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Exam 6C - F2022 > OSFI.MCT > Flashcards

OSFI.MCT Flashcards

1
Q

Operational risk includes ( ) but excludes ( ).

A

Includes legal risk
Excludes strategic and reputation risk

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2
Q

What is the purpose of the cap on operational risk?

A

Serves to dampen the operational risk margin for companies that have high-volume/low-complexity business.

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3
Q

Identify 3 factors that can cause rapid growth.

A
  1. Mergers
  2. New LOBs
  3. Changes to products or U/W criteria
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4
Q

Identify 3 regulatory deductions to capital available.

A
  1. Unsecured & unregistered reinsurance exposures and SIRs
  2. Earthquake premium reserve not used as part of financial resources
  3. Accumulated impact of shadow accounting
  4. Goodwill and other intangible assets
  5. Deferred tax assets
  6. Investment in own instruments
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5
Q

Define credit risk

A

Risk of loss FROM counter-party’s potential inability OR unwillingness to fully meet contractual obligations due to the insurer.

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6
Q

Identify the 4 qualitative considerations regarding MCT capital available. (APAS)

A
  1. AVAILABILITY: capital fully paid & available to absorb losses?
  2. PERMANENCE: until when is capital element available?
  3. ABSENCE: ask whether a capital element has an absence of encumbrances and mandatory servicing costs.
  4. SUBORDINATION: is the capital element subordinated to the rights of policyholders & creditors in an insolvency winding-up?
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7
Q

Define Market Risk

A

Risk of loss FROM changes in prices in various markets.

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8
Q

Define Operational Risk

A

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

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9
Q

What are the 6 components of category A capital?

(Hint: QAS-RRR)

A
  1. Qualifying Category A common shares
  2. Surplus (Contributed + Other Capital)
  3. Retained Earnings
  4. Reserves
  5. Accumulated Other Comprehensive Income (AOCI)
  6. Residual Interest
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10
Q

What is the purpose of Diversification Credit (DC) ?

A

Recognize diversification by reducing the capital required (diversified risks are not likely to suffer big losses all at the same time).

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11
Q

MCT stands for….?

A

Minimal Capital Test

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12
Q

Define Insurance Risk

A

Risk of loss FROM the potential for claims FROM policyholders and beneficiaries.

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13
Q

Identify the 2 uncertainties that Insurance Risk deals with.

A
  1. Ultimate amount of net cash flows from premiums, commissions, claims and related settlement expenses.
  2. Timing of the receipt and payment of these cash flows.
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14
Q

Identify the 4 sub-categories of Insurance Risk.

A
  1. Claim liabilities (reserving risk)
  2. Premium liabilities (U/W risk)
  3. Unregistered reinsurers
  4. Catastrophes (earthquake, nuclear)
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15
Q

What is the limit on Letters of Credit for obtaining capital credit against unregistered reinsurers?

A

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

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16
Q

Define SIR

A

Self-insured retention represents the portion of a loss that is payable by the policyholder.

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17
Q

Identify the condition for admitting recoverability of SIRs.

A

OSFI must be satisfied with the collectability of recoverables and may require collateral to ensure collectability.

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18
Q

Define earthquake premium reserve

A

Voluntary accumulation of earthquake premiums (must not exceed PML500)

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19
Q

If earthquake premium is implicit in total premium, what must the insurer demonstrate?

A

Demonstrate the reasonableness of premium allocation to earthquake coverage.

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20
Q

Identify the 2 situations in which earthquake premium reserve are reduced.

A
  1. When there is material decrease eqk-x
  2. To establish a claims&LAE provision post-event
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21
Q

Identify the impact of a decrease in earthquake reserves on capital available, insurance risk, market risk and operational risk.

A
  1. Capital available does not change
  2. CapReq(InsRsk) decreases
  3. CapReq(MktRsk) does not change
  4. CapReq(OpnRsk) decreases
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22
Q

Identify the 4 sub-categories of Market Risk.
(Mr IFER)

A
  1. Interest rate risk
  2. Foreign exchange risk
  3. Equity risk
  4. Real estate risk
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23
Q

Define interest rate risk

A

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.

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24
Q

Define duration

A

Measure of the sensitivity of the value of the asset or liability to changes in interest rates

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25
Q

Contrast effective duration and modified duration.

A

Modified duration is a duration measure in which it is assumed that interest rate changes do not change the expected cash flows.
Effective duration is a duration measure in which recognition is given to the fact that interest rate changes may change the expected cash flows.

26
Q

How do you obtain the portfolio duration?

A

By calculating the weighted average of the duration of the assets or liabilities in the portfolio.

27
Q

What is the dollar duration?

A

Change in dollar value of an asset or liability for a given change in interest rates.

28
Q

Define foreign exchange risk

A

Intended to cover the risk of loss resulting from fluctuations in currency exchange rates and is applied to the entire business activity of the P&C insurer.

29
Q

Define equity risk

A

Risk of economic loss due to fluctuations in the value of common shares equity securities.

30
Q

Define real estate risk

A

Risk of economic loss due to changes in the value of a property or in the amount and timing of cash flows from a property.

31
Q

Identify the 3 sub-categories of counter-party risk.

A
  1. Default risk for B/S items
  2. Default risk for off B/S items
  3. Default risk for collateral & guaranteed from unregistered reinsurers.
32
Q

Identify 4 off-balance sheet exposures

A
  1. Structured Settlement
  2. Letters of Credit (LOC)
  3. Non-owned deposits (NOD)
  4. Derivatives
33
Q

Define credit conversion factor

A

Factor reflecting the nature and maturity of the instrument.

