Federal financial regulators are contemplating changes to capital requirements for segregated funds, some of which could kick in next year, and others that likely won’t take effect for several years.

In a letter to the Canadian Life and Health Insurance Association on Wednesday, the Office of the Superintendent of Financial Institutions said that it is considering the adoption of more sophisticated risk-based modeling approaches to capital requirements, in an effort to produce more robust and risk-sensitive capital requirements for Canadian life insurers.

As part of that work, OSFI has been conducting a fundamental review of seg fund capital requirements. “We are proceeding to act on the results of this review,” it said, reporting that it is pursuing two different paths regarding internal modeling for the capitalization of seg fund guarantee exposures.

“The first area of work is the implementation of changes to underlying calibration standards for modeling segregated fund guarantee exposures,” OSFI said, noting that it expects to issue a draft advisory in the fall of 2010 for public comment. “We expect that this will change the existing capital requirements in respect of new (rather than in-force) segregated fund business.”

The second avenue is a follow-up to the fundamental review of seg fund guarantee exposure requirements. OSFI said that in 2011 it will work on changes to the current internal models approaches for seg fund guarantee exposures.

“We are considering a range of alternatives including a more market-consistent approach and potentially credit for hedging,” it said. “Although difficult to predict how long this will take, given the complexity of the process, we expect this work stream to continue for several years, likely into 2013.”

OSFI stressed that it is premature to draw conclusions about the impact this process will have. “For example, considered as a whole, there could be increases in some lines of business and decreases in others – and increases may be offset by other changes, such as hedge recognition. In addition, the impact is likely to vary from company to company,” it said.

The regulator also said that it will be consulting with the CLHIA, and the industry, on proposed changes, and will provide ample notice prior to the implementation of new guidance.

IE