OSFI.MCT Flashcards
Operational risk includes ( ) but excludes ( ).
Includes legal risk
Excludes strategic and reputation risk
What is the purpose of the cap on operational risk?
Serves to dampen the operational risk margin for companies that have high-volume/low-complexity business.
Identify 3 factors that can cause rapid growth.
- Mergers
- New LOBs
- Changes to products or U/W criteria
Identify 3 regulatory deductions to capital available.
- Unsecured & unregistered reinsurance exposures and SIRs
- Earthquake premium reserve not used as part of financial resources
- Accumulated impact of shadow accounting
- Goodwill and other intangible assets
- Deferred tax assets
- Investment in own instruments
Define credit risk
Risk of loss FROM counter-party’s potential inability OR unwillingness to fully meet contractual obligations due to the insurer.
Identify the 4 qualitative considerations regarding MCT capital available. (APAS)
- AVAILABILITY: capital fully paid & available to absorb losses?
- PERMANENCE: until when is capital element available?
- ABSENCE: ask whether a capital element has an absence of encumbrances and mandatory servicing costs.
- SUBORDINATION: is the capital element subordinated to the rights of policyholders & creditors in an insolvency winding-up?
Define Market Risk
Risk of loss FROM changes in prices in various markets.
Define Operational Risk
Risk of loss FROM inadequate OR failed internal processes, people, systems OR from external events.
What are the 6 components of category A capital?
(Hint: QAS-RRR)
- Qualifying Category A common shares
- Surplus (Contributed + Other Capital)
- Retained Earnings
- Reserves
- Accumulated Other Comprehensive Income (AOCI)
- Residual Interest
What is the purpose of Diversification Credit (DC) ?
Recognize diversification by reducing the capital required (diversified risks are not likely to suffer big losses all at the same time).
MCT stands for….?
Minimal Capital Test
Define Insurance Risk
Risk of loss FROM the potential for claims FROM policyholders and beneficiaries.
Identify the 2 uncertainties that Insurance Risk deals with.
- Ultimate amount of net cash flows from premiums, commissions, claims and related settlement expenses.
- Timing of the receipt and payment of these cash flows.
Identify the 4 sub-categories of Insurance Risk.
- Claim liabilities (reserving risk)
- Premium liabilities (U/W risk)
- Unregistered reinsurers
- Catastrophes (earthquake, nuclear)
What is the limit on Letters of Credit for obtaining capital credit against unregistered reinsurers?
LOC limit = 30% * (A + B)
A = P associated with unexpired cov of reins contracts held = ARC + Unamortized Reins comm + P payable (if PAA)
B = AIC Recov from assuming insurer
Define SIR
Self-insured retention represents the portion of a loss that is payable by the policyholder.
Identify the condition for admitting recoverability of SIRs.
OSFI must be satisfied with the collectability of recoverables and may require collateral to ensure collectability.
Define earthquake premium reserve
Voluntary accumulation of earthquake premiums (must not exceed PML500)
If earthquake premium is implicit in total premium, what must the insurer demonstrate?
Demonstrate the reasonableness of premium allocation to earthquake coverage.
Identify the 2 situations in which earthquake premium reserve are reduced.
- When there is material decrease eqk-x
- To establish a claims&LAE provision post-event
Identify the impact of a decrease in earthquake reserves on capital available, insurance risk, market risk and operational risk.
- Capital available does not change
- CapReq(InsRsk) decreases
- CapReq(MktRsk) does not change
- CapReq(OpnRsk) decreases
Identify the 4 sub-categories of Market Risk.
(Mr IFER)
- Interest rate risk
- Foreign exchange risk
- Equity risk
- Real estate risk
Define interest rate risk
Represents the risk of economic loss resulting FROM market changes in interest rates and the impact ON interest rate sensitive assets & liabilities.
Arises due to the volatility & uncertainty of future interest rates.
Define duration
Measure of the sensitivity of the value of the asset or liability to changes in interest rates