OSFI.MCT Flashcards
What is the minimum supervisory target for OSFI’s MCT Ratio
150%
What is the MCT ratio requirement for federally regulated insurers
100% (OSFI’s requirement of 150% is a more strict requirement)
Are insurers required to meet capital requirements at all times
Yes
Identify the main components of MCT capital required
- Insurance Risk
- Market Risk
- Credit Risk
- Operational Risk
Define MCT Insurance Risk
Risk of loss FROM the potential for claims (from policyholders & beneficiaries)
Define MCT market risk
Risk of loss FROM changes in prices in various markets
Define MCT credit risk
Risk of loss FROM counterparty’s potential INABILITY of UNWILLINGNESS to fully meet contractual obligations due to the insurer
Define MCT operational risk
Risk of loss FROM inadequate or failed internal processes, people, systems or from external events
Define “target capital required” (give the statistical definition)
Capital level corresponding to CTE(99%) on the loss distribution over 1-yr time horizon
(CTE = Conditional Tail Expectation)
Identify a proxy for capital available that appears in the Statement of Financial Position
Total Equity (line 699 from Statement of Financial Position - Liabilities & Equity)
- Sometimes an exam problem does not provide the components required to directly calculate capital available
- But if the question provides equity, you can use that instead as a proxy
Identify the principles of allocation regarding MCT capital requirements
- Allocation method should be Free from bias
- Allocation method should be Accurate when allocating revenue & costs
- Allocation method should be Consistent with allocation methods used by the insurer for other business decision-making purposes
- Allocation methods should be Consistent over time
- Allocation methods should be Systematic & reasonable
Describe the transitional arrangement for MCT capital requirements for business combination effective before June 30, 2019
The contractual service margin (CSM) arising from favorable development can be included in capital available
Identify qualitative considerations in defining MCT capital available (4)
- Availability: is the capital element fully paid & available to absorb losses
- Permanence: the period for, and extent to which, the capital element is available
- Absence of encumbrances and mandatory servicing costs: the extent to which the capital element is free from mandatory payments or encumbrances
- Subordination: the extent to which and the circumstances under which the capital element is subordinated to the rights of policyholders and creditors of the insurer in an insolvency or winding-up
Identify the main components of MCT capital available (3+1)
- Category A capital
- Category B capital
- Category C capital
- Non-controlling interests in subsidiaries, subject to certain conditions (category A, B or C)
Identify the subcomponents of category A capital available as listed in the MCT source text
- 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
Identify the subcomponents of category A capital available as listed on page 20.11 in the financial statements
Under Policyholders’ Equity:
- Residual Interest
Under Shareholders’ Equity: (include everything except Preferred Shares)
- Common Shares
- Contributed Surplus
- Other Capital
- Retained Earnings
- Nuclear and Other Reserves
- AOCI
Should dividends paid to stockholders be removed from capital available
Yes
Which subcomponents of category B and category C capital do you need to know for the exam
None - not provided in text
Briefly describe the MCT capital composition limits
BC Limit:
- (category B) + (category C) ≤ 40% x (total capital available - AOCI)
C Limit:
- (category C) ≤ 7% x (total capital available - AOCI)
Which regulatory adjustment to MCT capital availabe is an addition
CSM associated with title insurance contracts
Which regulatory adjustment to MCT capital available is an addition or deduction
Adjustments to owner-occupied property valuations
Which regulatory adjustments to MCT capital available are deductions
- Interests in and loans or other forms of lending provided to non-qualifying subsidiaries, associates, and joint ventures in which the company holds more than a 10% ownership interest
- Unsecured unregistered reinsurance exposures and self-insured retentions
- The earthquake premium reserve (EPR) not used as part of financial resources to cover earthquake risk exposure
- Insurance acquisition cash flows
- Accumulated other comprehensive income on cash flow hedges
- Goodwill and other intangible assets
- Deferred tax assets
- Cumulative gains and losses due to changes in own credit risk on fair valued financial liabilities
- Defined benefits pension fund assets and liabilties
- Investments in own instruments (treasury stock)
- Reciprocal cross holdings in the common shares of insurance, banking and financial entities
Identify the two uncertainties required for a risk to be considered “insurance risk”
- Uncertainty in the amount of payments
- Uncertainty in the timing of payments
Identify the subcomponents of MCT insurance risk (4)
- LIC or Liability for Incurred Claims
- Unexpired coverage (includes catastrophes other than earthquake and nuclear)
- Unregistered reinsurance
- Earthquake and nuclear catastrophes
