Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

April 2025 > OSFI > Flashcards

OSFI Flashcards

1
Q

MCT ratio formula

A

MCT = CapAv / minCapReq

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

CapAv formula

A

CapAv = CapAv(gross) - deduc(UnregRe) - deduc(BC limit)

  • deduc(UnregRe) is a penalty for too much unregistered reinsurance, and unregistered reinsurance is riskier than registered reinsurance
  • deduc(BC limit) if the insurer is holding too much of category B and C
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

MinCapReq formula

A

MinCapReq = CapReq / 1.5

150% is OSFI minimum requirement and 100% is regulator minimum requirement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

CapReq formula

A

CapReq = SUM(IMCO) - DC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

DC formula

A

DC = A + I - SQRT(A^2 + I^2 + 2RAI)
A = C + M

DC is diversification credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

main components required of MCT capital required

think about the formulas

A

(IMCO):
- insurance risk
- market risk
- credit risk
- operational risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

define MCT insurance risk

A

risk of loss from the potential for claims from policyholders & beneficiaries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

define MCT market risk

A

risk of loss from changes in prices in various markets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

define MCT credit risk

A

risk of loss from counterparty’s potential inability or unwillingness to fully meet contractual obligations due to the insurer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

define MCT operational risk

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

statistical definition of ‘target capital required’

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

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

A

Total Equity (line 699 from Statement of Financial Position - Liabilities & Equity)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

principles of allocation regarding MCT capital requirements

A

(FACCS):
- free from bias
- accurate when allocating revenue & costs
- consistent with allocation methods used by the insurer for other business decision-making puposes
- consistent over time
- systematic & reasonable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

describe the transitional arragement for MCT capital requirements for business combinations effective before 6/30/2019

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

considerations in defining MCT capital available

A

(APAS):
- availability: is the capital element fully paid & available to absorb losses
- permanence: until when is a capital element available
- absence: ask whether a capital element has an absence of encumbrances & mandatory servicing costs
- subordination: is the capital element subordinated to rights of policyholders and creditors in insolvency or winding-up

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

main components of MCT capital available

A
  • category A
  • category B
  • category C
  • non-controlling interests in subsidiaries, subject to certain conditions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

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

A
  • 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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

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

A

(RC-CORNA):
under policyholder’s equity:
- residual interest (non-stock)
under shareholder’s equity: (include everything except preferred shares)
- common shares
- contributed surplus
- other capital
- retained earnings
- nuclear and other reserves
- AOCI

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

should dividends paid to stockholders be removed from capital available

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

briefly describe the MCT capital composition limits

A

BC limit: category B + category C <= 40% * (total capital available - AOCI)
C limit: category C <= 7% * (total capital available - AOCI)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

which regulatory adjustment to MCT capital available is an addition

A

CSM associated with the title insurance contracts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

which regulatory adjustment to MCT capital available is an addition or deduction

A

adjustments to owner-occupied property valuations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

2 uncertainties required for a risk to be considered ‘insurance risk’

A
  • uncertainty in the amount of payments
  • uncertainty in the timing of the payments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

subcomponents of MCT insurance risk

A
  • LIC
  • unexpired coverage includes catastrophes other than earthquake and nuclear
  • unregistered reinsurance
  • earthquake and nuclear catastrophes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

how is diversification risk accounted for regarding MCT insurance risk

A
  • risk factors for each class of insurance contain an implicit diversification credit
  • this is based on the assumption that insurers have a well-diversified portfolio
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

formula margin(LIC)

A

margin(LIC) = 1.1 * sum (risk factor * net LIC(issued) excl.RANF - AIC(re held) excl.RANF)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

formula margin(unexpired coverage)

A

margin(unexpired coverage) = risk factor * max(net unexpired coverage, 30% * net premiums received past 12 months)
where
net premiums received = premiums received net of associated reinsurance premiums paid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

formula net unexpired coverage

A

net unexpired coverage = unexpired coverage for insurance contracts issues - unexpired coverage for reinsurance contracts held

