See all chapters of Encyclopaedia of Prudential Solvency and A Guide to Solvency II.
Introduction
This chapter of the Encyclopaedia of Prudential Solvency discusses the prudential solvency regime in Canada. Canada’s insurance sector is widely recognised for its sophistication, robust regulatory oversight and international integration. The prudential solvency regime in Canada is underpinned by a risk-based approach, with a strong emphasis on consumer protection, transparency and market discipline. This chapter provides a comprehensive and technical analysis of the Canadian prudential solvency framework, focusing on the regulatory architecture, capital adequacy requirements, valuation methodologies, disclosure principles and ongoing reforms.
1. The Canadian Insurance Market
The Canadian insurance market is characterised by robust capital requirements, a strong focus on consumer protection, and an increasing orientation towards ESG and climate-related considerations. There are significant differences between the life and non-life sectors. The life insurance sector is highly consolidated, dominated by three large groups that control the majority of the market. In contrast, the non-life sector is fragmented, comprising a mix of domestic firms, subsidiaries and branches of major international groups, along with government monopolies for private passenger auto insurance in three provinces.
2. Regulatory Structure
Legislative Framework
The principal legislative instruments governing insurance solvency in Canada are the Insurance Companies Act (ICA) and the Office of the Superintendent of Financial Institutions (OSFI) regulatory guidelines. Key provisions of the ICA are as follows:
- Subsection 515(1) requires federally regulated life and P&C companies and their branches to maintain adequate capital.1
- Subsection 608(1) imposes a similar requirement on foreign life and P&C companies operating in Canada, mandating an adequate margin of assets in Canada over their Canadian liabilities.2
- Subsection 992(1) requires insurance holding companies to: (i) maintain adequate capital; (ii) maintain adequate and appropriate forms of liquidity; and (iii) comply with any regulations in relation to capital and liquidity.3
Federal and Provincial Oversight
Canada’s insurance regulatory framework is mature and sophisticated, with a distinctive division of responsibilities between federal and provincial authorities. The OSFI is the principal federal regulator, responsible for the prudential regulation of most insurers and their branches, including those of foreign companies.4 OSFI employs a predominantly principles-based approach and is internationally recognised for its conservative and effective supervision.5
OSFI is an integrated regulator, overseeing not only insurers but also banks, private pension plans and certain other financial institutions.6 This integrated approach facilitates enhanced coordination and consistency in solvency regulation across the Canadian financial sector.
Provincial regulators are responsible for market conduct and the licensing of insurers and intermediaries.7 A small number of provincially incorporated insurers are also subject to prudential regulation at the provincial level. However, the focus of this chapter is on the federal regime administered by OSFI.
3. Core Prudential Solvency Frameworks
Life Insurance Capital Adequacy Test
Purpose and Scope
The Life Insurance Capital Adequacy Test (LICAT) is the cornerstone of Canada’s risk-based capital framework for life insurers.8 Introduced by OSFI, LICAT establishes rigorous standards to ensure that insurers maintain sufficient capital to support the unique risks inherent in the life insurance sector.
Capital Requirements
LICAT sets both minimum and supervisory target ratios for core and total capital:
| Minimum Target Ratio9 | Supervisory Target Ratio10 | |
|---|---|---|
| Core Capital | 55% | 70% |
| Total Capital | 90% | 100% |
These ratios are designed to protect policyholders and enhance confidence amongst investors and other market participants, reflecting a broader trend towards robust risk management and regulatory oversight in the Canadian financial services landscape.
Disclosure Principles
LICAT is underpinned by five key disclosure principles that shape its disclosure requirements and reinforce the integrity of Canada’s life insurance regulatory regime:11
- Clarity: Disclosures must be accessible and understandable for all key stakeholders.
- Meaningfulness: Disclosures should focus on significant current and emerging risks and their management, providing information that adds genuine value to users’ understanding of an insurer’s risk and capital position.
- Consistency: Disclosures should be consistent over time, enabling stakeholders to track trends and changes in an insurer’s risk profile across reporting periods.
