Office of the Superintendent of Financial Institutions
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:
These requirements are prescribed in accordance with the Assets (Foreign Companies) Regulations.
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:
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:
70% of Surplus Allowance
70% of Eligible Deposits
Other Admitted Assets
The Available Margin is the difference between Assets Available and Assets Required.
Assets Available consists of:
Vested Assets are to be valued in accordance with the Insurance Companies Act.
The amount of Other Admitted Assets included in Assets Available is the lesser of:
B. 50% of the difference between Required Margin, and the total risk adjustment reported in the financial statements calculated net of registered reinsurance only.
Assets under the control of the Chief Agent may be included in Other Admitted Assets only if the following conditions are met:
The following amounts are deducted from Assets Available:
Assets Required in respect of a branch’s insurance business in Canada consists of:
The volatility adjustment in item 9) above is the same as that described in section 2.1.1, with the exception that, if the option to use the adjustment is chosen, the applicable percentage of any increase in the liability for cost of guarantees caused by market movements between the end of the previous quarter and the reporting date is subtracted from Assets Required, and the applicable percentage of any decrease in the liability for cost of guarantees caused by market movements between the previous quarter and the reporting date is added to Assets Required.
For item 17) above, if an insurance contract comprises two or more distinct legal obligations for which, on a Best Estimate basis, at least one of the obligations is an asset and at least one of the obligations is a liability (e.g. funds withheld reinsurance), then the Best Estimate value of all legal obligations under the contract that are assets should be added to Assets Required unless:
If the asset amounts under a contract are added to Assets Required in item 17) above, then the contract may be excluded from the negative reserve requirement in item 10).
The Surplus Allowance for a branch is calculated in respect of its insurance business in Canada, in the manner described 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.
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:
The Required Margin forms part of the vesting requirements for foreign insurers.
Refer to Guideline E-4, Foreign Entities Operating in Canada on a Branch Basis.
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Includes amounts for outstanding claims and adjustments expenses, as well as provisions for policyholder dividends, experience rating refunds and discretionary participation features. 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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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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