Office of the Superintendent of Financial Institutions
COVID-19 Measures – FAQs for Federally Regulated InsurersFootnote 1
OSFI has prepared the following questions and answers for federally regulated insurers about measures it has taken to address issues stemming from COVID-19.
Have a question that is not addressed in these FAQs? Please send your question to COVID-19FAQS@osfi-bsif.gc.ca.
No. Insurers should do their own due diligence and follow their risk management frameworks in determining whether to approve deferrals on a case-by-case basis.
Payment deferrals of up to six months granted before August 31, and payment deferrals of up to three months granted after August 30 and on or before September 30 should not contribute to the determination of a mortgage loan as being impaired or restructured. Under normal circumstances, non-performing, or past-due loans are subject to higher capital requirements than performing loans. By allowing insurers to treat loans as performing, capital requirements are not subject to increase due to payment deferrals. This reflects the flexibility being offered by insurers to assist borrowers that are temporarily unable to service their loan during this time. After the payment deferral period ends, (up to a maximum of three or six months, as applicable according to the August 31 announcement), the rules for designating a mortgage loan as impaired or restructured will be applied relative to the modified schedule of payments.
If the deferral was granted before August 31, the special capital treatment outlined in the April 9 letter will apply for up to six calendar months from the effective date of the deferral. If, however, the deferral was granted after August 30 but on or before September 30, it will apply for up to three calendar months from the approval date of the deferral, as set out in the August 31 announcement.
Institutions may choose to extend longer deferrals in accordance with their internal policies; however, those loans will not receive the special capital treatment outlined in the April 9 letter and August 31 announcement beyond three or six calendar months, as applicable.
For purposes of determining when a loan is past due, the insurer can take into account reduced payments as well as any changes to the term of the loan, including modified payment schedules.
Institutions are responsible for documenting their own controls. OSFI will provide clarity on any additional reporting requirements to insurers but does not plan to standardize criteria for loan deferrals.
OSFI expects institutions to continue applying sound underwriting in all circumstances (including the likelihood of borrowers to repay when the payment deferral ends).
Payment deferrals may refer to deferrals of the full interest and principal payments, or to deferrals of a portion of the payment (e.g. principal). The extent of the deferrals is at the discretion of the insurer.
The treatment outlined in OSFI's April 9 communication applies to all loans, irrespective of the jurisdiction in which the loan originated.
For details on what are considered impaired and restructured obligations, refer to section 3.1.10 of the LICAT Guideline.
Any accounting impacts should flow through available capital through the normal channels. The measures introduced for loan payment deferrals only impact the calculation of the base solvency buffer in the LICAT. There is no change to the available capital calculation.
Modifications granted to a borrower as a result of COVID-19 during the deferral period will not cause an obligation to be classified as restructured under the capital test.
After the deferral period, the determination of whether an obligation has been restructured should be made relative to the modified schedule of payments. At the end of the deferral period, obligations that were not classified as impaired or restructured in the capital test before the start of the deferral period should be classified as performing. Any impairment, default or restructuring based on the modified schedule of payments that occurs after the deferral period will cause the obligation to be classified as impaired/restructured in the capital test.
Obligations that were classified as impaired or restructured in the capital test before the start of the payment deferral period should continue to be classified as such during the period. For the purpose of determining when a borrower has met the terms of a restructured obligation for one year so that the obligation may be removed from the restructured category, the date of restructuring that should be used is the latest date of restructuring that occurred before the start of the deferral period. Any restructuring that occurs during the deferral period will not restart the one-year period during which the borrower is required to meet the terms of the restructured obligation.
For uninsured/conventional mortgages, the capital treatment described in the April 9 letter applies. Insurers do not need to recalculate loan-to-value (LTV) ratios when loan deferrals are granted. All residential mortgages issued at origination with a LTV ratio below 80% continue to be eligible to be classified as qualifying residential mortgages. This treatment also applies to mortgage renewals; however, it will be necessary to recalculate the LTV ratio if a mortgage is refinanced.
The actual payment deferral granted by insurers to their borrowers can be shorter or longer.
Yes, deferrals, if related to COVID-19, may be extended and maintain the capital treatment in the April 9 letter as long as the total duration of the deferral is no longer than six calendar months for deferrals originally granted before August 31. For loans that have not previously been granted a deferral and are granted a deferral after August 30 and on or before September 30 (i.e. new deferrals), the capital treatment will end no later than December 31.
Yes, the capital treatment of loans and leases outlined in the April 9th letter would apply equivalently to deferrals granted by insurers in relation to equipment leases.