- Comparability: Disclosures should be comparable across life insurers, with standardised formats and levels of detail that facilitate meaningful benchmarking of solvency and capital adequacy within the Canadian market.
- Qualitative narrative: Disclosures should be accompanied by qualitative narrative, offering context and explanations for material changes and other issues of interest, thereby enhancing transparency and supporting informed decision-making by policyholders, investors and other market participants.
Branches of Foreign Life Insurers
Canadian branches of foreign life insurers are subject to a minimum margin test within the LICAT, known as the Life Insurance Margin Adequacy Test (LIMAT).12
Minimum Capital Test
Purpose and Scope
The Minimum Capital Test (MCT) Guideline, while not issued under specific subsections of the ICA, provides the framework for assessing whether these companies meet capital or margin requirements.13 The MCT sets out minimum and supervisory target capital standards, using a risk-based formula to determine the required capital or margin and to define what qualifies as available capital or assets.
OSFI has the authority to require higher capital or margin levels than the minimum standards if deemed necessary, under subsections 515(3)14 and 608(4)15 of the ICA. This discretionary power enables OSFI to respond to the unique risk profiles of individual insurers and to evolving market conditions.16
Capital Requirements
The MCT sets regulatory capital requirements for different risks at a specific confidence level, chosen by OSFI to be the 99% conditional tail expectation (CTE) over a one-year period, including a terminal provision.17 This means the capital requirements are designed to cover losses up to a high level of certainty. Risk factors outlined in OSFI’s guidelines are applied to calculate the capital needed at this target level.
Insurers must maintain the required MCT capital at all times, using a definition of available capital that includes qualifying capital instruments, composition limits and regulatory adjustments. This definition also covers capital within all consolidated subsidiaries.18
Calculation Methodology
The minimum capital requirement (MCR) is calculated on a consolidated basis. It is determined by summing the capital required at the target level for each risk component — insurance risk, market risk, credit risk and operational risk — then subtracting the diversification credit. The result is divided by 1.5 to arrive at the final MCR.19
Capital Ratios
The MCT ratio is a key measure of capital adequacy, calculated as the amount of available capital divided by the MCR. The requirements for federally regulated insurers are as follows:20
- Minimum MCT ratio: 100%
- Supervisory target MCT ratio: 150%
The higher supervisory target acts as a buffer above the minimum, helping insurers absorb unexpected losses and supporting early regulatory intervention if needed.
Insurers are also expected to set their own internal target capital ratios, and to maintain capital above this internal target at all times. OSFI may set a different supervisory target for an insurer based on its unique risk profile, following consultation.21
If an insurer expects its MCT ratio to fall below its internal target, it must notify OSFI immediately and submit a plan for returning to compliance, subject to OSFI’s approval. OSFI will consider any unusual market conditions when assessing an insurer’s performance relative to its internal target.22
Insurers are required to continuously maintain their MCT ratios at or above their internal targets. Any questions about a specific insurer’s target ratio should be directed to its OSFI Lead Supervisor.23
Branch Adequacy of Assets Test
Foreign P&C branches must comply with the Branch Adequacy of Assets Test within the MCT framework.24
4. Valuation of Assets and Liabilities
Accounting Standards
Canadian insurers prepare their financial statements in accordance with Canadian Generally Accepted Accounting Principles (GAAP). Life insurance liabilities are valued using the new IFRS 17 valuation approach. This replaced the Canadian Asset Liability Method previously used under IFRS 4, following the implementation of IFRS 17 at the start of 2023.25
IFRS 17: Transformative Impact
IFRS 17 introduces a comprehensive framework that enhances transparency, consistency and comparability across the insurance sector. The standard requires insurers to recognise and measure insurance contracts based on a current, risk-adjusted estimate of future cash flows, combined with the recognition of profit over the period services are provided. This approach ensures that financial statements more accurately reflect the economic realities of insurance activities, particularly the long-term and variable nature of insurance cash flows.26
IFRS 17 also mandates the separation of insurance service results from insurance finance income or expenses and introduces rigorous disclosure requirements to enable stakeholders to assess the impact of insurance contracts on an entity’s financial position and performance.27
The adoption of IFRS 17 is particularly significant in Canada, given the market’s concentration of large, diversified insurers and its robust regulatory environment, which emphasises prudential oversight and consumer protection. The standard’s implementation is expected to drive greater alignment between Canadian insurers and their global peers, foster enhanced comparability for investors, and support ongoing industry trends toward digitalisation and innovation in product offerings.
