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, RE comm and Acq CF) if GMM or (LRC - LC + Unamortized Ins Acq CFs + Prm 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).
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
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
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.
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
Contrast effective duration and modified duration.
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.
How do you obtain the portfolio duration?
By calculating the weighted average of the duration of the assets or liabilities in the portfolio.
What is the dollar duration?
Change in dollar value of an asset or liability for a given change in interest rates.
Define foreign exchange risk
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.
Define equity risk
Risk of economic loss due to fluctuations in the value of common shares equity securities.
Define real estate risk
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.
Identify the 3 sub-categories of counter-party risk.
- Default risk for B/S items
- Default risk for off B/S items
- Default risk for collateral & guaranteed from unregistered reinsurers.
Define duration
Measure of the sensitivity of the value of the asset or liability to changes in interest rates
Identify 4 off-balance sheet exposures
- Structured Settlement
- Letters of Credit (LOC)
- Non-owned deposits (NOD)
- Derivatives
Define credit conversion factor
Factor reflecting the nature and maturity of the instrument.
Define counter-party credit risk factor
Factor reflecting the risk of default of the counter-party to a transaction.
Identify the 3 sub-categories of operational risk.
- Sum(IMC)
- Premium volume & growth
- Intra-group pooling
How do you calculate diversification credit (DC)?
A + I - (A^2 + I^2 + 2RAI)^0.5
A = Credit risk + Market risk
I = Insurance risk
How do you calculate the capital required for unregistered reinsurance?
CapReq(UnregRe) = 0.20*(A+B+C) - max(0, -Deduc(UnregRe))
Deduc(UnregRe) = (A+B+C+D)-(E+F+G+H+I)
How do you calculate the earthquake reserve/EQ margin?
ER = (EPR + ERC) * 1.25
ERC = ERX - FinRes
How do you calculate ERX1 using the Model approach?
ERX1 = ( (East PML500)^1.5 + (West PML500)^1.5)^(1/1.5)
How do you calculate ERX3 using the standard approach?
ERX3 = max(East PTIV - applicable deductible, West PTIV - applicable deductible)
How do you calcule the operational risk?
Cap.Req(Oper.) = Min[30%*sum(IMC); sumprod(A) + Max(B)]
sumprod(A) = sumprod( risk factors; IMC,DWP,AWP,CWP, (growth >20%) x (DWP + AWP) / (1 + growth))—-
Max(B) = Max(risk factor * AWP_IG; risk factor *CWP_IG)
How do you calculate the capital required for interest rate risk?
CapReq(IntRt) =abs(∆i * mod D.Asset * PV(Asset)- ∆i * mod D liab * PV(liab))
∆i=1,25% if not given
How do you calculate the foreign exchange risk?
CapReq(Foreign Exchange=10%*max(Net long position, Net short position)
Net position = (foreign assets in CAD$ - foreign liabilities in CAD$)
How do you calculate the equity risk?
30% * (common shares + joint ventures < 10% owned + futures + forwards + swaps)
How do you calculate the real estate risk?
10% * owner-occupied property + 20% * investment property
How do you calculate the effective maturity?
M = (sum over t of ( t * CFt)) / (sum over t of CFt)
How do you calculate the capital required for off B/S items?
(credit equivalent amount @ reporting date - collateral securities or guarantees) * credit conversion factor * counterparty credit risk factor
What is the formula for MCT capital required for nuclear reserves?
Nuclear reserve = (P Received - P Paid - Comm) x 1.25
Must be held for 20y
Calculate the Capital Required for Counter-party default risk from B/S items within Credit Risk.
Margin = Asset Value * Risk factor
Identify 2 conditions for a hedge to qualify in the calculation of equity margin.
The hedge must be issued to an entity that:
1. Issues obligations which attract 0% credit risk factor
2. Is rated A- or better
In the calculation of required margin for credit risk from BS items, how is the risk factor determined?
- Corresponds to external credit rating of the counter-party
OR - Represents a prescribed factor determined by OSFI
identify the risks of holding a reinsurance contract with a reinsurer
- reinsurer won’t pay insurer what is owed
- mis-assessment of required provision (the amount the insurer expects to be paid)