The cash flows used to determine the interest rate requirement in the capital tests should be those under the modified schedule of payments.
Yes. For any payment deferral granted after August 30 and on or before September 30, the special capital treatment outlined in OSFI’s April 9 letter can be applied for a maximum of three calendar months starting from the approval date that the deferral is granted by the insurer. For example, a payment deferral that is approved on September 1 would be eligible for the special capital treatment up to December 1. The actual payment deferral granted by insurers can be shorter or longer than three calendar months.
For the purposes of the August 31 announcement, a deferral granted after August 30 and on or before September 30 refers to a deferral on a loan that has not previously been granted a deferral. Deferrals initially granted before August 31 may qualify for the special capital treatment for a period spanning up to six calendar months from the effective date of the deferral, including extensions of the original deferral.
Not necessarily. For loans where deferrals were first granted before August 31, the six calendar month maximum period could extend into 2021. However, for any deferrals granted on new loans after August 30 and on or before September 30, the special capital treatment will end on or before December 31.
Such a payment deferral should be treated consistently with a payment deferral granted between April 9 and August 30, and thus would qualify for the special capital treatment for a period of six calendar months starting from the effective date of the loan payment deferral granted by the insurer.
Institutions are responsible for documenting their own controls. OSFI will provide clarity on additional reporting requirements, if any, to insurers but does not plan to standardize criteria for premium payment deferrals.
Premium deferrals granted due to COVID-19 should not attract higher credit risk factors (i.e. capital requirements are not required to rise due to approved premium deferrals). Given this, premiums not yet due that are deferred as a result of COVID-19 will continue to be considered "premiums not yet due" and therefore will not be subject to the "outstanding premium < 60 days" capital charge that would have applied under the original terms and conditions. If some of the premiums receivable were in the "outstanding < 60 days category" prior to the deferral, and the new terms and conditions are respected, these will not fall into the "outstanding => 60 days" category following the deferral.
The actual premium deferral granted by insurers to their policyholders can be shorter or longer.
Yes, deferrals, if related to COVID-19, may be extended and maintain the capital treatment in the April 9 letter as long as the total duration of the deferral is no longer than six calendar months for deferrals originally granted before August 31. For policies that have not previously been granted a deferral and are granted a deferral after August 30 and on or before September 30 (i.e. new deferrals), the capital treatment will end no later than December 31.
Yes. For any premium deferral granted after August 30 and on or before September 30, the special capital treatment outlined in OSFI’s April 9 letter can be applied for a maximum of three calendar months starting from the approval date that the deferral is granted by the insurer. For example, a premium deferral that is approved on September 1 would be eligible for the special capital treatment up to December 1. The actual premium deferral granted by insurers can be shorter or longer than three calendar months.
For the purposes of the August 31 announcement, a deferral granted after August 30 and on or before September 30 refers to a deferral on a policy that has not previously been granted a deferral. Deferrals initially granted before August 31 may qualify for the special capital treatment for a period spanning up to six calendar months from the effective date of the deferral, including extensions of the original deferral.
Not necessarily. For policies where deferrals were first granted before August 31, the six calendar month maximum period could extend into 2021. However, for any new deferrals granted on policies after August 30 and on or before September 30, the special capital treatment will end on or before December 31, 2020.
Such a premium deferral should be treated consistently with a premium deferral granted between April 9 and August 30, and thus would qualify for the special capital treatment for a period of six calendar months starting from the effective date of the premium deferral granted by the insurer.
Declines in FRIs’ capital ratios are understandable in the current circumstances, and consistent with OSFI’s guideline A-4 Regulatory Capital and Internal Capital Targets and the functioning of a well-capitalized financial institution. Guideline A-4 states: “OSFI understands that an insurer’s Capital Resources levels may fall below its Internal Targets on unusual and infrequent occasions”.
OSFI, in carrying out its mandate and as set out in guideline E-19 Own Risk and Solvency Assessment (ORSA), expects FRIs to continue to manage their capital in consideration of their ORSA. FRIs should, among other things:
In this FAQ, the concept "capital" includes the equivalent concepts of "margin" and "Net Assets Available" applicable to foreign companies' and societies' branch operations in Canada.
OSFI expectations with respect to the risks, factors and other considerations for setting Internal Capital Targets are contained in guideline E-19 Own Risk and Solvency Assessment. OSFI expects insurers to set their Internal Capital Targets at levels that support their risk profile and risk appetite. This includes consideration of all reasonably foreseeable and relevant material risks, and of their ability to continue operations in the normal course, under varying degrees of stress and under a wind-up scenario. Other considerations include external or third party capital expectations (e.g.: OSFI’s expectation that Internal Capital Targets should be set above the supervisory targets), potential changes in risks, business strategies and operating environment (e.g.: economic and market conditions, anticipated growth, acquisitions and divestments), potential group needs, and limitations on access to capital and/or fungibility/transfer of capital.