Asset Valuation
Asset valuation under Canadian GAAP depends on classification:
- Reserve assets: Generally held-for-trading and marked to market.
- Surplus assets: Often classified as available-for-sale and carried at amortised cost for regulatory capital purposes.
OSFI’s approach is to focus on the fair value of assets, with adjustments to reflect the long-term nature of insurance liabilities and the likelihood that certain assets will not be sold.
5. Composition and Quality of Regulatory Capital
Capital Components
OSFI sets standards to ensure that insurers have sufficient and appropriate capital resources to meet regulatory capital requirements.28 Capital must be able to fulfil obligations to policyholders and creditors and absorb losses during times of financial stress.29 OSFI sets out criteria for evaluating the quality of different capital components and specifies that the composition of regulatory capital should be dominated by the highest quality capital.30
Qualitative Criteria
There are four primary considerations for defining the capital available of a company for the purpose of measuring capital adequacy:31
- Availability: The extent to which the capital element is fully paid in and available to absorb losses.
- Permanence: The period for, and extent to which, the capital element is available.
- Absence of encumbrances and mandatory servicing costs: The extent to which the capital element is free from mandatory payments or encumbrances.
- Subordination: The extent to which and the circumstances under which the capital element is subordinated to the rights of policyholders and creditors of the insurer in an insolvency or winding-up.
Diversification Credit
OSFI recognises that losses arising across some risk categories are not perfectly correlated, and as a result a company is not likely to incur the maximum possible loss at a given level of confidence from each type of risk simultaneously. Therefore, an explicit credit for diversification is allowed between the sum of credit and market risk requirements and the insurance risk requirement.32
The diversification credit is calculated using a formula that incorporates a correlation factor of 50% between the asset risk margin (capital required for credit and market risks) and the insurance risk margin.33
6. Comparison With International Regimes
United States: Risk-Based Capital System
The Canadian MCT and LICAT frameworks share similarities with the U.S. Risk-Based Capital system, in that both are risk-based and use factor-based formulas. However, the Canadian approach is more principle-based, particularly in its use of IFRS 17’s valuation approach, which allows for more realistic modelling of asset-liability interactions. The Canadian regime also places a strong emphasis on explicit margins for adverse deviation and dynamic testing.
Europe: Solvency II
As noted above, OSFI set its risk factors to a target confidence standard of 99% CTE for MCT and similarly, OSFI’s LICAT guideline indicates an aim for 99% CTE for life insurers’ required capital. Compared to Solvency II, the Canadian system is less explicitly calibrated to a specific confidence level (such as Solvency II’s 99.5% over one year) and does not use a full economic balance sheet approach. However, Canada is moving in that direction, especially with the adoption of IFRS and ongoing reforms to align with international best practices.
7. Unique Features and Challenges
Subjectivity in Margins for Adverse Deviation
A unique challenge in the Canadian system is the subjectivity involved in setting margins for adverse deviation, which can lead to variability in reported liabilities and capital across companies. OSFI addresses this through rigorous review and guidance, but it remains an area of focus as the regime evolves.34
Regional Variations
There are notable regional variations, particularly in Quebec, which operates under a unique civil law system and imposes French language requirements. However, these are primarily relevant to market conduct and licensing, rather than prudential solvency requirements.
8. Ongoing Reforms and Future Directions
Canada is actively modernising its solvency framework. Despite rejecting the International Association of Insurance Supervisors’ Insurance Capital Standard,35 OSFI is moving towards a total balance sheet approach for capital adequacy,36 which will bring Canadian standards closer to Solvency II and other international regimes.
