Fitch Ratings doesn’t expect the final Life Insurance Capital Adequacy Test (LICAT) guideline for Canadian life insurers to negatively impact the sector’s capital strength, but warns it could result in firms reducing their reinsurance utilisation.
Issued by The Office of the Superintendent of Financial Institutions (OSFI), LICAT replaces the Minimum Continuing Capital and Surplus Requirements (MCCSR), and comes into effect January 1st, 2018, with the intent to reflect more advanced risk-based techniques to measure credit, market, insurance and operational risks.
The ratings agency has said it expects the capital strength of the industry to remain consistent with current levels, although this could vary modestly by company.
Unlike the MCCSR framework, LICAT carries a reinsurance counterparty credit risk charge, which, could lead insurers to consider “optimising at lower levels of reinsurance.”
Overall, Fitch expects insurers in Canada to start reporting LICAT ratios in May 2018, and will calibrate the new framework to its rating guidelines. However, Fitch doesn’t expect a change in company ratings as a result of the new capital guideline.