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The OSFI publishes adjustments and clarifications to the Minimum Capital Test

By Laurie LaPalme, Derek Levinsky, and Jesse Collins-Swartz
November 30, 2022
  • Insurance
  • Insurance regulatory
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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:

Page 40.05

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:

Page 20.00

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.

For more information, please reach out to the authors, Laurie LaPalme, Derek Levinsky, and Jesse Collins-Swartz.

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Laurie LaPalme

About Laurie LaPalme

Laurie LaPalme leads Dentons Canada’s National Corporate and Regulatory Insurance practice and is Co-Lead of the National Insurance sector group. With more than 20 years of experience advising domestic and foreign life and general insurance companies, insurance agents and brokers, reinsurance companies on corporate and regulatory matters, transactions, corporate reorganizations, and governance issues, clients note that Laurie is “absolutely an expert and that comes across clearly in the work,” taken from a Chambers Canada client interview.

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Derek Levinsky

About Derek Levinsky

Derek Levinsky (He/Him/His) is a partner in Dentons’ Corporate group and Insurance sector practice. Based in Toronto, Derek provides legal services to a wide range of clients in the insurance market, including brokers, agents, and other actors in the insurance space.

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Jesse Collins-Swartz

About Jesse Collins-Swartz

Jesse Collins-Swartz is an associate in the Corporate group and Insurance sector practice at Dentons Canada LLP. Jesse’s work focuses on corporate and regulatory matters and commercial transactions, including M&A, joint ventures, corporate finance, and reinsurance.

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