The Office of the Superintendent of Financial Institutions has issued a draft guideline for insurance companies on setting internal capital targets.

The guideline for both life and P&C insurers was published Friday. It sets out OSFI’s expectations for federally-regulated insurance companies on setting specific capital level targets. It also explains how its assessment of capital adequacy fits within the context of OSFI’s supervisory framework.

In a letter accompanying the draft guideline, OSFI notes that “Recent volatile market conditions have put pressure on financial institutions’ capital positions, emphasizing the need for appropriate and supportable capital targets.”

“Some insurers have set internal capital targets that may not be commensurate with their institutions’ risk profiles and business circumstances,” it notes. “In such circumstances, OSFI would be concerned with the ability of an insurer to manage capital when it fails to establish and maintain an appropriate internal capital target.”

OSFI notes that its original guidance on this subject (issued in December 2003) only addressed P&C insurers, not life insurers. And it says that the wording of the original guidance may not have been clear enough, “resulting in some insurers choosing internal capital targets which were inappropriate, either too high or too low”.

The regulator is seeking comments on the draft guideline by August 31. Once it issues final guidance, insurers will have a year to comply, it notes.