As highlighted in MFC’s 2Q10 Report to Shareholders, OSFI has released a letter to the Canadian Life and Health Insurance Association regarding Seg Fund Capital Requirements [footnote changed to link – JH]:
As mentioned publicly by the Superintendent in the fall of 2009, OSFI has been, as part of this [MCCSR Advisory Committee review] process, conducting a fundamental review of segregated fund capital requirements. We are proceeding to act on the results of this review. In particular, two work streams are underway with respect to internal modeling for the capitalization of segregated fund guarantee exposures.
The first area of work is the implementation of changes to underlying calibration standards for modeling segregated fund guarantee exposures. While we are currently continuing to consult through the MAC process, we expect to issue a draft advisory in the fall of 2010 for public comment. We expect that this will change the existing capital requirements in respect of new (rather than in-force) segregated fund business (e.g. post 2010 contracts).
It is not clear whether or not this draft advisory will include leverage caps on assets including seg funds.
The letter does not make any predictions about the effects on capital expected in the draft advisory:
It is premature to draw conclusions about the cumulative impact this process will have. For example, considered as a whole, there could be increases in some lines of business and decreases in others – and increases may be offset by other changes, such as hedge recognition. In addition, the impact is likely to vary from company to company. As usual, OSFI will be consulting with the CLHIA and your members on proposed changes and will provide ample notice prior to the implementation of new guidance.
… but I suggest that an increase in required capital is something of a slam-dunk.
[…] The Office of the Superintendent of Financial Institutions has released Revised Guidance for Companies that Determine Segregated Fund Guarantee Capital Requirements Using an Approved Model. This is the change we were told to expect in August. […]