The Canadian insurance market is also experiencing early growth in embedded and digital insurance products, new specialty lines such as cyber and cannabis coverage, and representations and warranties insurance. Alberta’s recent introduction of a captive insurance regime further diversifies the market, aiming to address capacity shortages in sectors like energy and to foster economic development.37
These opportunities are underpinned by a regulatory framework that is increasingly principles-based, with both federal and provincial regulators emphasising fair treatment of customers, climate resilience, and robust governance. The dynamic environment, combined with ongoing consolidation and the active participation of large pension funds and private equity, positions Canada as an attractive and innovative jurisdiction for insurance sector growth.
9. Conclusion
The Canadian prudential solvency regime is distinguished by its risk-based, principles-driven approach, robust capital requirements, and strong emphasis on transparency and market discipline. The LICAT and MCT frameworks administered by OSFI are designed to ensure the resilience and competitiveness of the Canadian insurance sector in a global context. Ongoing reforms and the adoption of international standards such as IFRS 17 are expected to further enhance the alignment of Canadian practices with global best practices, while maintaining a strong focus on consumer protection and innovation.
With special thanks to Stikeman Elliott for their assistance with research for this publication.
Paralegal Tyron Kerns contributed to this chapter.
The authors of this article are not licensed to practice law in Canada or provide legal advice on Canadian laws. This article is for informational purposes only; it is not intended to be legal advice. Local counsel should be consulted on legal questions under Canadian laws.
_______________
1 Subsection 515(1), Insurance Companies Act.
2 Subsection 608(1), ibid.
3 Subsection 992(1), ibid.
4 Office of the Superintendent of Financial Institutions website.
5 Office of the Superintendent of Financial Institutions, “OSFI’s principles-based approach: Encouraging smart, flexible regulation,” last updated 9 April 2025.
6 Office of the Superintendent of Financial Institutions, “About OSFI,” last updated 3 May 2025.
7 Canadian Council of Insurance Regulators website.
8 Office of the Superintendent of Financial Institutions, “Life Insurance Capital Adequacy Test,” effective 1 January 2025.
9 Chapter 1.2, ibid.
10 Ibid.
11 Office of the Superintendent of Financial Institutions, “Life Insurance Capital Adequacy Test Public Disclosure Requirements,” effective 31 December 2018.
12 Chapter 12, Office of the Superintendent of Financial Institutions, “Life Insurance Capital Adequacy Test,” effective 1 January 2025.
13 Office of the Superintendent of Financial Institutions, “Minimum Capital Test - Guideline (2024),” 1 January 2024.
14 Subsection 515(3), Insurance Companies Act.
15 Subsection 608(4), ibid.
16 Chapter 1.2.1, Office of the Superintendent of Financial Institutions, “Minimum Capital Test - Guideline (2024),” 1 January 2024.
17 Chapter 1.1.1, ibid.
18 Chapter 1.1.2, ibid.
19 Ibid.
20 Ibid.
21 Chapter 1.2.1,ibid.
22 Ibid.
23 Ibid.
24 Chapter 3, ibid.
25 IFRS, “IFRS 17 Insurance Contracts.”
26 Ibid.
27 Paragraph 80, ibid.
28 Office of the Superintendent of Financial Institutions, “Regulatory Capital and Internal Capital Targets (2025),” effective 1 January 2025.
29 Part IV, ibid.
30 Part I, ibid.
31 Chapter 2, Office of the Superintendent of Financial Institutions, “Life Insurance Capital Adequacy Test,” effective 1 January 2025.
32 Chapter 11.2, ibid.
33 Chapter 11.2.2, ibid.
34 Office of the Superintendent of Financial Institutions, “Actuarial Information Summary,” last updated 4 February 2025.
35 Office of the Superintendent of Financial Institutions, “OSFI does not support the proposed design of the IAIS global Insurance Capital Standard ,” last updated 14 November 2019.
36 Office of the Superintendent of Financial Institutions, “Capital Adequacy Requirements (CAR) (2026) – Chapter 4 – Credit Risk – Standardized Approach,” effective November 2025 / January 2026.
37 Government of Alberta, “Information for captive insurers.”
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