Backgrounder: 2025 Life Insurance Capital Adequacy Test (LICAT)

OSFI's Life Insurance Capital Adequacy Test (LICAT)

The Life Insurance Capital Adequacy Test (LICAT) Guideline establishes standards, using a risk-based approach, for measuring specific life insurer risks. The guideline also defines and establishes criteria for determining the amount of qualifying regulatory available capital.

Short history of the LICAT Guideline

The LICAT guideline first came into effect in 2018 replacing the Minimum Continuing Capital and Surplus Requirements guideline as the standards used by OSFI to assess whether a life insurer maintains adequate capital to support risks specific to the life insurance business.

In 2023, a new International Financial Reporting Standard 17 (IFRS 17) came into effect in Canada for life insurance companies and LICAT was updated at that time to be consistent with the new accounting standard. A major chapter in the LICAT framework is now being updated in the draft 2025 guideline. The new approach will determine capital requirements for segregated funds guarantee risk to replace the current method, which was implemented in the early 2000s.

Public consultation for the 2025 LICAT guideline

A public consultation on the draft 2025 LICAT guideline is taking place from August 22 to October 22, 2024, and includes the following:

• segregated fund new capital approach with a major revamp of the segregated fund chapter in the LICAT guideline
• other changes with minor clarifications and updates to LICAT chapters.

The importance of the LICAT guideline

This guideline enables OSFI to assess an insurer's financial condition and contributes to financial strength through periods when an insurer is under stress. This helps protect policyholders and creditors from risks that insurers may take by expanding and fortifying their risk management. The 2025 guideline contributes to the health, resilience, and public confidence in Canada's financial system.

Implementation date

The final LICAT 2025 guideline will be published on November 21, 2024, and will come into effect on January 1, 2025.

Links to other OSFI guidelines

The LICAT Guideline together with the Regulatory Capital and Internal Capital Targets provide the framework within which the Superintendent assesses whether a life insurer maintains adequate capital.