The Office of the Superintendent of Financial Institutions has issued a paper outlining a vision for new principles-based solvency financial requirements for Canadian life insurers.

These capital requirements are intended to encourage the use of improved risk-based business decisions and better reflect each company’s risk profile and risk management practices, the paper says. And, it notes that this principles-based solvency framework is not dependent on the current Canadian financial reporting regime and will apply regardless of the ultimate direction of Canadian accounting standards.

The paper, prepared by the Minimum Continuing Capital and Surplus Requirements Advisory Committee, calls for regulatory asset requirements to be calculated on two bases — a Target Asset Requirement (TAR) and at a minimum level (Minimum Asset Requirement or MAR). “All insurers would use the Standard Approach, a factor or formula based approach, to calculate the MAR. The most sophisticated method of calculating TAR would be the Advanced Approach which uses models integrated with the insurer’s risk management system,” explains OSFI in a letter. “The Advanced Approach will be made available only to those insurers that can demonstrate that they have robust controls in place and that they meet minimum standards set by the regulators.”

Firm target dates for implementation of the new regime have not been set out because, OSFI says, there is much work to be done to flesh out the new framework, and to satisfy OSFI and the Autorité des marchés financiers that the advanced approaches will provide a prudent approach to capital adequacy.

In May 2006, OSFI’s MCCSR Advisory Committee published its Key Principles for the Future Direction of the Canadian Regulatory Capital Framework on Insurance. The committee is co-chaired by Simon Curtis, chair of the Canadian Institute of Actuaries’ Risk and Capital Committee, and Bernard Dupont, director, Capital Measurement at OSFI. Its members are senior representatives from the Canadian Life and Health Insurance Association, the CIA, Assuris, the Autorité des marchés financiers, and OSFI, as well as large and small insurers and reinsurers.

It proposes that future solvency requirements should: take into account all credit, market, underwriting and operational risks; recognize all of the cash flows from all of the assets and liabilities; value the cash flows consistently and realistically; reflect the risk mitigation strategies used by the insurer; consider the dependencies within risks and between risks and recognize when appropriate and measurable; ensure that insurer assets are sufficient, with a high degree of confidence, to withstand adversity emerging over a defined regulatory control time horizon; and, ensure that there are sufficient assets at the end of the defined time horizon to provide for the transfer of the remaining obligations to another insurer or the run-off of the remaining obligations.

Comments on the approach are due by July 13.