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

formula (GMM) unexpired coverage for insurance contracts issued

A

unexpired coverage for insurance contracts issued = PV(estimate of future cash flows excluding premium cash flows)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

formula (PAA) unexpired coverage for insurance contracts issued

A

unexpired coverage for insurance contracts issued = (LRC - LC + unamortized insurance acquisition cash flows + unamortized reinsurance commissions + premiums receivable) x ELR + costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

formula (GMM) unexpired coverage for reinsurance contracts held

A

unexpired coverage for reinsurance contracts held = PV(estimate of future cash flows for current and future reinsurance contracts held)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

formula (PAA) unexpired coverage for reinsurance contracts held

A

unexpired coverage for reinsurance contracts held = (A + C + P1 + P2) x ELR - (P3 + P4)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

the risks of holding a reinsurance contract with a reinsurer

basically insurer not getting the money expected

A
  • reinsurer won’t pay insurer what is owed
  • mis-assessment of required provision the amount the insurer expects to be paid
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

define SIR(self-insured retention)

A

portion of loss payable by the policy holder

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

condition for admitting recoverability of SIRs (self-insured retention)

A

OSFI must be satisfied of collectability - may require collateral (i.e, lOC from policyholder)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Earthquake Reserves(ER) formula

A

ER = (EPR + ERC) x 1.25
where
ERC = ERX - FinRes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

methods for ERX

A

model approach:
- ERX1 = (East Canada PML500 ^ 1.5 + West Canada PML500 ^ 1.5) ^ (1 / 1.5)
standard approach:
- ERX3 = max(East Canada PTIV - applicable deductible, West Canada PTIV - applicable deductible)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

subcomponents of MCT market risk

A

(IFFERO):
- interest rate risk
- foreign exchange risk
- equity risk
- real estate risk
- right-of-use asset risk
- other market risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

interest rate risk formula

A

abs(asset duration * asset values - liability duration * liability values) * 1.25%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

foreign exchange risk formula

A

10% * Canadian dollar value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

equity risk formula

A

30% * market value of equities
including:
- common shares
- joint ventures where insurer holds <= 10% ownership interest
- futures
- forwards
- swaps

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

real estate risk formula

A

10% * owner-occupied property + 20% * investment property

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

formula margin(balance-sheet assets)

A

margin(credit risk) = asset value * risk factor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

briefly describe what the ‘risk factor’ is for calculating the margin for credit risk

A

the risk factor either:
- corresponds to the external credit rating of the counterparty
- represents a prescribed factor determined by OSFI

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

what are off-balance sheet exposures

A

risk exposures that are not listed on a company balance sheet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

example of off-balance sheet exposures

A
  • structured settlements
  • LOC(letters of credit)
  • NOD(non-owned deposit)
  • derivatives
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

formula margin(off-balance-sheet exposures)

A

margin(credit risk for off-balance sheet exposures) = (CEA - eligible collateral) x CCF) x risk factor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

operational risk formula

A

CapReq(OpnRisk) = min(30%*CR(0), sum(A components) + max(B components))
where
CR(0) = CapReq(I) + CapReq(M) + CapReq(C)
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)

the upper limit dampens operational risk for high-volume, low-complexity businesses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

is legal risk included in operational risk?

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

risks that excluded from MCT operational risk

A
  • strategic risk
  • reputation risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

describe the purpose of the cap on operational risk of 30%xCR(0)

A

to dampen operational risk for business that satisfies these conditions
- high-volume
- low-complexity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

scenarios linked rapid premium growth

common sense

A
  • mergers
  • new lines of business
  • changes to products or U/W criteria
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

briefly describe the impact of unregistered reinsurance on MCT operational risk

think about insurance risk components

A

when unregistered reinsurance goes up -> CapReq(OpnRsk) goes up because:
- operational risk depends on insurance and credit risk
- and insurance risk goes up because unregistered reinsurance is one of its components

