The Office of the Superintendent of Financial Institutions has published a proposed new framework for setting capital requirements in the insurance industry.

In a letter to the industry, OSFI explains that a working group comprised of the Autorité des marchés financiers, OSFI and Assuris was formed to update the current solvency framework in anticipation of the adoption of the International Financial Reporting Standards by Canadian financial institutions.

“The proposed new accounting method for insurance contracts will require a significant change in the way insurance obligations are valued and provided for in the capital requirements,” it reports. “It will also require modifications to the regulatory credit and market capital requirements.”

The working group has prepared a discussion paper which proposes a new standard approach to determine how much capital a Canadian life insurance company should be required to maintain in order to be able to meet its obligations to policy holders.

The proposed framework uses a target asset requirement approach, meaning that insurance companies would be required to hold assets equal to the best estimate of their insurance obligations plus a solvency buffer, the letter says.

The regulator notes that this discussion document is not intended to be a final statement of their position. “The methods described in the document are preliminary views,” it reports. The committee hopes to finalize the framework by June. Comments on the discussion paper are due by April 25.