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    OSFI Consults on the 2020 LICAT Guideline for Life Insurers

    February 26, 2020

    OSFI is consulting on the 2020 Life Insurance Capital Adequacy Test (LICAT) guideline for federally regulated life insurance companies and fraternal benefit societies. Comments are requested by March 26, 2020. As per the draft, life insurers are required to apply this guideline for reporting periods ending on or after June 30, 2020. Early application is not permitted.

    OSFI identified an aspect of the test that causes some unwarranted volatility in interest rate risk requirements for participating (par) products. To address this, OSFI is proposing to update the LICAT framework and publish a 2020 version of LICAT. The proposed updates affect the requirement for the par credit floor (LICAT sections 5.1.2, 9.1.2, and 9.3). Moreover, recognizing that the change could result in an initial increase in capital requirements for some insurers, OSFI is proposing that the impact be phased-in over six quarters.

    Additionally, it has come to the attention of OSFI that the current wording of the guideline may lead to a misinterpretation of the expectations for how an insurer would meet the conditions for claiming par credit as well as the treatment of negative Dividend Stabilization Reserves or other similar experience leveling mechanisms (LICAT sections 2.1.2.10 and 9.1.1). Therefore, OSFI is also proposing to clarify these expectations in the 2020 LICAT guideline. The final guideline is planned to be released in mid-2020 and will become effective on that date.

    The LICAT guideline establishes standards, using a risk-based approach, for measuring specific life insurer risks and for aggregating the results to calculate the amount of a life insurer's regulatory required capital to support these risks. The guideline also defines and establishes criteria for determining the amount of qualifying regulatory available capital. LICAT is only one component of the required assets that foreign life insurers must maintain in Canada. Foreign life insurers must also vest assets in Canada per the Insurance Companies Act.

     

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    Comment Due Date: March 26, 2020

    Keywords: Americas, Canada, Insurance, Reinsurance, LICAT, Interest Rate Risk, Capital Requirements, OSFI

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