 2023 guideline, reporting forms and instructions, all of which come into force on January 1, 2023. For federally regulated P&C insurers, OSFI also released Minimum Capital Test (MCT) 2023 guidelines, reporting forms and instructions. Finally, for federally regulated mortgage insurers, the Mortgage Insurer Capital Adequacy Test (MICAT) guideline was also updated, along with related reporting forms and instructions.

OSFI says shortly after IFRS 17 was first published in June 2017, it embarked on a multi-year exercise to update the capital tests, guidance, reporting requirements and supervisory expectations. “The input from the insurance industry and stakeholders have helped us come to conclusions that make sense for the Canadian industry,” they add. “OSFI will continue to monitor the effectiveness of our guidelines to ensure they remain fit-for-purpose and appropriate in light of industry and economic developments.”

The documents also include a summary of consultation comments, along with OSFI responses.

Segregated fund guarantees 

For life insurers with segregated fund guarantee (SFG) business, they say OSFI is developing a new approach to determine capital requirements for that risk to replace the current method. OSFI announced June 2021 that it was deferring the implementation date of this new approach to January 1, 2025. “In the interim period, the current method for the capital treatment of SFG risk has been retained, updated to accommodate IFRS 17. A public consultation of the revised methodology is planned for February 2023.” 

Other life insurance documentation receiving updates as a result of changes made to the LICAT 2023 guideline, include Own Risk Solvency Assessment (ORSA) key metrics report form and instructions, Guideline A-4, Regulatory Capital and Internal Capital Targets, and the Revised Guidance for Companies that Determine Segregated Fund Guarantee Capital Requirements Using an Approved Model.

Intra-group reinsurance pooling arrangements 

For P&C insurers, the MCT 2023 sets out OSFI’s expectation for insurers to obtain supervisory approval for any new or existing intra-group reinsurance pooling arrangements, while the MICAT 2023 guideline directly incorporates the calculations for First-Time Homebuyer Incentive (FTHBI) mortgages specified in the advisory document, MICAT Total Requirements for FTHBI Mortgages.

“Through all this work, OSFI continues to fulfill its commitment to protect the rights and interests of Canadian policyholders and creditors and contribute to public confidence in the Canadian financial system,” they write.