On November 7, 2022, the Office of the Superintendent of Financial Institutions (Canada) (OSFI) released its Assurance on Capital, Leverage, and Liquidity Returns guideline (the Guideline). The Guideline applies to, among others, the capital returns of all federally regulated insurers in Canada (each an FRI, and collectively, FRIs). The Guideline includes new requirements for FRIs’ preparation and submission of Returns (as defined below) required to be filed with OSFI.
To assist in developing the Guideline, OSFI published a discussion paper in April 2021 and released a draft guideline in March 2022 for public review and comment (the Consultation Period).
OSFI notes that the Guideline is a response to rising complexity in regulatory reporting frameworks for federally regulated financial institutions in Canada, including those changes resulting from the International Financial Reporting Standards 17 Insurance Contracts.
This article provides a brief overview of the key action items required for FRIs’ compliance with the Guideline. We note that this article does not cover the Guideline’s application to federally regulated deposit-taking institutions.
II. Scope and guiding principles
With respect to FRIs, the Guideline applies to the capital returns of FRIs (Returns), such Returns being comprised of the following: (i) the Life Insurance Capital Adequacy Test (LICAT) and Life Insurance Margin Test (LIMAT) (applicable to life insurers), (ii) the Minimum Capital Test (MCT) and Branch Adequacy of Assets Test (BAAT) (applicable to property and casualty insurers), and (iii) Mortgage Insurer Capital Adequacy Test (MICAT) (applicable to mortgage insurers).
The assurance expectations for the Returns set out in the Guideline capture the following principles:
- Assurance expectations should contribute to public confidence in the Canadian financial system.
- Assurance expectations should be risk-based and principles based.
- Assurance expectations should consider OSFI’s reliance on external auditors and the use of the work of others, including an FRI’s oversight functions.
- Assurance expectations should reflect an FRI’s size, nature, complexity, and business activities.
III. Assurance expectations for FRIs’ Returns
The compliance requirements applicable to FRIs set out in the Guideline deal with (i) external audit opinions, (ii) senior management attestations, and (iii) internal audit opinions. Each of the foregoing is discussed in further detail below.
a) External audit opinion
OSFI expects that external audit opinions provide independent, third-party assurance regarding the numerator and denominator that comprise FRIs’ Returns. OSFI’s guidance regarding external audit opinions for FRIs’ Returns is summarized in the below chart.
| Type of FRI | External Audit Opinion Requirement | Filing Requirement (to lead OSFI supervisor) | Frequency |
| Life Insurers | For life insurers operating in Canada on a branch basis, an external audit opinion is required on whether the numerator and denominator of the ratios listed on page 120.000 of FRIs’ LIMAT at the year-end reporting date have been prepared, in all material respects, in accordance with the appropriate regulatory framework.For life insurers operating in Canada not on a branch basis, an external audit opinion is required on whether the numerator and denominator of the ratios listed on page 10.100 of FRIs’ LICAT at the year-end reporting date have been prepared, in all material respects, in accordance with the appropriate regulatory framework. | Within 90 days of FRIs’ fiscal year-end. Note: Foreign Life/P&C FRIs may retain their May 31 filing schedules for LIMAT/BAAT. | Annual at year-end reporting date beginning in fiscal 2025. |
| Property and casualty (P&C) | External audit opinion is required on whether the numerator and denominator of the ratios listed on page 10.00 of FRIs’ MCT/BAAT at the year-end reporting date have been prepared, in all material respects, in accordance with the appropriate regulatory framework. | Within 90 days of FRIs’ fiscal year-end. Note: Foreign Life/P&C FRIs may retain their May 31 filing schedules for LIMAT/BAAT. | Annual at year-end reporting date beginning in fiscal 2025. |
| Mortgage Insurers | External audit opinion is required on whether the numerator and denominator of the ratios listed on page 10.10 of FRIs’ MICAT schedule at the year-end reporting date have been prepared, in all material respects, in accordance with the appropriate regulatory framework. | Within 90 days of FRIs’ fiscal year-end. Note: Foreign Life/P&C FRIs may retain their May 31 filing schedules for LIMAT/BAAT. | Annual at year-end reporting date beginning in fiscal 2025. |
External auditors should establish an appropriate, risk-based materiality level to review the numerator and denominator of an FRI’s Returns. In determining the materiality level, OSFI notes that external auditors should consider factors that include (i) the size, nature, and complexity of an FRI’s operations; (ii) any breach or near breach of an FRI’s internal target for any Returns; and (iii) offsetting misstatements in the numerator and denominator of a regulatory ratio that may cause the subject matter to be materially misstated. It is important to note that the foregoing analysis may yield a materiality threshold for external auditors’ review of Returns that is lower than that used for audits of an FRI’s financial statements. During the Consultation Period, OSFI clarified that external auditors are expected to opine on whether model implementation (where applicable) is consistent with OSFI-approved models with respect to the scope of external audit assurance concerning models. Lastly, FRIs expressed concern to OSFI that examining a regulatory ratio’s numerator and denominator separately will increase the scope and cost of the external audit; however, OSFI reasons that it is important to conduct a separate assessment of the numerators and denominators, as this prevents potential offsetting errors that may go undetected if audited together.