Normally, insurers assess the adequacy of their Internal Capital Targets at least annually. Current COVID-19 circumstances, along with the current and forecasted business environments, may cause insurers to undertake such a review and update certain assumptions or elements supporting their own risk and solvency assessment.
Per OSFI guideline A-4 Regulatory Capital and Internal Capital Targets, OSFI expects that insurers will operate at Capital Resources levels above the Internal Capital Targets. OSFI understands that an insurer's Capital Resources levels may fall below its Internal Capital Targets on unusual and infrequent occasions. If this happens, or is anticipated to happen within two years, the insurer should promptly inform OSFI and provide plans on how it expects to manage the risks and/or restore its Capital Resources levels to its Internal Capital Targets within a relatively short period of time.
The period of time that may be reasonable for a FRI to restore its Capital Resources depends on several factors, including the risk profile of the FRI, the nature of the stress and the circumstances prevalent at the time of the stress, and its expected duration. When a FRI contacts its Lead Supervisor to give notice that its capital ratio may fall close to, or below, its Internal Capital Targets, OSFI considers all these factors, among others, in assessing a FRI’s plans to restore its Capital Resources. OSFI makes this assessment on a case-by-case basis.
Where an insurer's Capital Resources levels fall below its Internal Capital Targets, OSFI's Guideline A-4 indicates that an insurer should provide OSFI with a plan on how it expects to manage its risks and/ or restore its Capital Resources levels to its Internal Capital Targets within a relatively short period of time. When assessing that plan, OSFI does not apply a specific timeframe to measure whether an insurer meets the expectation to restore Capital Resources levels within a relatively short period of time. Instead, OSFI considers the specific circumstances of the insurer and recognizes that the restoration of Capital Resources levels may take longer for some insurers when operating in a difficult environment. In all cases, the results of OSFI's on-going insurer risk profile assessments will drive the nature and extent of any OSFI interventions.
Earlier this year, OSFI communicated that it identified an issue in the LICAT that could cause some unwarranted volatility in interest rate risk requirements for participating business. Changes were proposed via the public consultation of LICAT 2020. The proposed changes and public consultation of LICAT 2020 are on hold because of the current situation. The smoothing is a stopgap measure to reduce any unwarranted volatility in interest rate risk requirements for participating insurance.
The interest rate risk smoothing method for par blocks outlined in OSFI's April 9 communication should be implemented as follows:
For each separate par block within an insurer's LICAT calculation, calculate the simple average, over the current quarter and the previous five quarters (i.e. the six-quarter rolling average), of the quantities:
for the block. These averages will be referred to as
i par npt
Use the averaged quantity
in place of IRRi par in the calculation of the standalone requirement Kpar i for the block in LICAT section 11.3.
Within the calculation of the par credit CPi for the block in LICAT section 9.1.2:
Use all three of the averaged quantities in place of the current quarter amounts in the calculations of the intermediate components Ki, Ki reduced interest, and Ki floor.
Use the averaged amounts
in place of IRRi par and Ci adverse in the remaining components of CPi. The amount used for Ci initial should be the amount for the current quarter.
All other components of the LICAT interest rate risk requirement calculation, including the determination of the most adverse scenario for a geographic region, and the calculation of the requirements for non-participating business, should follow the methodology specified in LICAT without modification.
For the Q1 2020 LICAT filing, an insurer may elect to use the smoothing methodology, or to follow the existing methodology specified in LICAT. Regardless of which methodology an insurer chooses, it should apply the same methodology to all of its participating blocks (i.e. it cannot elect to apply smoothing to some blocks and the current methodology to others).
For the Q2 2020 LICAT filing and all subsequent filings, insurers should use the smoothing methodology specified in OSFI's April 9 communication for all par blocks.
The measure, which smooths interest rate risk requirements for participating business, will be in place until at least December 31, 2023.
As OSFI communicated in its letter accompanying the public consultation of the LICAT 2020 guideline, due to methodology in the LICAT there can be some unwarranted/heighted volatility in these requirements.
As the measure is sufficient in addressing unwarranted volatility in the test and considering feedback from stakeholders, OSFI has decided to retain it until at least December 31, 2023.
