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🛡️ '''Life insurance capital adequacy test''' (LICAT) is the regulatory [[Definition:Capital adequacy|capital adequacy]] framework applied to [[Definition:Life insurance|life insurance]] companies in Canada, administered by the [[Definition:Office of the Superintendent of Financial Institutions|Office of the Superintendent of Financial Institutions]] (OSFI). Introduced in 2018 as a successor to the previous Minimum Continuing Capital and Surplus Requirements (MCCSR) framework, LICAT represents a modernized, risk-sensitive approach to assessing whether a life insurer holds sufficient capital to absorb potential losses across a range of risk categories. The framework establishes both a supervisory target ratio and a minimum ratio, with the former serving as the primary threshold that OSFI expects insurers to maintain in normal operating conditions.

⚙️ LICAT operates by quantifying the capital required to withstand adverse scenarios across five major risk categories: [[Definition:Credit risk|credit risk]], [[Definition:Market risk|market risk]], [[Definition:Insurance risk|insurance risk]], [[Definition:Operational risk|operational risk]], and segregated fund guarantee risk — this last category being particularly relevant to the Canadian market, where segregated funds (analogous to variable annuities) carry investment guarantees that create material tail risk for insurers. Available capital is measured against these required capital components to produce a ratio, with OSFI setting the supervisory target at 100% and the minimum at 90% for the total ratio. A key innovation of LICAT over its predecessor was the introduction of more granular risk charges, improved recognition of diversification benefits, and a more sophisticated treatment of participating and adjustable products where insurers retain the ability to share risk with [[Definition:Policyholder|policyholders]] through dividend or benefit adjustments.

🌐 While LICAT is specific to the Canadian regulatory environment, it sits within a broader global trend toward risk-based [[Definition:Solvency|solvency]] frameworks that has also produced [[Definition:Solvency II|Solvency II]] in Europe, the [[Definition:Risk-based capital|Risk-Based Capital]] (RBC) system in the United States, [[Definition:C-ROSS|C-ROSS]] in China, and the evolving [[Definition:Insurance Capital Standard|Insurance Capital Standard]] (ICS) being developed by the [[Definition:International Association of Insurance Supervisors|International Association of Insurance Supervisors]] (IAIS). Canada's decision to modernize its framework reflected both domestic lessons from the financial crisis and a desire to align more closely with international best practices in capital regulation. For Canada's major life insurers — several of which operate on a global scale — LICAT directly influences strategic decisions around product design, [[Definition:Asset-liability management|asset-liability management]], [[Definition:Reinsurance|reinsurance]] utilization, and international subsidiary capitalization. The framework is periodically updated by OSFI to reflect evolving risks and market conditions, reinforcing its role as a living regulatory tool rather than a static capital floor.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Capital adequacy]]
* [[Definition:Office of the Superintendent of Financial Institutions]]
* [[Definition:Solvency II]]
* [[Definition:Risk-based capital]]
* [[Definition:Insurance Capital Standard]]
* [[Definition:Asset-liability management]]
{{Div col end}}

Definition:Life insurance capital adequacy test - Revision history

PlumBot: Bot: Creating definition