34
Q

Define counter-party credit risk factor

A

Factor reflecting the risk of default of the counter-party to a transaction.

35
Q

Identify the 3 sub-categories of operational risk.

A
  1. Sum(IMC)
  2. Premium volume & growth
  3. Intra-group pooling
36
Q

Identify the 4 components of Capital Available.

A
  1. Category A capital
  2. Category B capital
  3. Category C capital
  4. Non-controlling interests
37
Q

How do you calculate diversification credit (DC)?

A

A + I - (A^2 + I^2 + 2RAI)^0.5
A = Credit risk + Market risk
I = Insurance risk

38
Q

How do you calculate Capital Required?

A

Sum (IMCO) - DC

39
Q

How do you calcule minimum capital required?

A

Capital required / 1.5

40
Q

How do you calcule the MCT ratio?

A

Capital Available / minimum capital required

41
Q

How do you calculate the capital required for unexpired coverage

A

CapReq(PLiab) = sum over LOBs of max(0.3 * Net P Received, Net Unexpired Cov)*(risk factor margin)

Net P Received = P Received - Reins P

Net Unexpired Cov = LRC - ARC

LRC = PV(CFs) if GMM = (LRC excl LC + Unamortized Ins Acq CFs + Re receivable) * ELR + Costs if PAA

ARC = PV(CFs) if GMM = (ARC Excl LC + Unamortized Reins Comm + Re payable + Future Reins P) * ELR - (Future Reins P - Reins Comm) if PAA

42
Q

How do you calculate the margin for LIC?

A

By LOB,
(Net amount at risk) x (risk factor)

Net amount at risk = LIC excl RA - AIC excl RA

43
Q

How do you calculate the capital required for unregistered reinsurance?

A

LOC* = min(LOC, 0.3(A+B))
D = (A + B + CFs out for funds withheld + Re receivable - Re payable) - (Re payable + NOD + LOC)
CapReq(UnregRe) = 0.20*(A+B) - max(0, -D)

44
Q

How do you calculate the earthquake reserve?

A

ER = (EPR + ERC) * 1.25
ERC = ERX + FinRes

45
Q

How do you calculate ERX1 using the model without phase-in?

A

ERX1 = ( (East PML500)^1.5 + (West PML500)^1.5)^(1/1.5)

46
Q

How do you calculate ERX3 using the standard model?

A

ERX3 = max(East PTIV - applicable deductible, West PTIV - applicable deductible)

47
Q

How do you calcule the operational risk?

A

min(0.3CR(0), sum(A)+max(B))
CR(0) = I + M + C
A: sumprod of risk factors and (CR(0), DWP, AWP, CWP, (Growth -20%)(DWP+AWP)/(1+Growth))
B: prod of risk factors and (AWP(ing), CWP(ing)

48
Q

How do you calculate the capital required for interest rate risk?

A

ABS(chg(value of assets)-chg(value of liabilities))
chg = (Fair value or APV) * chg(int rt) * modified duration

49
Q

How do you calculate the foreign exchange risk?

A

10% * (foreign assets in CAD$ - foreign liabilities in CAD$)

50
Q

How do you calculate the equity risk?

A

30% * (common shares + joint ventures < 10% owned + futures + forwards + swaps)

51
Q

How do you calculate the real estate risk?

A

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

52
Q

How do you calculate the effective maturity?

A

M = (sum over t of ( t * CFt)) / (sum over t of CFt)

53
Q

How do you calculate the capital required for off B/S items?

A

(credit equivalent amount @ reporting date - collateral securities or guarantees) * credit conversion factor * counterparty credit risk factor

54
Q

How do you calculate the deduction for unregistered reinsurer recoverables from capital available?

A

Deduction = max(0,D)
D = (A + B + CFs out for funds withheld + Re receivable - Re payable) - (Re payable + NOD + LOC)
LOC = min(LOC, 30%*(A+B))

55
Q

How do you calculate the deduction for excess category B&C from capital available?

A

BC = 40% * (CapAv(Net) - AOCI)
C = 7% * (CapAv(Net) - AOCI)
BC excess = (Cat B + Cat C) - BC
C excess = Cat C - C
Deduction = max(0, BC excess, C excess)

56
Q

Define ‘target capital required’

A

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

57
Q

What is the formula for MCT capital required for nuclear reserves?

A

Nuclear reserve = (P Received - P Paid - Comm) x 1.25

Must be held for 20y

58
Q

Calculate the Capital Required for Counter-party default risk from B/S items within Credit Risk.

A

Margin = Asset Value * Risk factor

59
Q

Identify the 5 principles of allocation regarding MCT capital

A

Allocation methods should be:
1. Free from bias
2. Accurate when allocating revenues & costs
3. Consistent with allocated methods used for other business decision-making purposes
4. Consistent over time
5. Systematic & reasonable

60
Q

Identify 2 conditions for a hedge to qualify in the calculation of equity margin.

A

The hedge must be issued to an entity that:
1. Issues obligations which attract 0% credit risk factor
2. Is rated A- or better

61
Q

In the calculation of required margin for credit risk from BS items, how is the risk factor determined?

A
  1. Corresponds to external credit rating of the counter-party
    OR
  2. Represents a prescribed factor determined by OSFI

Exam 6C - F2022 (58 decks)

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