OSFI MCT Flashcards
Reasons for 150% MCT supervisory target
- Provides a cushion above the minimum requirement
* Facilitates OSFI’s early intervention process
Why should an insurer establish an internal target capital ratio sufficiently high ?
- Absorb unexpected losses beyond those covered by the supervisory target
- Provide adequate time for management to resolve financial problems that arise before OSFI intervention
- If an insurer falls or anticipates falling below their internal target, must inform OSFI and outline their plans, subject to OSFI’s approval, to return to their internal target
List primary considerations for defining the capital available of a company for MCT purpose
- Availability (capital is fully paid and available to absorb losses)
- Permanence (period over which the capital is available)
- Absence of encumbrances and mandatory servicing costs (free of payments)
- Subordination to the rights of PH and creditors
List examples of Category A capital
- Common shares issued by the PC insurer
- Share premium resulting from the issuance of instruments included in common equity capital and other contributed surplus
- Retained earnings
- EQ, nuclear and general contingency reserves
- AOCI
Define Category B capital
Instruments issued by the institution that meet category B criteria and do not meet the criteria for classification as category A, subject to applicable limits
List an example of Category C capital
Amortization Years to Maturity : Included in Capital 5 years or more : 100% 4 years and less than 5 years : 80% 3 years and less than 4 years : 60% 2 years and less than 3 years : 40% 1 year and less than 2 years : 20% Less than 1 year : 0%
List parts of the insurance risk
- Reserving risk associated with variation in claims provisions
- UW risk including catastrophe risk, other than EQ and nuclear
- EQ and nuclear risks
- Risk associated with unRe
List 12 deductions to capital available
- Interests in and loans to non-qualifying subsidiaries, associates, and joint ventures in which the company holds more than 10% ownership interest
- Unsecured unRe exposures and SIR
- EQ premium reserve not used as part of financial resources to cover EQ risk exposure
- DPAE associated with A and S business
- AOCI on CF hedges
- Accumulated impact of shadow accounting
- Goodwill and other intangible assets
- Deferred tax assets
- Cum. gains/losses due to changes in own credit risk on FV financial liabs
- Defined benefit pension fund assets and liabs
- Investments in own instruments
- Reciprocal cross holdings in the common shares of insurance, banking and financial entities
List parts of the market risk
- Interest Rate Risk
- Foreign Exchange Risk
- Equity Risk
- Real Estate Risk
- Other Market Risk Exposures
List interest rate sensitive assets
- Term deposits and other similar short-term securities
- Bond and debentures
- Commercial paper
- Loans
- Mortgages
- Mortgage-backed and asset-backed securities
- Preferred shares
- Interest rate derivatives held for other than hedging purposes
List and briefly describe 3 allowable interest rate derivatives
CF are dependent on future interest rates. Only plain-vanilla interest rate derivatives that clearly serve to offset FV changes
• Interest rate and bond future
• Interest rate and bond forwards
• Single-currency interest rate swaps
Discuss the capital compostions limits for MCT, treatment of excess capitals and exceptions
- Sum of capital instruments under B and C will not exceed 40% of total capital available, excluding AOCI
- Capital instruments under C will not exceed 7% of total capital available, excluding AOCI
- If these limits are not respected, capital above limits will not be considered (greater value can be excluded depending on the case)
Define Insurance Risk and two uncertainties included it account for
Risk arising from the potential for claims or payouts to be made to PH or beneficiaries. Includes uncertainties around
• Ultimate amount of net CF from premiums, commissions, claims, and related settlement expenses
• Timing of the receipt and payment of these CF
Define Registered Re
Generally considered to be a registered Re, if:
• Incorporated fed and has Re the risks of the ceding company
• Foreign company that has Re in Canada the risks of the ceding company and is authorized by order of the Supt
• Provincially/territorially regulated insurer that has been approved by the Supt
Briefly discuss letters of credit and capital credit for unRe
- Must be approved by OSFI
- Limit on the use of LOC to obtain capital credit for unRe is 30% of “UEPR ceded to assuming insurer” and “O/S losses recoverable from assuming insurer”
- Limit is applied in the aggregate and not against individual Re exposures
Briefly discuss Nuclear Reserve
PC insurers issuing nuclear risk policies are required to record an additional provision of 100% of net WP, net of commissions, multiplied by 1.25. In the absence of meaningful statistical data on the severity and frequency of losses, OSFI considers it appropriate to reverse this provision after 20 years
Define Market Risk
Arises from potential changes in rates or prices in various markets such as for interest rates, foreign exchange rates, equities, real estate, and other market risk exposures. Exposure to this risk results from trading, investing, and other business activities, which create on and off-BS positions
Define Interest Rate Risk
Risk of economic loss resulting from market changes in interest rates and the impact on interest rate sensitive assets and liabs. Interest rate risk arises due to the volatility and uncertainty of future interest rates
Define Foreign Exchange Risk
Risk of loss resulting from fluctuations in currency exchange rates and is applied to the entire business activity
Define Equity Risk
Risk of economic loss due to fluctuations in the prices of common shares
Define Real Estate Risk
Risk of economic loss due to changes in the value of a property or in the amount and timing of CF from investments in real estate
Define Other Market Risk
Include assets that fall in the category “other assets”
Define Operational Risk
Risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes legal risk but excludes strategic and reputation risk
Define how Interest Risk margin is computed
Duration and interest rate shock are applied to the FV of interest rate sensitive assets and liabs
• Interest rate risk margin is the diff between change in the value of interest rate sensitive assets and liabs
What is credit risk? What is actuarial risk ?
- Credit risk: Risk from un-collectability of funds or the amount expected to be returned differ from what was actually returned
- Actuarial risk: Accounts for the possible abnormal negative variation in the amounts calculated by actuaries
What is the formula for Minimum Capital Required
Sum of Capital required for: • Insurance Risk • Market Risk • Credit Risk • Operational Risk
What are the components of Insurance Risk ?
- Capital required for unpaid claims and premium liabs
- CAT Reserves (EQ and nuclear)
- Margin for Re ceded to unRe
What is excess collateral and how does it affect a company’s MCT ?
- Non-owned deposits and LOC that are greater than the unRe requirements
- Reduces capital required
Compute excess collateral and the reduction in capital required
Excess Collateral = Total Collateral - unRe Exposure
- Total Collateral = Non-owned deposits + LOC
- UnRe Exposure = Margin*(UEPR ceded + O/S Loss Recoverable) + Receivables - Payables
Reduction to Capital Required = (Excess/Total Collateral) * Total Capital Required (Indv. Collateral Amount * Risk Factor)
