SCR Calculator User Manual

LICAT - Implementation Technicals

The Canadian Life Insurance Capital Adequacy Test (LICAT) is updated every year. Its market and credit risk modules have some unique characteristics as compared to European insurance capital regimes.

• The base yield curves are calibrated for 5 world regions - Canada, the US, the UK, Europe ex-UK and Japan (The SCR Calculator maintains an independent monthly calibration of these curves).
• Interest rate risk capital is calibrated by four uniquely defined stress scenarios.
• Portfolio-level stress is first aggregated by the world geographical regions and then added.
• Equities are assumed to exhibit some interest rate risk due to future dividend streams.
• Equity option stresses are calibrated using a 2-d grid approach, varying the underlying price and implied volatility to identify a worst-case scenario.
• Foreign currency risk is taken as the larger of the net long and net short positions, rather than offsetting the two. Gold consists part of the currency risk.
• No diversification benefit is assumed between market and credit risk.

The above points are all reflected in the SCR Calculator's implementation.

Single Asset risk capital calculation is well-explained using the "Explain this Calculation" button.

Diversification benefit only exists within insurance risks and between market/credit and insurance risks. There is no diversification benefit assumed between market and credit risks.