MCT

Question 1

what is the minimum supervisory target for OSFI’s MCT ratio

Answer 1

150%

Question 2

what is the MCT ratio requirement for federally regulated insurers

Answer 2

100% (OSFI’s requirement of 150% is a more strict requirement)

Question 3

identify the main components of MCT capital required

Answer 3

( In My Crummy Opinion! )
Insurance risk
Market risk
Credit risk
Operational risk

Question 4

define MCT insurance risk

Answer 4

risk of loss FROM the potential for claims (from policyholders & beneficiaries)

Question 5

define MCT market risk

Answer 5

risk of loss FROM changes in prices in various markets

Question 6

define MCT credit risk

Answer 6

risk of loss FROM counterparty’s potential INABILITY or UNWILLINGNESS to fully meet contractual obligations due to the insurer

Question 7

define MCT operational risk

Answer 7

risk of loss FROM inadequate or failed internal processes, people, systems or from external events

Question 8

define ‘target capital required’ (give the statistical defn)

Answer 8

capital level corresponding to CTE(99%) on the loss distribution over 1-yr time horizon
(CTE = Conditional Tail Expectation)

Question 9

identify a proxy for capital available that appears in the Statement of Financial Position

Answer 9

Total Equity (line 699 from Statement of Financial Position - Liabilities & Equity)
→ sometimes an exam problem does not provide the components required to directly calculate capital available
→ but if the question provides equity, you can use that instead as a proxy

Question 10

identify the principles of allocation regarding MCT capital requirements

Answer 10

• allocation methods should be Free from bias
• allocation methods should be Accurate when allocating revenue & costs
• allocation methods should be Consistent with allocation methods used by the insurer for other business decision-making purposes
• allocation methods should be Consistent over time
• allocation methods should be Systematic & reasonable

Question 11

describe the transitional arrangement for MCT capital requirements for business combinations effective before June 30, 2019

Answer 11

the contractual service margin (CSM) arising from favorable development can be included in capital available

Question 12

identify qualitative considerations regarding MCT capital available [Hint: APAS]

Answer 12

• Availability - is the capital element fully paid & available to absorb losses?
• Permanence: - until when is the capital element available?
• Absence - does the capital element have an absence of encumbrances & mandatory servicing costs?
• Subordination - is the capital element subordinated to the rights of policyholders & creditors in an insolvency or winding-up?

Question 13

identify the main components of MCT capital available (3+1)

Answer 13

• category A capital
• category B capital
• category C capital
  ..and..
• non-controlling interests in subsidiaries, subject to certain conditions (category A, B, or C)

Question 14

identify the subcomponents of category A capital available as listed in the MCT source text

Answer 14

• Common shares issued by the insurer that meet the category A qualifying criteria
• Surplus (share premium) resulting from the issuance of instruments included in common equity capital and other contributed surplus
• Retained earnings
• Earthquake, nuclear and general contingency reserves
• AOCI (Accumulated other comprehensive income)
• Residual interest, reported either as equity or as a liability, of owner-policyholders of mutual entities

Question 15

identify the subcomponents of category A capital available as listed on page 20.11 in the financial statements

Answer 15

Under Policyholders’ Equity:
* Residual Interest (Non-Stock)

Under Shareholders’ Equity: (include everything except Preferred Shares)
* Common Shares
* Contributed Surplus
* Other Capital
* Retained Earnings
* Nuclear and Other Reserves
* AOCI

Question 16

Define interest risk

Answer 16

Interest rate risk is the risk associated with a shift in the market yield curve and its resulting impact on the values of assets and liabilities

Question 17

Define equity risk

Answer 17

Equity risk is the risk of economic loss due to fluctuations in the value of common shares and other equity securities.

Question 18

identify conditions for a hedge to qualify (for being recognized in the calculation of equity margin)

Answer 18

The hedge must be issued by an entity that:
issues obligations which attract a 0% factor under section (6.1.2) - Credit risk factors
is rated A- or better (including clearing houses rated A- or better)

Question 19

Capital required for Operational Risk formula

Answer 19

CapReq(OpnRsk)= min [ 30% x CR(0),sum(A components) + max(B components)]

CR(0) = CapReq(InsRsk) + CapReq(MktRsk) + CapReq(CrdRsk)

A Components
(Risk factor) x CR(0)
(Risk factor) x DWP
(Risk factor) x AWP
(Risk factor) x CWP
(Risk factor) x (growth above 20%) x (DWP + AWP) / (1 + growth)

B Components
(Risk factor) x AWP(ig)
(Risk factor) x CWP(ig)

Question 20

Diversification Credit fromula

Answer 20

DC = A + I - SQRT( A2 + I2 + 2·R·A·I )

Question 21

briefly describe the MCT capital composition limits

Answer 21

BC Limit:
(category B) + (category C) ≤ 40% x (total capital available – AOCI)

C Limit:
(category C) ≤ 7% x (total capital available – AOCI)

Question 22

which regulatory adjustment to MCT capital available is an addition

Answer 22

CSM associated with title insurance contracts (Contractual Service Margin)