Ottawa is easing the guidelines on the amount insurers must set aside for guaranteed payments on segregated funds with payment dates of more than five years.
The Office of the Superintendent of Financial Institutions (OSFI) has proposed a revision to its "capital rules for segregated fund guarantee obligations for life insurers." The revision, which is intended to help insurers through the current market instability, will apply to all capital calculations required since Oct. 1, 2008.
In a letter addressed to the Canadian Life and Health Insurance Association (CLHIA) on October 28, 2008, the OSFI explained that the measures "seek to reduce volatility in capital requirements, to ensure that appropriate capital is held in respect of longer term payment obligations and shorter term payment obligations and to increase capital as payment dates become more proximate."
In the guidelines that accompanied the letter, the OSFI suggests that insurers group their segregated fund guarantee obligations into three separate categories: those due in one year or less; those due between one and five years; and those due beyond five years.
In its guidelines, the OSFI adds: "The accumulation of unnecessary capital will be avoided by capping the maximum required capital … for greater than five year cash flows."
The CLHIA has applauded the OSFI initiative. In a press release issued the day that the OSFI letter was received, CLHIA president Frank Swedlove expressed his satisfaction with the steps taken to better reflect the risks associated with segregated fund guarantee obligations in these volatile economic times.
"We are pleased that OSFI has taken these steps to more accurately reflect the risks associated with segregated fund guarantee obligations," said Mr. Swedlove. He added, "This helps to deal with addressing the inappropriate volatility in capital requirements that we have been experiencing recently."
In the release, the CLHIA added that the Canadian life and health insurance industry remains strong and well capitalized despite the current uncertainty in the international financial markets. "With assets of more than $430 billion in Canada, minimal exposure to distressed asset classes and a comparably more robust Canadian market than elsewhere in the world, Canada’s life and health insurers rank among the strongest financially both nationally and internationally, and remain well positioned to meet their obligations to their policyholders."
The insurers targeted by these measures are those with approval from the OSFI to use internal models to determine the level of capital required. Following a review of its rules in 2005, the OSFI had proposed a framework to allow the largest insurers to adopt an internal model, with the smaller companies using the OSFI model. At the time, Ottawa was concerned by credit exposure and the risk of under-performance by the insurers’ assets.
With seg fund capital rules slated for revision in 2011, the OSFI has described this initiative as an interim step.