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

define diversification credit

A

a reduction to capital required recognizing that not all risk categories are likely to suffer their maximum loss simultaneously

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

what is the general goal of ORSA

A

enhance insurer’s understanding of the relationship between risk profile and capital needs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

does OSFI approve an insurer’s ORSA

A

no, but OSFI will review a company’s ORSA as part of its assessment of the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

what is the relationship between ERM & ORSA

A

ERM, ORSA should be well-intergrated so that analysis, results are consistent between them

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

ORSA’s key elements

A
  • risk identification & assessment
  • relate risk to capital
  • oversight
  • monitoring & reporting of risks
  • internal controls & objective review
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

describe the ORSA key element ‘risk identification & assessment’

A

identify & assess the materiality of forseeable & emerging risks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

describe the ORSA key element ‘relating risk to capital’

A
  • set ICT(internal capital target) using stress-testing techniques
  • must withstand a specified loss without falling below supervisery capital requirements
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

describe the ORSA key element ‘oversight’

think about if I’m about to manage, what I will do

A

senior management responsibiity: should have a good understanding of:
- nature and significance of the risk exposures
- risk mitigants
- risk management methods
- capital adequacy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

describe the ORSA key element ‘monitoring & reporting’

A

annual reports to Board of Directors & Senior Management on risk profile & capital management

63
Q

describe the ORSA key element ‘internal control & objective review’

A
  • review for: accuracy, integrity, reasonableness
  • objective reviewer: internal or external auditor or skilled professional not involved in the ORSA process
64
Q

is ORSA process the same for all federal insurers

A

Yes and No:
- key elements are the same (remember to list them!)
- but specifics differ by company depending on risk profile & NSC(nature/scale/complexity) of operations

65
Q

should ORSA be used to set ICT

A

yes: an important part of ORSA is to set ICT since ICT considers insurer-specific risks

66
Q

should item be included in MCT calc and setting internal capital target: cyber risk

A

MCT: not specifically part of MCT
ORSA:
- should be considered in setting ICT
- product is sold through a mobile app (this is for the specific question, because it’s mentioned in the context)

67
Q

should item be included in MCT calc and setting internal capital target: interest rate risk

A

MCT: part of market risk within ICT
ORSA:
- should be considered in setting ICT
- government bonds are subject to fluctuations in interest rate

68
Q

should item be included in MCT calc and setting internal capital target: geographical diversification

A

MCT: not part of MCT
ORSA:
- should be considered in setting ICT
- company operates in several provinces

69
Q

what is the relative importance of quantitative, qualitative aspects of ORSA

A

equally important

70
Q

regarding ORSA key element ‘relating risk to capital’, identify possible approaches to calculating ICT

A
  • complex internal model: for complex risks
  • simple model: with conservative assumptions
  • qualitative: includes expert judgment for difficul-to-quantify risks
71
Q

similarities between DCAT & ORSA

A
  • both are concerned with risk identification & control
  • both are concerned with capital requirements
  • both are submitted to BoD & regulators
72
Q

differences between DCAT & ORSA

A

guidelines:
- DCAT: uses CIA SOPs(statement of principles)
- ORSA: uses OSFI guidelines
methods:
- DCAT: quantitative only
- ORSA: quantitative & qualitative
report:
- DCAT: by AA
- ORAS: management responsibility

73
Q

advantages of ORSA over MCT

A

ORSA:
- includes all material risks
- uses stress-testing to set ICT
- qualitative as well as quantitative
- admits assessment of internal controls

74
Q

definition of ‘stress-testing’

A

a risk management technique
- to evalualte effects on financial position
- due to specified changes in risk factors
- corresponding to exceptional but plausible events

