Summary of comments from the public consultation for LICAT Guideline (2025)
| Comment | OSFI Response | |
|---|---|---|
| Credit and market risks | Segregated Funds Guarantee (SFG) credit and market risks requirements should be net of all registered reinsurance (as opposed to net of all reinsurance as in the LICAT 2025 guideline). OSFI should review the capital treatment for unregistered reinsurance of SFG to ensure that it is commensurate with the risk transferred. | Capital treatment for unregistered reinsurance of SFG is under review and we will communicate any policy changes, if required. Insurer should contact OSFI if it plans to enter into an unregistered reinsurance arrangement that transfers SFG risks. |
| Mortality risk | There should be no cap on SFG mortality volatility risk when the policy guarantee benefits payable immediately in the event of death is less than the Restated Liability for the policy. | Appropriateness of the cap on SFG mortality volatility risk is under review and we will communicate any policy changes, if required. |
| Lapse risk | There are opposing views concerning the SFG lapse risk shocks. Some respondents indicated it is overly punitive while others indicated the opposite. | No change was made to the LICAT 2025 guideline regarding SFG lapse risk from the public consultation version. We are comfortable with the construct and level of SFG lapse risk shocks. We will continue to monitor this important SFG risk and make adjustments as necessary. |
| Equity implied volatility risk | An equity implied volatility risk charge should not be included and it is also unduly onerous, particularly in later years. Furthermore, some companies’ IFRS 17 valuation of SFG liabilities utilizes long-term assumptions and has limited exposure to changes in current equity implied volatility. | Equity implied volatility is a key assumption of SFG liability. It is included as a component of SFG capital framework regardless of whether insurers use actual market observables and/or information derived from these observables when setting IFRS 17 equity implied volatility assumptions. SFG equity implied volatility shocks are also prevalent in international capital frameworks. |
| Restatement of IFRS 17 liabilities | The financial statement IFRS 17 liabilities, without restatement, should be the starting point for the SFG standard approach calculations. | The restated SFG liability excludes illiquidity premiums and is based on swap rates to reflect OSFI’s view that market consistent valuation for SFG should not include any illiquidity premiums. |
| Simplified Option | The sentence “The election must be made within the first 3 months of the annual accounting period beginning on or after January 1, 2025” should be removed to allow new entries to SFG business to elect the simplified option. | We removed the sentence from the final LICAT 2025 guideline to address this feedback. We will communicate our expectation of the 3-month election requirement for existing qualified insurers separately. |
| Transition Measures – Smoothing | While OSFI has introduced an optional election for smoothing on the base solvency buffer and restated liabilities, the service contractual margin (CSM) for segregated funds can be volatile. OSFI should make CSM available for smoothing. | Our intention is to minimize modification of IFRS 17 balance sheet items for LICAT purposes, if possible, hence no changes were made to LICAT 2025 with respect to CSM for smoothing. Furthermore, many pointed out that a non-negligible portion of changes in CSM comes from new business, for which smoothing is not warranted. |
| Transition Measures – Scalar | OSFI should consider a scalar higher than 1.1 for risks not fully covered by the proposed standard approach. | No change was made to the LICAT 2025 guideline regarding SFG scalar from the public consultation version. We are comfortable with the scalar level. The postponed elements will be implemented in coming years and scalar will be re-assessed as necessary. |
| Harmonize capital framework | The differing approach taken by OSFI and the Autorité des marchés financiers (AMF) may create an uneven playing field in the Canadian industry for segregated fund business. We would encourage AMF and OSFI to continue to work towards a harmonized SFG capital framework after January 1, 2025, noting that there will be several differences in the OSFI and AMF SFG capital frameworks in effect at that date. | We worked collaboratively with the AMF in the development of the new segregated fund capital framework over the years and will continue to do so. We are committed to continue open dialogue with the industry and stakeholders as we monitor the test in the coming months and years. |
| Exchange Traded Funds (ETFs) | Most comments were supportive of this change. Some comments suggested more clarification on the conditions of using underlying exposures to calculate the credit and market risk factors for ETFs. Other comments suggested that OSFI should consider adopting similar treatment to other investment structures such as unleveraged mutual funds, etc. | We will review these clarifications/policy suggestions and reflect them in our next policy update, if appropriate. |