Life Insurance Capital Adequacy Test - Chapter 12 Life Insurers Operating in Canada on a Branch Basis

The Life Insurance Margin Adequacy Test (LIMAT) set out in this guideline, along with Guideline A-4: Regulatory Capital and Internal Capital Targets, provide the framework within which the Superintendent assesses whether life insurers operating in Canada on a branch basis (branches) maintain an adequate margin pursuant to subsection 608(1). Under subsection 608(1) of the ICA, a foreign insurer is required to maintain in Canada an adequate margin of assets over liabilities in respect of its insurance business in Canada.

In addition, foreign insurers are required to maintain assets in Canada, with respect to their life insurance business in Canada, that are sufficient to cover:

  1. reserves for actuarial and other policy liabilities;
  2. unpaid claims; and
  3. other liabilities and amounts related to the carrying on of their life insurance business in Canada.

These requirements are prescribed in accordance with the Assets (Foreign Companies) Regulations.

12.1. LIMAT Ratios

The LIMAT Total Ratio measures the adequacy of assets available to meet the margin requirements, as determined in accordance with this guideline. The Total Ratio focuses on policyholder and creditor protection. The formula used to calculate the Total Ratio is:

Math formula 

The LIMAT Core Ratio makes an adjustment to the Total Ratio calculation by excluding Other Admitted Assets, and focuses on financial strength. The formula used to calculate the Core Ratio is:

Math formula 

12.2. Available Margin

The Available Margin is the difference between Assets Available and Assets Required.

12.2.1. Assets Available

Assets Available consists of:

  1. Vested Assets;
  2. investment income due and accrued on Vested Assets; and
  3. Other Admitted Assets, as specified in section 12.2.3;


  1. Deductions/Adjustments per section 12.2.4

12.2.2. Vested Assets

Vested Assets are to be valued in accordance with the Insurance Companies Act.

12.2.3 Other Admitted Assets

The amount of Other Admitted Assets included in Assets Available is the lesser of:

A. The sum of:

  1. balance sheet values of amounts due from federally or provincially regulated insurers that are not in arrears, are unencumbered, are under the control of the Chief Agent, and that have not been deducted from Assets Required;
  2. all amounts included in Assets Required on account of negative reserves;
  3. 75% of the cash surrender value deficiencies calculated on a grouped aggregate basis (q.v. section;
  4. the adjustment amount to amortize the impact in the current period on Assets Required on account of each net defined benefit pension plan recognized as a liability on the branch's balance sheet, net of any associated deferred tax assets; and
  5. balance sheet values of right of use assets associated with owner-occupied leased properties, as recognised on the branch's balance sheet in accordance with relevant accounting standards.


B. 50% of the difference between Required Margin and Surplus Allowance.

Assets under the control of the Chief Agent may be included in Other Admitted Assets only if the following conditions are met:

  1. records and record keeping facilities in Canada are satisfactory to OSFIFootnote 1;
  2. the branch has received an unqualified auditor's opinion; and
  3. the Superintendent receives an undertaking from the head office of the insurer and the Chief Agent specifying that the assets referred to in section i) above that are under the control of the Chief Agent will be maintained in Canada.

12.2.4. Deductions/adjustments

The following amounts are deducted from Assets Available:

  1. aggregate positive policy liabilities ceded under unregistered reinsurance, less the amount of collateral and letters of credit applied toward these liabilities (q.v. Chapter 10);
  2. accumulated net after tax revaluation losses in excess of gains on owner-occupied properties vested in trust; and
  3. net after tax revaluation gains on owner-occupied properties vested in trust.

12.2.5. Assets Required

Assets Required in respect of a branch's insurance business in Canada consists of:

  1. insurance contract liabilities and other policy liabilitiesFootnote 2, net of all reinsurance ceded;
  2. provisions for policyholder dividends, experience rating refunds, and discretionary participation featuresFootnote 3;
  3. outstanding claims and adjustment expenses;
  4. policyholder amounts on deposit;
  5. accounts payable;
  6. income taxes payable;
  7. mortgage loans and other real estate encumbrances;
  8. deferred income tax liabilities;
  9. each net defined benefit pension plan recognized as a liability on the branch's balance sheet net of any associated deferred tax asset that would be extinguished if the liability were otherwise derecognized under relevant accounting standards;
  10. any and all other liabilities that pertain to Canadian creditors and that are associated with the operations of the insurer in CanadaFootnote 4;
  11. adjusted negative reserves calculated policy by policy (q.v. section and negative reserves ceded to unregistered reinsurers (qq.v. sections 10.3.2 and 10.3.4);
  12. cash surrender value deficiencies calculated on a grouped aggregate basis (q.v. section;
  13. loans secured by policies in Canada;
  14. agents' debit balances and outstanding premiums; and
  15. amounts due from federally regulated insurers and registered reinsurers (as defined in section 10.1.1) that can be legally netted against the insurance contract liabilities of the branch, as outlined below.