75
Q

purpose of stress-testing

A
  • risk: identify & control risk
  • complement: provide a complement to other risk management tools + simulate shocks
  • capital management: support capital management
  • liquidity management: improve liquidity management
76
Q

describe risk id & control regarding purpose of stress-testing

A
  • risk id: identify and concentration & interaction of risks
  • risk control: ajdust individual portfolios & overall business strategy
77
Q

describe complementing other tools regarding purpose of stress-testing

A
  • test statistical models used to determine VaR
  • simulate shocks to test model robustness to economic changes
78
Q

describe supporting capital management regarding purpose of stress-testing

A

identify severe events and/or compouding events that impact capital managements

79
Q

describe improving liquidity management regarding purpose of stress-testing

A

assess liquidity profile & adequacy of buffers for institutional & market-wide stresses

80
Q

describe how stress-testing is a key risk management tool for coverage of overland flooding

A

company won’t have historical data
- identify flood risks using stress-testing models
- estimate capital required to support flood risk in different scenarios
- stress-testing could complement publicly available flood data

81
Q

describe board vs. management responsibilities regarding a stress-testing program

A

BoD:
- ultimate responsibility for program
- ensures implementation of program by management
- should be aware of key findings
management:
- implement & manage stress-testing program
- identify PAS(plausible adverse scenario)
- develop & implement risk mitigation strategies

Bod set directions and oversight, management follow BoD’s decisions and oversight operations

82
Q

rudimentary stress-testing considerations

A

(RUDI):
- range of perspectives:
-> perspectives: consult economists, actuaries, others
-> techniques: qualitative, quantitative
- update stress-testing framework regularly:
-> monitor effectiveness of framework with qualitative, quantitative measures & update accordingly
-> elements of a framework include: docs, data quality, assumptions
- docs: provide written docs of assumptions & fundamental elements of scenarios
- infrastructure should be flexible
-> should allow increase in sensitivity testing in times of rapid change
-> should accomodate time horizons for management action

83
Q

how to improve stress testing

A

RUDI + includes making risks dynamic and reviewing assumptions more than once a year - focus on program not just scenarios

84
Q

considerations in scenario selections

A
  • scenarios should cover all important business & product lines
  • create non-historical scenarios(events that haven’t happened but could happen)
  • severe & sustained downturns includes large loses, loss of reputation, legal problems
85
Q

management considers only insurance risk in stress-testing program in an earthquake-prone region - appropriate?

A

not appropriate: stress-testing should consider all risks, not just 1 significant risk
change: consider operational risk also since call centers & claim adjusters may be overloaded after an earthquake event

86
Q

management doesn’t consider earthquake risk in stress-testing program in an earthquake-prone region - appropriate?

A

not appropriate: earthquakes are low-frequency so lack of prior event does not indicate lack of risk
change: use external data to construct earthquake risk models

87
Q

significant portion of investment portfolio is in local market - what are the interactions between risks?

A

insurance risk due to claims from earthquake event and market risk due to loss of income from own properties damaged in earthquake event
- a comprehensive stress-testing program would reveal these significant & interacting risks

88
Q

focus areas in reponse to financial market turmoil

A
  • risk mitigation
  • s&w(securitization & warehousing)
  • reputation (reputational risk)
  • credit risk & counter-party risk
  • concentration risk
89
Q

describe focus areas when designing stress-testing program for flood&provide examples

A

focus 1:
- risk mitigation
- stress-testing should facilitate development of mitigation & contingency plans
focus 2:
- reputation risk
- if customers don’t trust you, you may lose business
- if existing customers are not made aware of new flood coverage they may be angry & switch providers

90
Q

OSFI’s considerations in assessing stress-testing program

think about if you work for OSFI, what are the things you want to know about when you review the stress-testing program from insurers

A
  • appropriateness: are scenarios for institution’s risk profile
  • viability: are scenarios included that compromise viability
  • frequency: is stress-testing frequent enough for timely management action
  • severe shocks: do scenarios include severe shocks & sustained downturns
91
Q

describe & contrast scenario with sensitivity testing

A

scenario-testing:
- significant changes to risk factors
- observe future state including ripple effects & management actions over a longer time horizon
- more complex & comprehensive

sensitivity-testing:
- incremental changes to risk factors
- shock is more immediate & time horizon shorter
- simpler fewer resources required

