1. MCT Ratio
    • threshold 100%, supervisory 150% (cope with volatility, risks not explicitly addressed)
    • OSFI expects each P&C insurer to establish an internal target capital ratio
    • required to inform OSFI immediately if anticipate falling below internal target and lay out plan (for OSFI’s approval) to return to internal target
  2. 3 primary considerations for defining capital
    • permanence
    • being free of mandatory fixed charges against earnings
    • subordinated legal position to the rights of policyholders and other creditors
  3. Elements of capital available
    • unadjusted equity = total assets - total liabilities
    • sum adjustments such as market minus book value of bonds
    • sum intangibles
    • capital available = unadjusted equity + adjustments - intangibles - NARRUI
    • NARRUI = Net Amount Receivable & Recoverable from Unregistered Insurers
  4. Deductions and adjustments from capital available
    • amounts from unregistered reinsurers unless covered by letters of credit
    • interest in non-qualifying subsidiaries and associates
    • adjustments to own-use property valuations
    • goodwill and other intangible assets
  5. Elements of capital required
    • capital for assets
    • margins for UEP and unpaid claims
    • margin for reinsurance ceded to unregistered reinsurers
    • catastrophe reserves and additional policy provisions
    • capital for structured settlements, letters of credit, derivatives
    • total capital required of regulated financial institution subsidiaries
  6. Liability risk
    • variation in claims provisions (unpaid claims)
    • possible inadequacy of provisions for UEP or premium deficiencies
    • occurrence of catastrophes (EQ and others)
  7. Asset risk
    • potential losses resulting from asset default and related loss of income
    • loss of market value of equities and the related reduction in income
  8. Treatment of subsidiaries, associates and joint ventures
    • consolidated subsidiaries: statement fully consolidated, net value included in parent
    • non-qualifying subsidiaries: excluded from capital available including loans and debt
    • associates: excluded from capital available, including loans and debt
    • joint ventures with ≤ 10% ownership interest: included in capital (other investment)
    • joint ventures with > 10% ownership interest: excluded, including loans and debt
  9. Margins for liability amounts
    • UEP: margin = 8% applied to max[ Net UEP; 50% NWP ]
    • Unpaid claims: net amount at risk (net of reinsurance, salvage and subrogation)
5% for Personal & Commercial Property and other auto

    •    10% for auto (liability and personal accident)

    •    15% for liability, mortgage, all others
    • Premium deficiency: margin = 8%
    • All margins calculated on gross level and multiply by 25%; report max(25%, net margin)
  10. Margins for reinsurance amounts (registered reinsurers)
    • insurance receivables: 0.5%
    • UEP recoverable: 0.5%
    • unpaid claims recoverable: 2%
  11. Margin for unregistered reinsurance
    • step 1: margin on UEP and recoverable losses = 10%(UEP ceded + recoverable)
    • step 2: XS recoverable = (Payable + Non-owned deposits) - (UEP ceded + recoverables)
    • step 3: Credit = (2/3)(XS + letters of credit)
    • step 4: Margin required = margin on UEP and recoverables - Credit
  12. Actuary’s margin vs MCT margin
    • purpose: expected variations vs abnormal negative variation in actuary’s estimate
    • accounting: incl. in L&LAE liability vs used solely to calculate capital required
  13. MCT vs level of investment risk
    • capital factors applied to different investment vary with level of risk
    • investments categorized in government grade, investment grade, not-investment grade
Card Set