In order to deduct an amount due from a registered reinsurer from Assets Required, a branch should, at a minimum, meet the following conditions:

  1. The amount due is from an insurer to which the branch has a liability of an equal or greater amount. (Amounts due in excess of the liability are not deducted from Assets Required; they are included in Other Admitted Assets, below).
  2. The branch has executed a written, bilateral netting contract or agreement with the insurer to which the liability is owed that creates a single legal obligation. The result of such an arrangement must be that the branch has only one obligation for payment or one claim to receive funds based on the net sum of the liabilities and amounts due in the event the counterparty to the agreement failed to perform due to default, bankruptcy, liquidation or similar circumstances.
  3. The netting arrangement specifies that only the liabilities to the counterparty arising out of the Canadian operations of the foreign insurer may be taken into consideration in determining the net amount owed. In particular, the counterparty must not be able to net amounts due to the branch against any liabilities of the home office or affiliates of the branch that are not liabilities arising out of the Canadian operations of the foreign insurer.
  4. The branch should have written and reasoned legal opinions confirming that, in the event of any legal challenge, the relevant courts or administrative authorities will find the amount owed under the netting agreement to be the net amount under the laws of all relevant jurisdictions. In reaching this conclusion, legal opinions must address the validity and enforceability of the entire netting agreement under its terms.
    1. The laws of "all relevant jurisdictions" are: a) the law of the jurisdiction where the counterparty is incorporated and, if the foreign branch of a counterparty is involved, the laws of the jurisdiction in which the branch is located; b) the law governing the individual insurance transaction; and c) the law governing any contracts or agreements required to effect the netting arrangement.
    2. The legal opinions must be generally recognized as such by the legal community in the firm's home country or by a memorandum of law that addresses all relevant issues in a reasoned manner.
  5. The branch should have procedures in place to update legal opinions as necessary to ensure continuing enforceability of the netting arrangement in light of possible changes in relevant law.
  6. The netting contract/agreements terms and conditions, and the quality and content of the legal opinions, must meet the conditions of this guideline, and must be submitted to OSFI for review prior to the branch deducting the amount due from Assets Required.

12.3 Surplus Allowance and Eligible Deposits

The amount of the Surplus Allowance included in the calculation of the Total Ratio is based on PfADs that are calculated under CALM or any other method prescribed under the Standards of Practice of the Canadian Institute of Actuaries that is used to calculate insurance contract liabilities in respect of insurance business in CanadaFootnote 5. The specific PfADs included in the Surplus Allowance are outlined in section 1.1.3.

Eligible Deposits, as described in section 1.1.4, may be recognized in the calculation of the Total Ratio and Core Ratio.

12.4. Required Margin

A branch's Required Margin is calculated in the same way as the Base Solvency Buffer described in section 1.1.5, and applies to:

  1. Vested Assets;
  2. liabilities in respect of insurance business in Canada; and
  3. balance sheet values of assets under the control of the Chief Agent, if these are taken into consideration in determining Other Admitted Assets above.

The Required Margin forms part of the vesting requirements for foreign insurers.


Footnote 1

Refer to Guideline E-4 Foreign Entities Operating in Canada on a Branch Basis.

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Footnote 2

For LIMAT purposes, policy liabilities should include future income tax cash flows under valuation assumptions as required by the Canadian Institute of Actuaries Standards, prior to any accounting adjustment for balance sheet presentation.

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Footnote 3

These amounts must be included in assets required irrespective of whether they are classified as liabilities or equity for financial reporting purposes.

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Footnote 4

Includes liabilities associated with leased properties, plant and equipment recognised as right of use assets on the branch's balance sheet in accordance with relevant accounting standards and OSFI instructions.

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Footnote 5

If approximations are permitted by the CIA Standards of Practice and used to calculate the PfADs those approximations should continue to be used for LICAT purposes.

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