The Office of the Superintendent of Financial Institutions (OSFI) has published new rules aimed at giving life insurers a reprieve from falling stock markets.

OSFI, which oversees federally regulated banks and insurance companies, changed the rules Tuesday that dictate how much money insurers must put aside for their segregated funds businesses.

The Minimum Continuing Capital and Surplus Requirements (MCCSR) establishes the minimum capital rules for segregated fund guarantee obligations for life insurers that have approval to use internal models.

In a letter to the industry, the regulator said it had planned to update the rules by 2011, but that market developments highlighted the need to move quickly.

“These revisions seek to reduce volatility in capital requirements, to ensure that appropriate capital is held in respect of longer term payment obligations and shorter term payment obligations and to increase capital as payment dates become more proximate,” OSFI said.

Falling stock markets have forced insurers to sock away more capital now for payments they’ll have to make to customers years down the road, putting added pressure on firms. The revised rules give companies more time to put aside funds for far-off obligations.

The capital requirements for segregated funds are now less onerous if the payments are more than five years away, which should reduce the capital requirements for all of the insurers in the fourth quarter of this year.

“Provided an internal models-based SFG insurer elects to adopt these revisions, we
intend that these changes would have effect for its SFG MCCSR calculations required after
October 1, 2008,” OSFI said.

In response to OSFI’s move, Frank Swedlove, president of the Canadian Life and Health Insurance Association (CLHIA), said, “We are pleased that OSFI has taken these steps to more accurately reflect the risks associated with segregated fund guarantee obligations. This helps to deal with addressing the inappropriate volatility in capital requirements that we have been experiencing recently.”

The CLHIA added that the Canadian life and health insurance industry remains strong and well capitalized despite the current uncertainty in the international financial markets.

IE