OSFI.TargCap

Question 1

Define Minimum Capital Required.

Answer 1

MinCapReq = 100% x BaseCap

• capital required to cover risks specified in capital guidelines
• if CapAvail < MinCapReq THEN there are critical viability concerns for insurer

Question 2

Define Supervisory Capital

Answer 2

SupCapReq = 150% x BaseCap
- capital required to cover risks specified in capital guidelines PLUS MARGIN
- if CapAvail < SupCapReq THEN insurer is subject to supervisory attention
(early intervention status)

Question 3

Define Internal Capital Target

Answer 3

A capital target determined by ORSA above supervisory capital target
- includes risks specified in capital guidelines AND all insurer-specific risks

Question 4

Identify 2 reasons for having an Internal Capital Target

Answer 4

1. Gives management time to address issues

2. Captures insurer-specific risks not addressed by industry-wide capital guidelines

Question 5

Describe how an insurer could determine its internal capital target ratio.

Answer 5

• Include insurer-specific risks in capital assessment
• Assessment uses stress-testing
• Capital level must withstand a specified level of loss without falling below supervisory capital over specified time horizon

Question 6

Explain whether or not it is appropriate to consider a future injection of capital when setting the internal target capital ratio.

Answer 6

No, unless planned & certain

Also, cannot consider head-office guarantees & other management actions EXCEPT for setting targets above Internal Target

Question 7

Briefly explain the required management action if Capital Available FALLS BELOW Internal Capital Target

Answer 7

If this happens (or expected within 2 yrs) NOTIFY OSFI & SUBMIT plan to restore capital to internal target level reasonably quickly

Question 8

Identify 4 common errors in capital internal target ratio.

Answer 8

1. Internal target too low (should be higher than MCT target)
2. Did not use ORSA
3. Not forward-looking
4. Use capital injection (without it being planned and certain)