Office of the Superintendent of Financial Institutions

Office of the Superintendent of Financial Institutions

December 24, 2008 13:43 ET

OSFI Issues Revised MCCSR Guideline and Advisories

OTTAWA, ONTARIO--(Marketwire - Dec. 24, 2008) - The Office of the Superintendent of Financial Institutions (OSFI) is releasing a revised Minimum Continuing Capital and Surplus Requirements (MCCSR) Guideline and four advisories.

"OSFI reviews its regulatory capital framework on a regular basis to protect depositors and policyholders by ensuring financial institutions maintain adequate capital levels while reflecting the risks and market conditions that financial institutions face in a competitive global marketplace," says Robert Hanna, Assistant Superintendent, Regulation Sector.

To help achieve this balance, revisions are being made to the MCCSR Guideline, which sets the capital rules for the federally regulated life insurance industry. In addition, three new advisories that focus on life insurance capital are being issued.

MCCSR:

The revisions to the MCCSR Guideline aim to replace and refine outdated provisions and to improve the accuracy of the capital adequacy calculation. OSFI and the industry had agreed to make changes to the MCCSR on a three year cycle. With a few exceptions, these changes will be effective in 2009. Improvements will be made in the following areas:

- Asset default risk, mortality and morbidity risk, interest margin pricing risk and foreign exchange risk.

- Revised methodologies for calculating available capital. The key change recognizes that unrealized gains and losses on available for sale (AFS) debt securities held by life insurance companies do not reflect the capital value of these assets to a life insurer as, in most cases, these assets will be held for the long term (e.g. to maturity). As such, OSFI is updating its life insurance company capital rules so that, when fully implemented, they will correspond to the capital treatment for banks holding similar securities (i.e. unrealized gains and losses on AFS debt securities do not change capital adequacy).

Segregated fund changes include:

- Implementing the October 28, 2008 guidance to life insurance companies using internal models to calculate the capital required for segregated fund guarantees. This change results in a level of capital being held which better reflects when payments by insurers are likely to come due and, as a result of a smoothing mechanism, reduces the impact of market movements on capital requirements for payments expected to be made beyond five years.

- Introducing a similar approach for companies that calculate the capital required for segregated fund guarantees using prescribed factors. This will achieve the same objective of smoothing capital volatility and holding appropriate capital based on when payments are due.

- Introducing a new segregated fund guarantee hedging policy to allow greater credit for effective hedges of segregated fund guarantee risk.

A fourth advisory is also being issued today, allowing all Federally Regulated Entities (FREs) to calculate the capital impact of certain mark-to-market accounting changes on an after-tax basis to reflect proposed tax legislation.

Additional details may be found in the cover letters describing these guidelines and advisories and in the guidance itself. Please see the following links at the OSFI Web site:

- MCCSR - Guideline, revised December 2008 (into effect at the beginning of the first fiscal quarter of 2009):
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/guidelines/MCCSR09_e.pdf

Guideline Impact Analysis Statement:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/guidelines/MCCSR_GIAS_09_e.pdf

- Accompanying Letter:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/guidelines/MCCSR_let_09_e.pdf

- Supplementary Information for Life Insurance Companies that Determine Segregated Fund Guarantee Capital Requirements Using an Approved Model:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/advisories/sp_info_e.pdf

- Accompanying Letter:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/advisories/sp_info_let_e.pdf

- Alternative Method for Life Insurance Companies that Determine the Segregated Fund Guarantee Capital Requirement Using Prescribed Factors:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/advisories/alt_seg_e.pdf

- Accompanying Letter:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/advisories/alt_seg_let_e.pdf

- Recognition of Hedge Contracts in the Determination of the Segregated Fund Guarantee Capital Requirement for Life Insurance Companies:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/advisories/hdg_seg_e.pdf

- Accompanying Letter:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/advisories/hdg_seg_let_e.pdf

- Temporary Adjustments to Regulatory Financial Statements to Take into Account Proposed Tax Changes on Fair Value Accounting For Financial Instruments:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/advisories/tmp_taxch_e.pdf

Created in 1987 by an Act of Parliament, the Office of the Superintendent of Financial Institutions (OSFI) is the primary regulator and supervisor of federally registered deposit-taking institutions, insurance companies, and federally registered private pension plans. OSFI's mandate is to advance and administer a regulatory framework that contributes to public confidence in a strong, stable and competitive financial system.

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