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Exam 6C - Fall 2024 > OSFI.MCT > Flashcards

OSFI.MCT Flashcards

1
Q

What is the minimum supervisory target for OSFI’s MCT Ratio

A

150%

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2
Q

What is the MCT ratio requirement for federally regulated insurers

A

100% (OSFI’s requirement of 150% is a more strict requirement)

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3
Q

Are insurers required to meet capital requirements at all times

A

Yes

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4
Q

Identify the main components of MCT capital required [IMCO]

A
  • Insurance Risk
  • Market Risk
  • Credit Risk
  • Operational Risk
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5
Q

Define MCT Insurance Risk

A

Risk of loss FROM the potential for claims (from policyholders & beneficiaries)

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6
Q

Define MCT market risk

A

Risk of loss FROM changes in prices in various markets

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7
Q

Define MCT credit risk

A

Risk of loss FROM counterparty’s potential INABILITY of UNWILLINGNESS to fully meet contractual obligations due to the insurer

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8
Q

Define MCT operational risk

A

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

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9
Q

Define “target capital required” (give the statistical definition)

A

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

(CTE = Conditional Tail Expectation)

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10
Q

Identify a proxy for capital available that appears in the Statement of Financial Position

A

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

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11
Q

Identify the principles of allocation regarding MCT capital requirements
[FACCS]

A

Allocation method should be
- Free from bias
- Accurate when allocating revenue & costs
- Consistent with allocation methods used by the insurer for other business decision-making purposes
- Consistent over time
- Systematic & reasonable

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12
Q

Describe the transitional arrangement for MCT capital requirements for business combination effective before June 30, 2019

A

The contractual service margin (CSM) arising from favorable development can be included in capital available

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13
Q

Identify qualitative considerations in defining MCT capital available [APAS]

A

- 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

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14
Q

Identify the main components of MCT capital available (3+1)

A
  • Category A capital
  • Category B capital
  • Category C capital
  • Non-controlling interests in subsidiaries, subject to certain conditions (category A, B or C)
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15
Q

Identify the subcomponents of category A capital available as listed in the MCT source text [RC CORNA]

A
  • Residual Interest, reported either as equity or as a liability, of owner-policyholders of mutual entities
  • 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)
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16
Q

Identify the subcomponents of category A capital available as listed on page 20.11 in the financial statements

A

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

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17
Q

Should dividends paid to stockholders be removed from capital available

A

Yes

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18
Q

Briefly describe the MCT capital composition limits

A

BC Limit:
- (category B) + (category C) ≤ 40% x (total capital available - AOCI)

C Limit:
- (category C) ≤ 7% x (total capital available - AOCI)

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19
Q

Which regulatory adjustment to MCT capital availabe is an addition

A

CSM associated with title insurance contracts

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20
Q

Which regulatory adjustment to MCT capital available is an addition or deduction

A

Adjustments to owner-occupied property valuations

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21
Q

Which regulatory adjustments to MCT capital available are deductions

A
  • 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
22
Q

Identify the two uncertainties required for a risk to be considered “insurance risk”

A
  • Uncertainty in the amount of payments
  • Uncertainty in the timing of payments
23
Q

Identify the subcomponents of insurance risk (4)

A
  • LIC or Liability for Incurred Claims
  • Unexpired coverage (includes catastrophes other than earthquake and nuclear)
  • Unregistered reinsurance
  • Earthquake and nuclear catastrophes
24
Q

How is diversification risk accounted for regarding MCT insurance risk

A
  • Risk factors for each class of insurance contains an implicit diversification credit
  • This is based on the assumption that insurers have a well-diversified portfolio
25
Q

Formula 1: margin(LIC)

A

margin(LIC) = 1.1 x risk factor x (net LIC(issued) – AIC(reins held)]

LIC net of S&S, both LIC and AIC exclu RA

26
Q

Formula 2: margin(unexpired coverage)

A

margin(unexpired coverage) = (risk factor) x MAX [ net unexpired coverage) , 30% x (net premiums received past 12 months) ],

Net premium received = premiums received - associated reinsurance premiums paid

27
Q

Formula 2a: Net unexpired coverage

A

Net unexpired coverage = (unexpired coverage for insurance contracts issued) - (unexpired coverage for reinsurance contracts held)

28
Q

Formula 2b: (GMM): unexpired coverage for insurance contracts issued

A

(Unexpired coverage for insurance contracts issued) = PV (estimate of future cash flows excluding premium cash flows)

29
Q

Formula 2c (PAA): unexpired coverage for insurance contracts issued

A

(Unexpired coverage for insurance contracts issued) = (LRC - LC + unamortized insurance acquisition cash flows + premiums receivable) x ELR + costs

30
Q

Formula 2d (GMM): unexpired coverage for reinsurance contracts held

A

(Unexpired coverage for reinsurnance contracts held) = PV (estimate of future cash flows for current and future reinsurance contracts held)