92
Q

definition ‘MinCapReq’

A

MinCapReq = 100% x BaseCap
- capital required to cover risks specified in capital guidelines
- if CapAv < MinCapReq then there are critical viability concerns for insurer

93
Q

definition ‘SupCapReq’

A

SupCapReq = 150% x BaseCap
- capital required to cover risks specified in capital guidelines + margin
- if CapAv < SupCapReq then insurer is subject to supervisory attention

94
Q

definition ‘Internal Target Capital’

A
  • a capital target determined by ORSA above supervisery capital target
  • includes risks specified in capital guidelines and all insurer-specific risks
95
Q

reasons for having an Internal Target Capital

A
  • gives management time to address issues
  • captures insurer-specific risks not addressed by industry-wide capital guidelines
96
Q

approach to determine Internal Target Capital ratio

A
  • includes insurer-specific risks in capital assessment
  • assessment uses stress-testing
  • capital level must withstand a specified level of loss without falling below supervisery capital over specified time horizon
97
Q

is it ok to consider future capital projections when determining the Internal Capital Target?

A
  • no, unless planned & certain
  • also, cannot consider head-office guarantees & other management actions except for setting targets above internal target
98
Q

required management action if capital available falls below Internal Capital Target

A

if this happens or expected within 2 years, notify OSFI & submit plan to restore capital to internal target level reasonably quickly

99
Q

what is FRFI

A

federally regulated financial institution

100
Q

define corporate governance

A

set of relationships among BoD, management, shareholders, other stakeholders

101
Q

characteristics of good corporate governance

A
  • incentivizes good behavior(i.e,advances company & shareholder interests)
  • enables monitoring of operations & performance
102
Q

contrast roles: BoD and senior management

A
  • BoD: direction-setting, oversight of management
  • senior management: implement BoD decisions, oversight of operations
103
Q

role of corporate governance in OSFI’s supervision

A
  • OSFI relies on good corporate governance to support its supervisery role
  • OSFI required BoD involvement during interventions to determine best corrective actions
104
Q

what items should a risk appetite framework contain

A
  • RAS: risk appetitle statement
  • RL: risk limits
  • RR: roles/responsibilities of those implementing risk appetite framework
105
Q

provide a general description of a risk appetite statement

A

reflects level of risk, and type of risk FRFI is willing to accept to meet business objectives

106
Q

key features of the risk appetite statements

A
  • relate to short, long-term strategies
  • includes quanlitative/quantitative measures of risk
  • forward-looking
  • consider normal and stressed scenarios
107
Q

qualitative, quantitative measures within the risk appetite statement

A
  • qualitative: identify significants risks company wants to take/avoid + why
  • quantitative: measures of ECL(earnings, capital, loss) FRFI is willing to support
108
Q

describe the concepts of risk limits within the risk appetite framework

A

risk limits refers to allocations of FRFI’s risk appetite statement to:
- risk categories (IMCO)
- business unit
- LOB or product

109
Q

once BoD approves, who implements risk appetite framework

A

senior management

110
Q

how is compliance with risk appetite framework ensured

A

CRO: ensures risk limits are consistent with risk appetite statement
CRO: provides reports to BoD, senior management assessing risk limits and risk appetite statement
internal auditor: ensures compliance with risk appetite framework

111
Q

broad 3-point plan for managing earthquake exposure

A

(MML):
- measure/monitro/limit earthquake exposures

112
Q

define PML(probable maximum loss)

A

dollar value of loss a major earthquake is unlikely to exceed (loss expected only once per X years)