The smoothing measure incorporates recent experience. The measure was introduced to reduce unwarranted volatility, rather than to achieve specific/target LICAT ratios. The quantitative impact of the smoothing measure will depend on an insurer's specific circumstances.
For a new par block, there is no smoothing for Q1. For Q2, the averaged amounts should be based on ½ of Q1 and ½ of Q2. At Q3 the averaged amounts should consist of 1/3 each of Q1, Q2, and Q3. This continues until there are 6 quarters worth of data.
Any par block that is divested after Q1 2020 should be excluded completely from the capital calculation, and should not have a requirement reported for it.
For the Quarterly forms, the final required capital (after the smoothing is applied by participating block) should be reported on page 50.000 for par required capital and 90.000 for par credit, for each geographic region. On page 110.000, the smoothed interest rate requirements should be used to calculate diversification credit for par.
For the Annual forms, the smoothed required capital amounts for par should be reported on page 50.100 while the current quarter information (unsmoothed amounts) should be reflected elsewhere on that page.
If an entire par block is ceded to a reinsurer, the cedant should treat the transaction as a divesture, and the reinsurer should treat this par block as a new block. Please refer to the previous FAQ for more details.
If a portion of a par block is ceded to a reinsurer, the cedant should reflect the change in the components of the smoothing calculation, as if the reinsurance arrangement has been in place for the prior five quarters. If no portion of the block has previously been reinsured, the reinsurer should treat the ceded portion as a new block and refer to the previous FAQ for more details.
The cedant should reflect the changes in the components for prior quarters of the smoothing calculation by reducing each of the components IRRi par, IRRi par npt, Ci adverse by 60% for each of the previous five quarters in the smoothing calculation.
Most insurance companies will only implement IFRS 9 at the same time as IFRS 17. For those insurance companies that have adopted IFRS 9 (e.g. subsidiary of a federally
regulated deposit taking institution (DTI) such as a bank), the IFRS 9-related guidance provided by OSFI applies.
The actions included in OSFI's announcements to date include all that are being introduced at this time. OSFI will issue further guidance if/when warranted.
On July 13th, OSFI released a statement on restarting policy development work. On August 7th, OSFI announced details on resuming consultations for IFRS 17. More details will be available in the coming months on how OSFI will be resuming other policy work.
OSFI has strong capital frameworks in place and it is not uncommon for OSFI to revise or update its frameworks.
The proposed changes in LICAT 2020 are not indicative of concerns with the capitalization of participating business in Canada. In fact, OSFI is comfortable putting the consultation on hold because the starting point is a robust framework.
With respect to the treatment of negative DSRs (or other similar experience levelling mechanisms) in the draft LICAT 2020 guideline, OSFI was clarifying an existing policy/ expectation. Therefore, insurers should take this into account in their treatment of any negative DSRs (or other similar dividend stabilization reserves) for regulatory capital purposes. As with any aspect of the LICAT guideline, insurers or other stakeholders with questions on application should contact OSFI.
Policyholders and creditors can be confident that OSFI is in regular contact with all insurers and have access to all the information OSFI needs to provide effective supervision.
OSFI specified in its March 13 announcement that banks and insurers should not use this measure to increase dividends to shareholders or to undertake share buybacks.
Institutions can continue to pay regular dividends but may not increase them. To clarify, dividend increases approved before OSFI's announcement on March 13, 2020 may proceed. OSFI's announcement applies only to new dividend increases post March 13, 2020. Institutions may also declare special, or irregular, dividends on a case-by-case basis as set out in OSFI’s December 14, 2020 announcement.
Institutions must immediately halt all purchases or buybacks of common shares, including buybacks previously approved by OSFI.
Institutions may continue to undertake purchases or redemptions of capital instruments other than common shares subject to the prior approval of the Superintendent and any other requirements set out in OSFI's capital guidelines. This includes non-qualifying capital instruments.
On March 13, OSFI instructed all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being. Institutions can continue to pay regular dividends but may not increase them. To clarify, already approved increases to dividends that occurred before OSFI's March 13 announcement may proceed, but no new dividend increases can be made post-March 13. OSFI will continue to monitor market conditions and the related impacts on FRFIs' financial condition. Additional measures will be considered as appropriate and necessary.
OSFI continues to remain closely engaged with institutions in regard to their capital management. OSFI continues to monitor economic conditions and impacts to FRFIs and consider additional measures as appropriate.
An increase in dividends is defined as an increase in the total dollar amount of dividends paid after March 13, 2020 compared to the last approved regularly scheduled dividend (be it quarterly or less frequent) which occurred prior to March 13.