b) Senior management attestation
FRIs’ Returns should include a senior management attestation (Attestation), attesting that such Returns are accurate, complete, and in compliance with the applicable minimum regulatory requirements, as at the reporting date. In addition, OSFI notes that a review of a Return for the purpose of providing an Attestation should be conducted by an individual who is not directly involved in the preparation of an FRI’s Returns and who has the appropriate knowledge, authority, and expertise to interpret the applicable guidance.
OSFI also expects Attestations to be accompanied by a summary of unadjusted errors impacting the calculation of an FRI’s returns. The below chart summarizes the specific Returns requiring Attestation.
| Type of FRI | Returns Requiring Attestation | Filing Requirement (to lead OSFI supervisor) | Frequency |
| Life Insurers | For life insurers operating in Canada on a branch basis, Attestation required for the LIMAT cover schedule. For life insurers operating in Canada not on a branch basis, Attestation required for the LICAT cover schedule. | According to quarterly filing requirements. Note: On an annual basis, Attestation to be accompanied by FRIs’ summary of unadjusted errors impacting calculation of regulatory ratios. | Quarterly beginning fiscal 2024. |
| P&C Insurers | Attestation required for the MCT/BAAT cover schedule. | According to quarterly filing requirements. Note: On an annual basis, Attestation to be accompanied by FRIs’ summary of unadjusted errors impacting calculation of regulatory ratios. | Quarterly beginning fiscal 2024. |
| Mortgage Insurers | Attestation required for the MICAT cover schedule. | According to quarterly filing requirements. Note: On an annual basis, Attestation to be accompanied by FRIs’ summary of unadjusted errors impacting calculation of regulatory ratios. | Quarterly beginning fiscal 2024. |
c) Internal audit opinion
The Guideline states that an internal audit opinion should objectively assess the following:
- The effectiveness of internal controls in place for all schedules and line items with respect to an FRI’s key Returns;
- The effectiveness of management information systems and processes; and
- The monitoring of compliance with approved regulatory models.
FRIs may appoint qualified independent parties to perform the internal audit opinion. The internal audit may be completed at any time during an FRI’s fiscal year. If the internal audit opinion does not include testing of controls at year-end, the FRI must attest to OSFI that its processes and controls continue to be in place and no material changes occurr at year-end. OSFI’s guidance regarding internal audit opinions for FRIs’ Returns is summarized in the below chart.
| Type of FRI | What an Internal Audit Opinion Shall Cover | Filing Requirement (to lead OSFI supervisor) | Frequency |
|---|---|---|---|
| Life Insurers | For life insurers operating in Canada on a branch basis, required for the LIMAT (including related systems).For life insurers operating in Canada not on a branch basis, required for LICAT (including related systems). | Within 90 days of fiscal year-end. | Effective fiscal 2023, and minimum of once every three years (based on FRIs’ frequency of review). |
| P&C Insurers | Required for MCT/BAAT (including related systems). | Within 90 days of fiscal year-end. | Effective fiscal 2023, and minimum of once every three years (based on FRIs’ frequency of review). |
| Mortgage Insurers | Required for MICAT (including related systems). | Within 90 days of fiscal year-end. | Effective fiscal 2023, and minimum of once every three years (based on FRIs’ frequency of review). |
II. Next steps for FRIs
OSFI’s release of the Guideline provides welcome clarification that addresses certain feedback from industry participants during the Consultation Period. For example, during the Consultation Period, clarification was requested on the following items in the draft version of the Guideline:
- Whether external audit assurance is expected at a level lower than the numerator/denominator of a Return;
- The level of independence required in the management attestation process;
- The scope of external audit assurance with respect to models;
- The appropriate level of materiality for the assurance requirements;
- The form of audit report/opinion to be provided; and
- The need for, and timing of, internal audit assurance requirements.
Although the effective dates of the Guideline’s requirements for FRIs range from fiscal 2023 to fiscal 2025, it is important that FRIs commence updating their internal policies and procedures regarding the review and production of their Returns. Dentons Canada’s Corporate and Regulatory Insurance group would be pleased to assist with FRIs’ review of such policies and procedures or any other inquiries related to the implementation of the Guideline.