113
Q

define gross PML & net PML

A
  • gross PML: after deductible, before reinsurance
  • net pML: after deductible, after reinsurance

difference is only before/after reinsurance, both have deductible applied

114
Q

key principles for managing earthquake exposure

A
  • risk management
  • data management
  • models
  • PML
  • financial resources & contingency plan
115
Q

briefly describe the key principle of risk management for earthquake exposure

A

earthquake exposure risk management policies are overseen by senior management

116
Q

briefly describe the key principle of data management for earthquake exposure

A
  • data required is more than for traditional ratemaking
  • must address data integrity, verification, limitations
117
Q

briefly identify the key principles of modeling for earthquake exposure

A

must understand assumptions, methods, limitations or earthquake models

118
Q

briefly describe the key principle of PML for earthquake exposure

A

PML = total expected ultimate cost
- includes considerations for data quality, non-modeled exposure, model uncertainty, multi-region exposure

119
Q

briefly describe the key principle of financial resources & contingency plan for earthquake exposure

A
  • financial resources: quantification of how financial resources cover pML
  • contingency plan: how to continue efficient business operations after disaster
120
Q

items that should be documented for earthquake risk management

try to extend from the key principles

A
  • risk appetite and risk tolerance of insurer
  • data management framework
  • model assumptions, methods, limitations
  • calculation of PMLs
  • nature & adequacy of financial resources
  • contingency plans supporting the risk
  • how concentration of exposures is measured & monitored
121
Q

best practices for earthquake modelling

A

(DAQKDUP):
- Docs: document use of model within risk management program
- Alternatives: explain why a particular model is used vs. alternatives
- Qualified: need qualified staff to run in-house models regularly
- Knowledge: must have knowledge of assumptions, methods, limitations of earthquake model
- Data: should provide evidence to show that granularity & quality of data is appropriate
- Uncertainty: must understand the impact of uncertainty on capital adequacy & reinsurance requirements
- PMLs: if PML(model 1) not equal to PML(model 2) then must explain the differences & any subsequent model adjustments

122
Q

identify uses of earthquake models aside from PML calculation

A
  • make U/W decisions
  • monitor exposure-accumulations
123
Q

sound practices for earthquake model VERSION

A
  • use more than 1 model
  • ensure timely updates of material changes to model within 1 year of change
  • understand assumptions, methods, limitations of vendor software for PML calculation
  • if in-house PML model is used, should compare result to alternate models
124
Q

sound practices for earthquake model VALIDATION

common sense

A
  • compare modeled losses with actual losses
  • compare tail losses with market price for reinsurance
  • use global data to supplement limited Canadian earthqake data
125
Q

how might management adjust for low data quality in earthquake PML estimate

A

may add a margin of safety to the PML estimate

basically to account for uncertainty

126
Q

identify non-modeled exposures when calculating PML

A
  • exposure growth between date of data & relevant exposure period
  • consider adequacy of ITV
  • consider GRC(guaranteed replacement cost)
  • increased seimicity after large event
127
Q

2 examples of model uncertainty

A
  • uncertainty associated with conversion from location-specific ground motion to actual damage levels
  • model assumptions are being continuously updated & refined
128
Q

how might management adjust for model uncertainty in earthquake PML estimate

A

may add a margin of safety to the PML estimate

129
Q

regarding multi-region exposures, identify disadvantages of using the maximum of BC, QC exposures

basically think about the impacts of missing other regions

A
  • understates risk for insurers with exposure in both regions
  • ignores earthquake elsewhere, which could be material
130
Q

how should PMLs be reported for Canadian vs. foreign insurers with exposure outside Canada

A

BoD, senior management would report PMLs to OSFI as follows:
- Canadian insurers report PMLs based on worldwide exposure
- foreign insurers report PMLs based on Canada-wide exposure

131
Q

identify financial resources for covering PML for earthquake exposure

A
  • capital & surplus (max 10% of capital & surplus)
  • resinsurance (most insurers use cat reinsurance)
  • earthquake reserves calculated as part of MCT
  • capital marketing financing
132
Q

identify a restrictive condition on earthquake exposure financial resources for: reinsurance coverage

A

when including non-cat reinsurance must consider ‘per event’ limits and other events that may exhaust coverage

