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Julie Dickson, Superintendent for the Office of the Superintendent of Financial Institutions (OSFI). The banking and insurance regulator will delay planned changes to the life insurance capital framework until 2016.

Fred Lum/The Globe and Mail

Canada's banking and insurance regulator is postponing by two years the deadline for life insurers to meet upcoming changes to capital requirements.

The Office of the Superintendent of Financial Institutions (OSFI) said that it would delay finalizing the life insurance capital framework until 2016, and give the industry two years beyond that to adopt the changes.

The update report follows a regulatory framework plan issued just over a year ago that outlined some proposed rule changes on topics such as corporate governance, risk management and shareholder transparency. The framework is heavily focused on regulatory capital requirements for insurers, looking at credit risk, market risk and insurance risk, among other things.

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The industry watchdog originally planned to collaborate with the industry to review these matters until 2014, but that consultation has been extended. This puts insurers well behind Canada's banks, which have a lot more clarity around their capital requirements.

But the wider window for insurers to make the necessary changes may be a good thing. OSFI said that the altered time horizon is necessary to "develop, refine and calibrate" all the different parts of the capital framework. The organization needs the time to talk to the insurers and stakeholders, as well as complete studies to determine the effects of its actions.

Other international regulatory bodies, such as the International Association of Insurance Supervisors, are also working on their own standards for insurers capital, which may have added to delays.

"A longer period of uncertainty can cause added conservatism to seep into Canadian [life insurance company] capital management plans at a time when the market is beginning to price in such things as dividend increases and/or buybacks," Gabriel Dechaine, analyst at Credit Suisse, wrote in a note to clients.

While Mr. Dechaine said that he would usually be apprehensive about such a move, in this case there are positive signals. For instance, if the capital rules come to market around the same time as International Financial Reporting Standards (IFRS), there could be "regulatory capital offsets to a potentially disruptive accounting regime," he said.

The changes shouldn't "pose undue risks to the life insurance industry," OSFI noted in its statement Tuesday. "The financial crisis demonstrated that the current regulatory capital framework continues to be robust and broadly reflects the financial condition of Canada's life insurers."

OSFI said it thinks that, overall, the risks that Canada's insurers are exposed to are adequately balanced with the assets they have on hand.

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Insurers' capital levels were watched carefully during the recession. Manulife Financial Corp., for example, put aside billions of dollars in extra capital because it had not hedged the large portfolio of stocks that backs its variable annuity business.

The company has since recovered significantly, and it ended its third quarter with a solid regulatory capital ratio of 229 per cent. Manulife chief executive officer Donald Guloien said in a call with analysts that he was "very comfortable" with this level of capital, but would need "greater insight into where capital rules and accounting rules are going long-term," before he could think about returning any of that capital to shareholders.

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