31
Q

Formula 2e (PAA): unexpired coverage for reinsurance contracts held

A

(Unexpired coverage for reinsurance contracts held) = (A + C + P1 + P2) x ELR - P3

where:
- A = ARC excluding loss recovery component
- C = unamortized reinsurance commission
- P1 = premiums payable to the assuming insurer
- P2 = expected future reinsurance premiums
- P3 = expected future reinsurance premiums net of reinsurance commissions
- ELR = Expected Loss Ratio

32
Q

Identify the risks of holding a reinsurance contract with a reinsurer

A
  • reinsurer won’t pay insurer what is owed
  • mis-assessment of required provision (the amount the insurer expects to be paid)
33
Q

Define “SIR” (Self-Insured Retention)

A

Portion of a loss payable by the policyholder

34
Q

Condition for admitting recoverability of SIRs (Self-Insured Retentions)

A

OSFI must be satisfied of collectability - may require collateral (Ex: LOC from policyholder)

35
Q

Identify the subcomponents of MCT market risk (6) [IFERRO]

A
  • Interest rate risk
  • Foreign exchange risk
  • Equity risk
  • Real estate risk
  • Right-of-use asset risk
  • Other market risks
36
Q

What is the formula for margin(equities)

A

margin(equities) = 30% x (market value of equity)

Example of types of equities to which the 30% risk factor applies are:
- Common shares
- Joint ventures where insurer holds ≤ 10% ownership interest
- Futures
- Forwards
- Swaps

37
Q

Identify the conditions for a hedge to qualify (for being recognized in the calculation of equity margin) (2)

A

The hedge must be issued to an entity that:
- Issues obligations which attract a 0% factor under section (6.1.2) (Credit risk factors)
- Is rated A- or better (including clearing houses rated A- or better)

38
Q

What is the formula for margin(credit risk)

A

margin(credit risk) = margin(Balance Sheet Assets) + margin (Off-Balance Sheet Exposure) + margin(Collaterals and Guarantees), where

margin (Balance Sheet Assets) = Risk Factor x Net Exposure (Net Exposure = Balance Sheet Value - Redistribution of Exposure for Collateral/Guarantees)

39
Q

Briefly describe what the “risk factor” is for calculating the margin for credit risk

A

The risk factor either:
- Corresponds to the external credit rating of the counterparty
- Respresents a prescribed factor determined by OSFI

40
Q

What are “off-balance sheet” exposures + 4 examples

A

Risk exposures that are not listed on a company’s balance sheet

Examples are:
- Structured settlements
- LOC (Letters of Credit)
- NOD (Non-Owned Deposit)
- Derivatives

41
Q

What is the formula for: margin(off-balance-sheet exposures)

A

margin(credit risk for off-balance sheet exposures) = [ (CEA – eligible collateral) x CCF ] x (risk factor)

where:
- CEA = Credit Equivalent Amount = an approximation to the true credit risk exposure
- CCF = Credit Conversion Factor = a factor reflecting the nature and maturity of the instrument
- Eligible collateral = collateral or guarantees held by the insurer to offset amounts owed by counterparty

42
Q

Is legal risk included in operational risk?

A

Yes, legal risk is included as part of operational risk

43
Q

Identify risks that are excluded from MCT operational risk (2)

A
  • Strategic risk
  • Reputation risk
44
Q

Describe the purpose of the cap on operational risk of 30% x CR(0)

A

To dampen operational risk for business that satisfies these conditions
- High-volume
- Complexity

45
Q

Identify scenarios linked with rapid premium growth (3)

A
  • Mergers
  • New LOBs
  • Changes to products or U/W criteria
46
Q

Briefly describe the impact of unregistered reinsurance on MCT operational risk

A

When unregistered reinsurance goes UP, then CapReq(OpnRsk) goes UP because:
- Operational risk depends on: insurance and credit risk
- and insurance risk goes UP because unregistered reinsurance is one of its components

47
Q

Define “diversification credit”

A

A reduction to capital required recognizing that not all risk categories are likely to suffer their maximum loss simultaneously

48
Q

State the formula for the diversification credit

A

DC = A + I - SQRT (A^2 + I^2 + 2RA*I)

where
A = C + M (Asset Risk = Credit Risk + Market Risk)
and usually R = 0.5 (R is the correlation coefficient between A and I)

49
Q

Does the diversification credit consider correlation between and within all risk components

A

No
- Credit and market risk are summed to get asset risk
- Then the diversification credit considers the correlation between asset and insurance risk

50
Q

How to calculate Foreign Exchange Risk Margin

A

10% of the greater of aggregate NET LONG position or NET SHORT in each currency, adj by effective allowable foreign exchange rate hedges if any are used

51
Q

Calculate Foreign Exchange Risk (Example): An insurer has $100 of US assets and $50 US liabilities

A

Net spot position = A - L = long position of $50
[ positive = long, negative = short]
Carve out = 25% liabilities
= 25%*50
= 12.5

10% MAX (net spot position - carve out, 0)
= 10% MAX (50-12.5, 0)
= 10% * 37.5
= 3.75

Exam 6C - Fall 2024 (56 decks)

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