OSFI's expectation regarding the halt on dividend increases applies to all FRFIs, except for those that are subsidiaries of other FRFIs. Notwithstanding, OSFI may raise concerns with a dividend increase by a FRFI that is a subsidiary of another FRFI after considering various factors including the impact on the FRFI subsidiary's capital and liquidity ratios.
A regularly scheduled dividend is generally defined as a cash payment by a federally regulated financial institution (FRFI) to its shareholders at specified times of the year. To be considered regularly scheduled, the FRFI must show a consistent dividend payment pattern. Special, or irregular, dividends do not follow a consistent dividend pattern and may be permitted on a case-by-case basis as described in OSFI’s December 14, 2020 announcement.
The limitation on dividend increases targets regular cash dividends. Non-cash dividends such as stock dividends are not included in the limitation where they have the effect of maintaining or improving the total dollar value of the financial institution's common equity.
Special, or irregular, dividends may be permitted on a case-by-case basis subject to the criteria set out in OSFI’s December 14, 2020 announcement.
A FRFI would need to adjust its dividend per share amount after a stock split so as not to increase the total amount of dividends paid compared to the last approved regularly scheduled dividend prior to March 13.
A FRFI may increase its dividend per share amount following a reverse stock split so long as it does not result in an increase to the total dollar amount of dividends paid compared to the last approved regularly scheduled dividend prior to March 13.
A FRFI can maintain the same dividend per share amount so long as the increase in the total dollar amount of dividends paid is less than or equal to the total dollar increase in common share capital.
A FRFI can continue to use its dividend payout ratio methodology, however, the total dollar amount of regular dividends will be limited to the total dollar amount of the last approved regularly scheduled dividends prior to March 13, 2020.
No; dividends paid to participating policyholders are governed by the financial institution's policy on participating policyholder dividends. Payment of dividends under those policies forms part of the contractual payments to policyholders.
An increase in the total dollar amount of a preferred share dividend, compared with the last approved regularly scheduled dividend prior to March 13, 2020, that is caused by a scheduled reset of the dividend rate after March 13, 2020, as specified in the contractual terms of the capital instrument and not at the issuer's discretion, would be exempt from OSFI's expectations regarding dividend increases as set out in the March 13, 2020 announcement. Dividends or coupons on common shares, preferred shares, and other Additional Tier 1 capital instruments otherwise continue to be subject to the expectations on dividend increases set out in the March 13, 2020 announcement.
Yes, however, federally-regulated financial institutions may be permitted to declare special, or irregular, dividends on a case-by-case basis subject to certain criteria as described in OSFI’s December 14, 2020 announcement.
OSFI has concluded that there may be exceptional circumstances where a non-recurring payment of special, or irregular, dividends may be acceptable. In these situations, the institutions must have little exposure to pandemic related risks. The resilience of the institution’s capital and liquidity to severe but plausible scenarios must continue to be strong after the special dividend payment and factoring in the impacts of any COVID-19 regulatory measures and risk exposures.
OSFI will assess special, or irregular dividends, on a case-by-case basis. In doing so, OSFI will balance its obligations to protect depositors, creditors and policyholders while allowing institutions to compete effectively and take reasonable risks. OSFI still expects that institutions will not increase regular dividends, undertake common share buybacks or raise executive compensation. FRFIs should not use special, or irregular dividends to circumvent these restrictions. As such, strictly returning capital to a broad investor base would not be considered an exceptional circumstance, unless the special dividend would be required to preserve the institution’s tax status, pursuant to the Income Act Tax Act, as in the case of a Mortgage Investment Corporation.
Yes, the delay of the last two phases of the initial margin requirements under Guideline E-22 is applicable to all covered FRFIs, including insurance companies. A revised version of Guideline E-22 has been posted on OSFI's website.
The extension will allow FRIs to redeploy resources currently preparing for the next phase of the initial margin requirements to respond to the immediate impact of COVID-19. In addition, given the global nature of the derivatives market and the agreement by members of the Basel Committee on Banking Supervision and the International Organization of Securities Commissions to extend the deadline for the final two phases, OSFI believes that extending the deadline will allow for a smoother and coordinated implementation of the initial margin requirements around the world.
Employee compensation was referring to the total compensation packages for senior management, where significant portions are often tied to performance bonuses. This expectation was not intended to be applied to the entire institution.
OSFI will rely on each institution to determine what the most appropriate definition is for their own institution. However, OSFI would refer Canadian incorporated institutions to the definition of Senior Management included in the OSFI Corporate Governance Guideline for further clarifications.
Includes life, property & casualty and mortgage insurers; collectively referred to as FRIs or insurers.
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