Reinsurance News

Canada’s OSFI releases final insurance capital guidelines for IFRS 17

25th July 2022 - Author: Kassandra Jimenez-Sanchez

Canada’s Office of the Superintendent of Financial Institutions (OSFI) has announced the release of the final insurance capital guidelines.

canada-flagThey have been updated to reflect implementation of International Financial Reporting Standards 17 – Insurance Contracts (IFRS 17) for fiscal years beginning on or after 1 January, 2023.

According to OSFI, these guidelines recognise the improvements in the new international accounting standard of increased transparency and comparability of risks across the global insurance industry.

Amar Munipalle, Executive Director, Risk Advisory Hubsaid said: “The accounting transition to IFRS 17 represents the most significant change to insurance accounting requirements in over 20 years.

“Implementation will impact insurance companies by fundamentally changing accounting, actuarial, and reporting practices, and by significantly impacting supporting systems and practices.”

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As part of the updates, the OSFI released the final Minimum Capital Test (MCT) 2023 guideline, reporting forms and instructions that will come into force at the start of January 2023.

The MCT 2023 guideline was adapted for IFRS 17, including the use of concepts and measurements of insurance liabilities. For example, the new guideline uses “liabilities for incurred claims” instead of “unpaid claims”.

Other key revisions included adjusting requirements in respect of claims liabilities to maintain the overall level of required resources to protect policyholders; specifying credit risk requirements in a manner consistent with IFRS 9 Financial Instruments terminology; and establishing principles for allocation methods used for capital purposes.

Additionally, the MCT 2023 sets out OSFI’s expectation that insurers obtain a supervisory approval for any new or existing intra-group reinsurance pooling arrangements.

Peter Routledge, Superintendent, OSFI said: “The guidance released today [21 July, 2022] is the result of the concerted efforts to adapt our guidance to IFRS 17, while ensuring that the requirements are appropriate for the Canadian context.

“I would like to thank our colleagues at the Autorité des marchés financiers for their collaboration in developing and implementing consistent capital expectations.”

Alongside the MCT 2023, OSFI also published the final Life Insurance Capital Adequacy Test (LICAT) 2023 guideline, which will also come into force in January 2023.

Some key revisions include recalibrating certain elements of the test to minimise industry-wide capital impacts, including reducing the Base Solvency Buffer scalar from 1.05 to 1.0; and introducing a two-year optional volatility measure to dampen the volatility introduced by the market consistent valuation on Cost of Guarantees under IFRS 17.

The final Mortgage Insurer Capital Adequacy Test (MICAT) has also been released by OSFI, which key revisions include introducing a capital requirement on the loss components of liabilities for remaining coverage.

This amendment was done so that the MICAT ratios better reflect the changes in the level of insurance risk during periods when mortgage insurers are under stress.

Louis Morisset, President and CEO, AMF commented: “I applaud the work of all the stakeholders involved, especially on the industry side, for whom the transition to IFRS 17 has been the focus of considerable efforts and investments.

“I would also like to thank the Office of the Superintendent of Financial Institutions, which worked closely with us throughout this multi-year project to ensure the implementation today of harmonised and robust capital requirements.”

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