OSFI on Approach to Determine Capital for SFG Risk to Reflect IFRS 17
OSFI is developing a new approach to determine capital requirements for Segregated Fund Guarantee (SFG) risk, which will reflect the IFRS 17 standard on insurance contracts. OSFI has issued a letter to life insurers to provide additional details on the development of the approach. The new approach will become effective on January 01, 2023 and will replace the current Chapter 7 of the Life Insurance Capital Adequacy Test (LICAT) guideline. OSFI also released an advisory to the LICAT guideline to formally include in the framework a smoothing technique for determining interest rate risk requirements for participating business and to clarify expectations regarding negative Dividend Stabilization Reserves or other similar experience leveling mechanisms. The advisory has an effective date of January 01, 2021.
The development of the new approach is being undertaken separately from updates to other elements of the LICAT for IFRS 17—the timelines for this work were communicated in an OSFI letter dated September 30, 2020. One objective of the new standard approach is to improve the risk-sensitivity of SFG capital requirements. Accordingly, unlike updates being made to other areas of the LICAT framework for IFRS 17, for SFG risk, the new approach will include changes in the capital policies of OSFI. Consideration will be given at a later date to what, if any, specific transition or other measures will be introduced concurrent with the implementation of the new approach. Under the new approach, capital requirements will be calculated by applying shocks to SFG liabilities. Internal models that were previously approved for use by OSFI to calculate SFG capital requirements will no longer be permitted for this purpose, once the new approach is implemented.
OSFI has begun work on the development of the new approach. The remaining key steps in the development process are:
- In December 2020, distribute draft approach and quantitative impact study and sensitivity tests, with accompanying instructions directly to insurers with SFG business for comment
- In September 2021, publish, for public consultation, draft approach (that is revised Chapter 7 of the LICAT Guideline), draft LICAT forms related to SFG, and quantitative impact study and sensitivity tests, with the accompanying instructions
- From November 2021 to March 2022, issue potential directed consultations and data calls for calibration and transition purposes
- In August 2022, publish the final 2023 LICAT guideline, including the revised Chapter 7 with the final approach, along with the final regulatory capital forms, including forms related to SFG
Effective Date: January 01, 2023/January 01, 2021
Keywords: Americas, Canada, Insurance, IFRS 17, Insurance Contracts, SFG Risk, LICAT, Segregated Fund Guarantee, Life Insurers, OSFI
Experienced life actuary; background in economic capital modeling; ALM specialist; IFRS 17 researcher
Skilled life insurance actuary; subject matter expert on IFRS 17 and source of earnings
Previous ArticleUS Agencies Outline Practices to Strengthen Operational Resilience
Next ArticleBOT Circular Introduces Changes to Reduce Bank NPLs
FINMA Approves Merger of Credit Suisse and UBS
The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
MFSA Sets Out Supervisory Priorities, Issues Reporting Updates
The Malta Financial Services Authority (MFSA) outlined its supervisory priorities for 2023
German Regulators Issue Multiple Reporting Updates for Banks
Deutsche Bundesbank published the nationally deactivated validation rules for the German Commercial Code (HGB) users on the taxonomy 3.2, which became valid from December 31, 2022
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.