OSFI.MCT-IFRS Flashcards
MCT Ratio formula
MCT Ratio = Capital Available / (minimum Capital Required/1.5)
What is the minimum supervisory target for OSFI’s MCT ratio
150%
What is the MCT ratio requirement for federally insured regulated insurers
100%
What are the 5 principles of allocation to determine capital requirements
- Free from bias
- Accurate when allocation revenue & costs
- Consistent with allocation methods used by the insurer for other business decision-making purposes
- Consistent over time
- Systematic & reasonable
Identify considerations in defining MCT capital available (4)
- Availability: is the capital element fully paid and available to absorb losses
- Permanence: until when is the capital element available
- Absence of encumbrances & mandatory servicing costs: ask whether capital has an absence of encumbrances & mandatory servicing costs
- Subordination: is the capital element subordinated to rights of policyholders and creditors in an insolvency or winding-up
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
Define ‘target capital required’ (give statistical definition)
Capital level corresponding to CTE(99%) on the loss distribution over a 1-yr time horizon
Identify subcomponents of Category A capital available (6)
- Residual Interest (non-stock)
- Common Shares
- Contributed Surplus
- Other Capital
- Retained Earnings
- Nuclear and Other Reserves
- Accumulated Other Comprehensive Income (AOCI)
MCT Capital Available composition limits on Category B and C Capital
Category B + Category C <= 40% x (total capital available - AOCI)
Category C <= 7% x (total capital available - AOCI)
Which regulatory adjustment to MCT capital available is an addition
CSM associated with title insurance contracts
Which regulatory adjustment to MCT is an addition or deduction
adjustments to owner-occupied property valuations
4 main components of MCT capital required
Insurance Risk
Market Risk
Credit Risk
Operational Risk
Define MCT insurance risk
Risk of loss for the potential for claims and payouts from policyholders and 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 or unwillingness to fully meet contractual obligations due to the insurer
Define MCT operational risk
Risk of loss from inadequate or failed processes, people, systems or from external events
Subcomponents of MCT insurance risk (4)
- LIC
- unexpired coverage
- unregistered reinsurance
- earthquake and nuclear catastrophes
How is the diversification risk accounted for regarding MCT insurance risk
Risk factors for each class of business contain an implicit diversification factor (based on the assumption that insurers have well-diversified portfolios)
Formula margin(LIC)
(risk factor) x [(net* LIC issued excl. RANF) - (AIC for reinsurance contracts held excl. RANF)]
*net of S&S
Formula margin(unexpired coverage)
(risk factor) x MAX[(net unexpired coverage), 30% x (net premiums received in the past 12 months)]
net premiums received = premiums received net of associated reinsurance premiums paid
Formula net unexpired coverage
(unexpired coverage for insurance contracts issued) - (unexpired coverage for reinsurance contracts held)
Define Self-Insured Retention
portion of a loss payable by the policyholder
Condition for admitting recoverability of Self-Insured Retentions (condition for it to be deduced in capital required)
OSFI must be satisfied of collectability, OSFI may require collateral such as letter of credit (LOC)
Formula Earthquake Risk Exposure (Model Approach)
[(East Canada PML500)^1.5 + (West Canada PML500)^1.5)]^(1/1.5)
Formula Earthquake Risk Exposure (Standard Approach)
MAX[(East Canada PTIV - applicable deductible), (West Canada PTIV - application deductible)]
Formula margin for Earthquake Risk
1.25 x (EPR - ERC)
EPR: Earthquake Premium Reserve
ERC: Earthquake Risk Component
ERX: Earthquake Risk Exposure
ERC = ERX - Financial Resources
Financial Resources can be:
- Capital & surplus (max 10%)
- Reinsurance
- Earthquake Premium Reserve
- Capital market financing
Subcomponents of MCT market risk (6)
Interest rate risk
Foreign exchange risk
Equity risk
Real estate risk
Right-of-use asset risk
Other market risks
Formula for margin(interest rate risk)
A = (asset duration) x Δy x (asset values)
B = (liability duration) x Δy x (liability values)
F = | A – B |
Formula Modified duration
Macaulay duration = SUMPROD(t, PVCF@t)/(market value)
Modified duration = Macaulay duration / (1 + Yield)
Formula Effective duration
[(Fair value if yields decline) - (Fair value if yields rise)]/[2 x (initial price) x (change in yield in decimal)]
Contrast modified duration and effective duration
Effective duration accounts for situations where the cash flows may change as a result of changes in interest rates. Modified duration does not.
Formula for margin(foreign exchange risk)
10% x MAX[(aggregate net long positions for each currency, aggregate net short positions for each currency)]
Formula for margin(equity risk)
30% x [(Common Shares) + (Joint Ventures with <= 10% ownership) + (futures) + (forwards) + (swaps)]
Formula for margin(real estate risk)
(risk factor) x (value of owner occupied properties) + (risk factor) x (value of investment properties)
Formula for margin(credit risk)
(asset value) x (risk factor)
What are the 2 different options of risk factors used in calculating the margin for credit risk
either:
- external credit rating of the counter-party
- prescribed factor determined by OSFI
Formula for margin(operational risk)
MIN{(30% x CR0), [(8.5% x CR0) + (2.5% x direct prem. received) + (1.75% x prem. received reins. issued) + (2.5% x prem. paid for reins. held) + (2.5% x prem. growth above 20% threshold)] + MAX[(0.75% x prem. received reins. issued arising from intra-group pooling), (0.75% x prem. received reins. held arising from intra-group pooling)]
Identify risks that are excluded from MCT operation risk
- reputation risk
- strategic risk
Define diversification credit
a reduction to capital required recognizing that not all risk categories are likely to suffer their maximum loss simultaneously
Formula diversification risk
DC = A + I - SQRT(A^2 + I^2 + 2RAI)
R = correlation for diversification
A = asset risk (market risk + credit risk)
I = insurance risk
