Life Insurance Capital Adequacy Test (LICAT)
What is Life Insurance Capital Adequacy Test (LICAT)
The Life Insurance Capital Adequacy Test (LICAT) is a tool used by Canada’s federal financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), to make sure life insurance companies have enough capital to stay financially strong—even in tough times.
In simple terms, LICAT helps OSFI check whether a life insurance company has enough of its own money (called capital) to cover the risks it takes on. These risks could include things like paying out life insurance claims, changes in interest rates, or unexpected economic downturns.
Why LICAT matters
Life insurance companies promise to pay benefits to policyholders, sometimes many years into the future. To keep those promises, they need to be financially stable. LICAT helps ensure that insurers can meet their obligations, even if things don’t go as planned.
By using LICAT, OSFI can:
- Monitor the financial health of life insurers
- Set clear expectations for how much capital insurers need
- Protect policyholders and the broader financial system
How LICAT works
LICAT looks at two main things:
- Available Capital – This is the money the insurer has on hand to absorb losses.
- Required Capital – This is the amount of capital the insurer needs, based on the risks it faces.
The LICAT ratio is calculated by dividing available capital by required capital. A higher ratio means the insurer is in a stronger financial position.
For example, if a company has $1.20 in capital for every $1.00 of required capital, its LICAT ratio is 120%. OSFI sets minimum LICAT ratio requirements to ensure insurers are well-prepared for future challenges.
In summary
LICAT is a key part of how OSFI keeps Canada’s life insurance sector safe and sound. It ensures that insurers have enough capital to handle risks and protect the people who rely on them. By setting clear, risk-based standards, LICAT helps build trust in the financial system.