133
Q

identify a restrictive condition on earthquake exposure financial resources for: capital marketing financing

A

OSFI prior approval is required before recognition as a financial resource under MCT guidelines

134
Q

identify a restrictive condition on earthquake exposure financial resources for: capital & surplus

A

limited to a maximum of 10% of capital & surplus

135
Q

identify a restrictive condition on earthquake exposure financial resource for: EPR

A

must not exceed countrywide PML 500

136
Q

ways to improve risk estimation & cat risk management for this insurer

A
  • tech investments
  • audit data
  • ensure adequate financial resources & contingency plan
  • measure/monitor/limit earthquake exposure
137
Q

what are OSFI’s earthquake exposure reporting requirements

A
  • file earthquake exposure data form annually
  • if no material exposure then submit letter stating so
138
Q

what are OSFI’s earthquake exposure supervisory requirements

A

if an insurer has material earthquake exposure:
- insurer must submit earthquake risk management policies
- must submit FCT report that includes earthquake exposure scenario or provide reason for not including

139
Q

what is the difference between OSFI’s earthquake exposure reporting & supervisory requirements

A
  • for reporting purposes: just submit the standard earthquake exposure data form
  • for supervisory purposes: must submit comprehensive risk management policies
140
Q

what are OSFI’s supervisory options when an insurer’s earthquake exposure risk management principles are not being followed

A

OSFI may adjust capital or asset requirements or TSR(target solvency ratio)

141
Q

what are the duties of senior management regarding earthquake exposure risk management

A
  • implement risk management plan & internal controls
  • discretion to increase PML from model due to low data quality or model uncertainty
  • a senior manager reports to all senior management about compliance and the PML
142
Q

what is included in a senior officer’s regular reports to senior management regarding earthquake exposure

A
  • state compliance with risk management policies except where noted
  • explain calculation of PML with details of supporting financial resources
143
Q

what are the duties of the BoD regarding earthquake exposure risk management

A

oversight of risk management plan & ensuring adequacy of internal controls

144
Q

main responsibility of OSFI relationship manager

A

main point of contract between FRFI and OSFI
-> responsible for maintaining an up-to-date risk assessment of FRFI

145
Q

key principles of risk assessment

A
  • identify material risks
  • should be forward-looking & allow for early intervention
  • use sound predictive judgment
  • understand risk drivers
  • differentiate between inherent risks & management of those risks
  • dynamic adjustment
  • assess whole institution by calculation a CRR(composite risk rating)
146
Q

primary concepts of risk assessment

A
  • significant activities
  • inherent risk
  • quality of risk management
  • net risk
  • importance & overall net risk
  • earnings
  • capital
  • liquidity
  • risk matrix & CRR(composite risk rating)
147
Q

describe significant activities

A
  • anything that is fundamental to the business model (LOB, unit, process,…)
  • it’s the fundamental risk assessment concept within the supervisory framework
148
Q

describe quality of risk management

A
  • control level 1: operational day-to-day control of significant activities
  • control level 2: oversight of finance, compliance, actuarial,…
149
Q

describe net risk

A
  • net risk of significant activity = judgment on inherent risk & quality of risk management
  • can be low, moderate, above average, high + trend
150
Q

describe risk matrix, CRR(composite risk rating)

A
  • risk matrix: records assessment of significant activities and risks
  • CRR: culmination of assessment can be low, moderate, above average, high
151
Q

risk assessment of core supervisory processes

A
  • planning
  • execution & updating risk profile
  • reporting & intervention
152
Q

fundamental concept in OSFI’s supervision of risk assessment

A

significant activities

153
Q

OSFI’s steps

A

STEP1: identify significant activities
STEP2: assess inherent risks and quality of risk management
STEP3: calculate net risk for each significant activity
STEP4: use risk matrix to assess intervention status and CRR

154
Q

If inherent risk = above average and quality of risk management = needs improvement determine net risk assessment

A

net risk = high

April 2025 (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions