OSFI quarterly update — Key guideline adjustment for life insurers using reinsurance for capital adequacy requirements

OSFI’s quarterly update was released on May 22, 2025, with a Q&A session open to the public on June 6, 2025. In this update, OSFI provided notice that adjustment had been made to the Life Insurance Capital Adequacy Test (“LICAT”).

As the regulator of solvency and asset requirements for insurance companies, OSFI sets out guidelines for all insurers regarding how much capital Canadian insurers and Canadian branches of foreign insurance companies must have available to operate in the Canadian market. In the case of life insurance companies, the LICAT applies to fraternal benefit companies, insurance holding companies, and non-operating life insurance companies in addition to operating traditional life insurers. The purpose of the LICAT is to assure holders of insurance policies that registered insurers in the Canadian market will not have solvency issues in paying out claims and to ensure that the insurer has sufficient financial strength.

Two ratios are used to calculate the LICAT – the “Total Ratio” and the “Core Ratio”. Both ratios include determinations of Tier 1 and Tier 2 capital and involve certain deductions, limits and restrictions on such capital. One of the available deductions for Tier 1 capital was that registered stop-loss reinsurance arrangement whereby a ceding insurer  (an insurer who has a portion of risk reinsured by a reinsurance company) could reduce its Tier 1 capital deduction with respect to negative reserves (reserves where claims exceed the amount of premiums received) up to an aggregate reduction of five percent of Net Tier 1 capital (with Net Tier 1 capital viewed prior to reduction for these arrangements).

The change announced by OSFI removes the five percent cap on the aggregate reduction amount, but only where the insurer is reinsured under a registered reinsurance stop-loss arrangement. Unregistered reinsurance arrangements are excluded from being included in reduction amounts. While this cap is removed, the guidance notes that “should [OSFI] observe material deterioration in the insurer’s capital quality because of these arrangements, we may take supervisory actions to ensure the insurer’s capital quality remains satisfactory”.

The second change announced concerns reinsured segregated fund guarantees (“SFG”) which are insurance-backed investment products that guarantee amounts invested. Prior to the change, Credit Risk (the risk of loss arising from the potential default of parties having a financial obligation to the insurer) and Market Risk (risks including interest rate, equity, real estate, and currency risks) capital requirements were calculated net of all reinsurance, including unregistered reinsurance. Now, SFG capital requirements must be calculated net of registered reinsurance only.   

The potential impact of this change will be a reduction in reliance on unregistered reinsurers (who are generally permitted to reinsure risk in Canada) insofar as that reliance is for direct mitigation of insurance risks. For further information, please contact the author.