OSFI - MCT

Question 1

List the items that category A capital consists of. (5)

Answer 1

• qualifying category A common shares
• contributed surplus
• R/E (Retained Earnings)
• reserves (includes earthquake, nuclear, general contingency reserves)
• AOCI (Accumulated Other Comprehensive Income)

Question 2

List the items other than category A capital included in capital available. (3)

Answer 2

• category B capital
• category C capital
• non-controlling interests

Question 3

Identify 4 considerations in defining MCT Capital Available.

Answer 3

• AVAILABILITY: is the capital element fully paid and available to absorb losses?
• PERMANENCE: until when is the capital element available?
• ABSENCE: ask whether a capital element has an absence of encumbrances & mandatory servicing costs
• SUBORDINATE: is the capital element subordinated to rights of policyholders and creditors in an insolvency or winding-up?

Question 4

Define Insurance Risk.

Answer 4

Risk of loss FROM the potential of claims from policyholders & beneficiaries.

Question 5

Define Market Risk.

Answer 5

Risk of loss FROM changes in prices in various markets.

Question 5

Define Credit Risk.

Answer 5

Risk of loss FROM a counterparty’s potential inability OR unwillingness to fully meet contractual obligations due to the insurer.

Question 6

Define Operational Risk

Answer 6

Risk of loss FROM inadequate or failed internal processes, people, or systems OR FROM external events.

Question 8

Diversification credit - Definition

Answer 8

It is a reduction to the capital required RECOGNIZING that not all risk categories are likely to suffer maximum loss simultaneously.

Question 9

What is the minimum MCT ratio that is required to be held by Federally Regulated P&C insurers?

Answer 9

100%

Question 10

What is the industry wide supervisory target capital ratio set by OSFI?

Answer 10

150%

Question 11

Insurance risk - On what basis should claims and premium be put before calculating the capital required for insurance risk?

Answer 11

The data should be NET of reinsurance, salvation & subrogation, and SIRs (Self-Insured Retention), and EXCLUDE PfADs

Question 12

Insurance risk - What is the limit on LOC (Letters of Credit) for obtaining credit against unregistered reinsurance?

Answer 12

LOC limit = 30% * (UEP ceded + O/S recoverable)

Question 13

Insurance risk - Define SIR (Self-Insured Retention)

Answer 13

It is a portion of the loss payable by the policyholder.

Question 14

Insurance risk - What is the condition for admitting recoverability of SIR?

Answer 14

OSFI must be satisfied of the collectability - they may require collateral (eg: LOC (Letter of Credit) from the policyholders)

Question 15

Insurance risk - Define Earthquake Premium Reserve (EPR)

Answer 15

It is the voluntary accumulation of earthquake premiums (must not exceed the PML500).

Question 16

Insurance risk - If EQ premium is implicit in the total premium, what must the insurer demonstrate?

Answer 16

The insurer must demonstrate reasonableness of the premium allocation to EQ coverage.

Question 17

Insurance risk - When can the EPR (Earthquake Premium Reserve) be reduced? (2)

Answer 17

• when there is a material decrease in EQ exposure

- to establish a claims or LAE provision post event

Question 18

Insurance risk - Is the EPR (Earthquake Premium Reserve) included in reserve amounts on the B/S (Balance Sheet)?

Answer 18

Yes.

Question 19

What are the 3 main components of Credit Risk?

Answer 19

• Counter-party default risk for Balance Sheet items
• Counter-party default risk for off-Balance Sheet items
• Counter-party default risk for Collateral & Guarantees from UnregReins.

Question 20

Credit Risk - What are some examples of off-Balance Sheet (B/S) exposures? (4)

Answer 20

• structured settlements
• NOD (non-owned deposits)
• LOC (letter of credit)
• derivatives

Question 21

Operational Risk - Is legal risk included in operational risk?

Answer 21

YES, legal risk is included.

Question 23

Operational Risk - List 2 types of risk that are EXCLUDED from MCT operational risk.

Answer 23

• Strategic risk

- Reputational risk

Question 23

Operational Risk - What is the purpose of the cap on operational risk of 30%*CR(0), where CR(0) = sum(ins, mkt, crdt) risk

Answer 23

In order to dampen the operational risk for high-volume , low complexity business that have high levels of reinsurance.

Question 23

Operational Risk - What is rapid premium growth linked to? (3)

Answer 23

• mergers
• new LOBs
• changes to products or U/W criteria

Question 24

Describe the impact of unregistered reinsurance on the MCT capital available.

Answer 24

• if unregistered reinsurance goes UP, then CapAv goes DOWN
  reduction = max(0,D) where D = (UEP ceded + O/S Recv + Reins Recv) - (Reins Payable + NOD + LOC) summed over all reinsurers separately

Recv = Recoverable/Receivable
NOD = Non-Owned Deposits
LOC = Letters of Credit

Question 25

Diversification credit - Does the diversification credit consider the correlation between credit risk and market risk?

Answer 25

NO, the credit risk and market risk are summed to get Asset risk, then the diversification credit considers the correlation between the asset risk and the insurance risk.

Question 27

Operational Risk - What is the impact of unregistered reinsurance on MCT operational risk?

Answer 27

• when unregistered reinsurance goes UP, then CapReq(Opn Risk) goes UP
  i) Operational risk DEPENDS on Insurance risk and Credit Risk
  ii) Insurance risk goes UP because unregistered reinsurance is one of its components