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Exam 6 > OSFI.MCT-IFRS > Flashcards

OSFI.MCT-IFRS 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%; Lower than OSFI’s 150%

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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 (4)

A

Insurance Risk
Market Risk
Credit Risk
Operation Risk

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5
Q

Define MCT insurance risk

A

Risk of loss from potential claims (both policyholder and beneficiaries)

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6
Q

Define MCT market risk

A

Risk of loss from potential changes in price in various markets

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7
Q

Define MCT credit risk

A

Risk of loss from counterparty’s potential inability or unwillingness to fully meet contractual obligations due to the insurer

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8
Q

Define “target capital required” (statistical definition)

A

Capital level corresponding to CTE of 99% on loss distribution over 1 year horizon

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9
Q

Define MCT operation risk

A

Risk of loss from inadequate or failed internal process, system, people or external events

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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)

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11
Q

identify the principles of allocation regarding MCT capital requirement

A

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

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12
Q

Describe the transitional arrangement for MCT capital requirement for business combinations effective before June 30th, 2019

A

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

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13
Q

Identify considerations in defining MCT capital available (4)

A

(1) Availability: the extent to which the capital element is fully paid in and available to absorb loss
(2) Permanence: the period for, and extent to which, the capital element is available
(3) Absence of encumbrances and mandatory servicing costs: the extent to which the capital element is free from mandatory payment or encumbrances
(4) Subordination: the extent to which and the circumstances under which the capital element is subordinated to the right 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 (4)

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

Identify the subcomponents of category A capital available as listed in the MCT source test

A

C - Common shares issued by the insurer that meet the category A qualifying criteria
S - Surplus (share premium) resulting from the issuance of instruments included in common equity capital and other contributed surplus
R - Retained earnings
E - Earthquake, nuclear and general contingency reserves
A - AOCI (Accumulated Other Comprehensive Income)
R - Residual Interest, reported either as equity or as a liability, of owner-policy holders of mutual entities

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16
Q

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

A

Under policyholder’s equity
R - Residual Interest (non - stock)
Under shareholder’s equity
C - Common Shares
C - Contributed Surplus
O - Other Capital
R - Retained Earnings
N - Nuclear and other Reserves
A - AOCI (Accumulated Other Comprehensive Income)

17
Q

Should dividends paid to stock holders be removed from capital available

A

Yes

18
Q

Which subcomponents of category B and C do you need to know for the exam

A

None provided in the MCT source readings

19
Q

Briefly describe the MCT capital composition limits

A

BC Limit
B + C <= 40% * (Total capital available - AOCI)

C Limit
C <= 7% * (Total capital available - AOCI)

20
Q

Which regulatory adjustment to MCT capital available is an addition

A

CSM (Contractual Service Margin) associated with title insurance contracts

21
Q

Identify the 2 uncertainties required for a risk to be considered “Insurance Risk”

A

Uncertainty in the timing of payments
Uncertainty in the amount of payment

21
Q

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

A

Adjustment to owner-occupied property valuations

22
Q

Identify the subcomponents of MCT insurance risk

A

Liability of Incurred Claims (LIC)
Unexpired coverage
Unregistered reinsurance
Earthquake and nuclear catastrophes

23
Q

How is diversification risk accounted for regarding MCT insurance risk

A
  • Risk factor for each class of insurance contains an implicit diversification credit
  • this is based on the assumption that insurers have well-diversified portfolio
24
Q

Identify the risks of holding a reinsurance contract with a reinsurer

A
  • Reinsurer failed to make payments
  • Reinsurer mis-assessment of required provision
24
Q

Identify the subcomponents of MCT market risk

A

I - Interest rate risk
F - Foreign exchange risk
E - Equity risk
R - Right of use of asset risk
R - Real estate risk
O - Other market risk

25
Q

Define “SIR” (Self-Insured Retention)

A

Portion of loss payable by the policy holder

25
Q

What are “off-balance sheet” exposures

A

Exposures that are not on the company’s balance sheet

26
Q

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

A

OSFI must be satisfied with collectability - may require collateral (i.e., line of credit from policy holder)

27
Q

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

A
  • external credit rating of the counterparty
  • represents a prescribed factor determined by OSFI
28
Q

Examples of “off-balance sheet” exposures

A
  • Structured settlement
  • LOC (letter of credit)
  • NOD (non-owned deposit)
  • Derivatives
28
Q

Is legal risk included in operation risk

A

Yes

29
Q

Identify risks that are excluded from MCT operation risk

A

strategic risk and reputation risk

30
Q

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

A

To dampen the operation risk for business that are low complexity and high volume

31
Q

Identify scenario linked to rapid premium growth (3)

A
  • Change in underwriting criteria or products
  • New line of business
  • Merger of 2 companies
32
Q

Briefly describe the impact of unregistered reinsurance on MCT operation risk

A

Increase capital required for operation risk
- Operation risk is dependent on credit risk and insurance risk
- Unregistered reinsurance is a component in insurance risk

33
Q

Define diversification credit

A

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

34
Q

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

A

No, credit and market risk sum to be asset risk
thus diversification credit considers the correlation between asset and insurance risk

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