C - OSFI Target Capital

Question 1

OSFI TARGET CAPITAL

Discuss OSFI’s risk assessment process
similar to OSFI SUPERVISORY FRAMEWORK article

Answer 1

starts with evaluation of

1) risk within each significant activity
2) quality of risk management applied to mitigate these risks.

Next, OSFI determines the LEVEL OF NET RISK AND DIRECTION OF THE RATING (decreasing, stable, increasing) for each significant activity.

The NET RISK of each activities are combined, to arrive at the OVERALL NET RISK (ONR) of insurer

ONR is a consolidated assessment of the potential adverse impact that the activities collectively could have on performance and adequacy of capital

OSFI considers EARNINGS, CAPITAL, LIQUIDITY in relation to ONR

Finally, OSFI develops a Composite Risk Rating (and its direction) of insurer

Question 2

OSFI TARGET CAPITAL

While regulatory capital is an important factor in OSFI’s capital assessment, other factors are also considered

5 CAPITAL ASSESSMENT CRITERIA (other than regulatory capital)

Answer 2

1) adequacy of capital to support risk profile and business plan
2) ability to access capital at reasonable rates
3) quality of capital
4) quality of capital management processes
5) senior management and Board roles in capital management processes

Question 3

OSFI TARGET CAPITAL

3 relevant factors in assessing the adequacy of an insurer’s current capital position

Answer 3

1) past and emerging trends
2) earnings and liquidity
3) insurer’s preparedness to deal with potential capital deficiencies

Question 4

OSFI TARGET CAPITAL

2 elements a FRI (Federally Regulated Insurer) should consider when establishing INTERNAL TARGET CAPITAL RATIO

Answer 4

1) its risk appetite

2) its risk profile

Question 5

OSFI TARGET CAPITAL

INTERNAL TARGET should be above which target?

2 reasons why

Answer 5

Above Supervisory Target

to ABSORB UNEXPECTED LOSSES above those covered by STCR

AND

to PROVIDE ADEQUATE TIME TO MANAGEMENT TO RESOLVE FINANCIAL PROBLEM that arise, while minimizing the need for OSFI intervention.

Question 6

OSFI TARGET CAPITAL

Responsibility of insurer when falling under INTERNAL CAPITAL RATIO

Answer 6

if capital level of an insurer falls, OR IS ANTICIPATED TO FALL WITHIN 2 YEARS, below its internal target, INFORM OSFI IMMEDIATELY.

PROVIDE PLANS TO RESTORE THE MCT TO AT LEAST THE INTERNAL TARGET within a reasonable period of time.

Question 7

OSFI TARGET CAPITAL

Define
CAPITAL MANAGEMENT

Answer 7

On-going process to MAINTAIN QUANTITY AND QUALITY OF CAPITAL to support operations.

Question 8

OSFI TARGET CAPITAL

Define
Minimum Capital Ratio
Supervisory Target Capital Ratio
Internal Target Capital Ratio

Answer 8

–Minimum Capital Ratio–
MINIMUM LEVEL OF CAPITAL TO COVER THE RISKS SPECIFIED IN THE CAPITAL GUIDELINES
below MCR = 100%

–Supervisory Target Capital Ratio–
TARGET LEVEL OF CAPITAL TO COVER THE RISKS SPECIFIED IN THE CAPITAL GUIDELINES as well as TO PROVIDE A MARGIN FOR OTHER RISKS
below STCR (150%) triggers early intervention by OSFI

–Internal Target Capital Ratio–
TARGET LEVEL OF CAPITAL, determined in ORSA, to COVER ALL RISKS, including the risks specified in the capital guidelines