Insurers granted relief on seg fund reserves

The Office of the Superintendent of Financial Institutions (OSFI) has announced revisions to its capital rules for segregated fund guarantee obligations, obligations for life insurers with approved internal models.

The changes mean that approved insurers will face less pressure to shore up their capital reserves, which have been hit hard in the past two months of market volatility.

Under current rules, seg fund guarantee (SFG) capital is based on a conditional tail expectation (CTE) score of 95 — in layman’s terms, 95% certainty — over the term of the contract, regardless of when the payment is due. OSFI has modified that level of certainty upon which the guarantee is based, depending on when payment is due.

For those that mature in one year or less, the guarantee is based on CTE(98), or 98% certainty. Seg funds that mature in between one and five years require CTE(95), while those that are due after five years require only CTE(90).

OSFI also offered guidance on how to graduate funds from CTE(90) to CTE(95) as the maturity date approaches, and crosses the five-year threshold.

Given the three different requirements for each of the three cash-flow streams, the allocation of assets between the three streams will need to be assessed by conservatively matching and maintaining sufficient reserves/liabilities and capital for all future obligations.

The new standards may be applied by approved insurers for any quarter end starting with their 2008 year end. Insurers have until March 31, 2009, to irrevocably elect whether they will follow the new standards.

The Canadian Life and Health Insurance Association (CLHIA) quickly applauded the announcement.

“We are pleased that OSFI has taken these steps to more accurately reflect the risks associated with segregated fund guarantee obligations,” said Frank Swedlove, president of CLHIA. “This helps to deal with addressing the inappropriate volatility in capital requirements that we have been experiencing recently.”

CLHIA asserts that the Canadian industry is well capitalized despite the latest market mood swings, with assets of more than $430 billion.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(10/29/08)