OSFI.MCT Flashcards
MCT stands for….?
Minimal Capital Test
MCT Ratio formula
MCT Ratio = CapAv/minCapReq
where minCapReq = CapReq/1.5
Define ‘target capital required’
Capital level corresponding to CTE(99%) on the loss distribution over 1-yr time horizon
what is the minimum supervisory target for OSFI’s MCT ratio
150%
3 Reasons for 150%, OSFI’s minimum target
- Provides cushion above minimum requirement
- Facilitates OSFI’s early intervention
- Provides additional capacity to absorb unexpected losses
what is the MCT ratio requirement for federally regulated insurers
100% (OSFI’s requirement of 150% is a more strict requirement)
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?
Identify the 4 components of Capital Available.
- Category A capital
- Category B capital
- Category C capital
- Non-controlling interests
What are the 7 components of category A capital?
(Hint: RC-CORNA)
- Residual Interest
- Common shares
- Contributed Surplus
- Other Capital
- Retained Earnings
- Nuclear Reserves
- Accumulated Other Comprehensive Income (AOCI)
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
How do you calculate the deduction for unregistered reinsurer recoverables from capital available?
Deduc(UnregRe) = Max(0 ; (A+B+C+D)-(E+F+G+H+I))
D,E,F’G’H *are all collaterals
att!: if capAval is given, state assumption deduction for un-reg RE is 0
A: unexp. Cov prm on RE held == ARC+RE comm + prm payable to the assuming insurer, if PAA ;
B:Ceded incurred claims==assets for incurred.;
C: CF (out) within the funds withheld collateral, ass. C=0;
D:RE Receivable;
E: RE payable;
--collaterals:
F: Non-owned deposits RSA; G: Other Non-owned depot.; H: collaterals funds held,
I: Letter of cred *Always check LOC limit = 30%(A+B)
How do you calculate the deduction for excess category B&C from capital available?
BC = 40% * (CapAv(Net of adj) - 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)
How do you calculate Capital Required?
Sum (IMCO) - DC
Define Insurance Risk
Risk of loss FROM the potential for claims.
Identify the 2 uncertainties that Insurance Risk deals with.
1* uncertainty in the amount of payments
2* uncertainty in the timing of payments
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.
Define credit risk
Risk of loss FROM counter-party’s potential inability OR unwillingness to fully meet contractual obligations due to the insurer.
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.
Identify the 4 sub-categories of Insurance Risk.
- Liability for Incurred Claim (LIC)
- unexpired coverage (includes catastrophes other than earthquake and nuclear)
- Unregistered reinsurers
- Catastrophes (earthquake, nuclear)
How do you calculate the margin for LIC?
margin(LIC) = 1.1 x Σ (risk factor) x [ net LIC(issued) excl. RANF – AIC(re held) excl RANF]
How do you calculate the capital required for unexpired coverage
CapReq(UnexpCov) = (risk factor margin)*max(0.3 * Net Prm Received, Net Unexpired Cov)
Net P Received : net of RE
net unexpired coverage = (unexp cov for Ins contracts issued) – (unexp cov for RE contracts held)
unexp cov Ins contracts = PV(CFs excluding prm) if GMM or (LRC - 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
Identify the 4 sub-categories of Market Risk.
(Mr IFER)
- Interest rate risk
- Foreign exchange risk
- Equity risk
- Real estate risk
Identify 3 factors that can cause rapid growth.
- Mergers
- New LOBs
- Changes to products or U/W criteria
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).