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
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