On November 23, 2022, the Office of the Superintendent of Financial Institutions (Canada) (OSFI) released a brief publication setting out certain adjustments and clarifications (collectively, the Changes) regarding the Minimum Capital Test (MCT), a guideline published by OSFI on July 21, 2022, with an effective date of January 1, 2023. For further background on the MCT guideline published on July 21, 2022, please refer to our prior publication: The Final Milestone of IFRS 17: OSFI Issues the Final Insurance Capital Guidelines.
OSFI notes that the Changes will be incorporated into the PC4 instruction and may be incorporated into future versions of the MCT, as appropriate.
The Changes fall into the following two categories and are discussed in further detail below:
- Clarification for when an insurance contract is included for the determination of the unexpired coverage for insurance contracts issued in section 4.2.2 of the MCT; and
- A clarification on the reporting of cryptoasset exposures.
1. Unexpired coverage for insurance contracts issued
OSFI provided the following clarification and page impacted in the PC4 instruction:
Insurance contracts issued in accordance with paragraphs 25 to 28 of the IFRS 17 standard are recognized for capital purposes in the MCT 2023 Guideline, unless otherwise specified. To determine the unexpired coverage for insurance contracts issued in section 4.2.2 of the MCT 2023 Guideline, only insurance contracts that have the earliest of:
(i) the date the coverage begins, and
(ii) the date on which the first payment of the premium is due,
on or prior to the reporting date should be considered recognized. For greater clarity, this means that only insurance contracts that individually meet the recognition criteria (a) or (b) set out in paragraph 25 of IFRS 17, by the reporting date, are to be treated as insurance contracts issued for purposes of the MCT’s requirements for unexpired coverage.
2. A clarification on the reporting of cryptoasset exposures
On August 18, 2022, OSFI published an advisory on the interim capital treatment for cryptoasset exposures. In the advisory, OSFI notes that Group 1 cryptoasset exposures receive a capital treatment consistent with comparable traditional assets, including credit, market, and/or other risks. In addition, OSFI notes in the advisory that Group 2 cryptoasset exposures, including the absolute value of short positions, the full notional amount of long option positions, and the full notional amount of long forward contracts, are deducted from the capital available.
OSFI provides the following clarification and page impacted in the PC4 instruction:
Group 2 cryptoasset exposures are to be reported on the line 225 “Other (specify)” line of MCT with “Group 2 cryptoasset exposures” specified as the description.
Key next steps:
It is critical that federally regulated property and casualty insurers take note of the above changes and ensure that any internal policies and procedures regarding the MCT are amended accordingly.
Dentons Canada’s corporate and regulatory insurance group would be pleased to assist with any questions related to the above-noted changes to the MCT or any other inquiries regarding the application of insurance capital guidelines to insurers doing business in Canada.