Backgrounder: Final Life Insurance Capital Adequacy Test (LICAT) - Guideline (2025)
Backgrounder -
Overview
The 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.
The LICAT guideline first came into effect in 2018 replacing the Minimum Continuing Capital and Surplus Requirements guideline as the standard used by the Office of the Superintendent of Financial Institutions (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 (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 about Segregated Fund products is addressed in the 2025 guideline.
A public consultation took place from August 22 to October 22, 2024, and comments were taken into consideration when finalizing the 2025 LICAT Guideline.
Key changes included in the final 2025 LICAT Guideline
For life insurers with segregated fund guarantee (SFG) business, OSFI developed a new framework to determine capital requirements to improve SFG risk sensitivity. The new framework includes adjustments to the available capital calculation, adjustments to the Base Solvency Buffer and the inclusion of transition measures.
Other changes to LICAT 2025 involve minor adjustments and clarifications to apply the framework accurately.
Why it’s important
LICAT enables OSFI to assess an insurer’s financial condition. Meeting LICAT’s expectations contributes to the insurer’s financial strength through periods when an insurer is under stress by assessing whether the life insurer maintains adequate capital. This helps protect policyholders and creditors from risks that insurers may take by expanding and fortifying risk management.
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.
In addition, the Own Risk and Solvency Assessment (ORSA) Key Metrics Report form and instructions, as well as Guideline A-4 Regulatory Capital and Internal Capital Targets and OSFI’s Solo Capital Framework for Federally Regulated Life Insurers received minor updates.
Effective date
The final LICAT 2025 guideline comes into effect on January 1, 2025.