The Office of the Superintendent of Financial Institutions has issued a guideline establishing hedging criteria for segregated funds.

These were promised when OSFI updated the capital requirements for seg funds late last year. The guidance note provides the criteria that must be met to obtain OSFI’s approval for a capital offset in respect of a hedging program for segregated funds.

The note is intended to provide direction to life insurers wishing to obtain an MCCSR capital offset for hedging programs used in managing segregated funds market and insurance risks. Because this is an evolving area within the life insurance industry, OSFI expects that, as experience is gained, this guidance note will be revised.

OSFI notes that “a strong risk management culture is a critical element in approving any hedging program for the purposes of a capital offset”. Several of the requirements require an effective risk management culture. Examples include board and senior management involvement and approvals, independence of the risk management function, effective controls and validation processes, reporting that includes relevant management action plans, and appropriate skills to identify, monitor and manage the risks.