OSFI.MCT Flashcards by Jacob Menard

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

150%

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What is the MCT ratio requirement for federally regulated insurers

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

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Are insurers required to meet capital requirements at all times

Yes

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Identify the main components of MCT capital required

Insurance Risk
Market Risk
Credit Risk
Operational Risk

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Define MCT Insurance Risk

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

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Define MCT market risk

Risk of loss FROM changes in prices in various markets

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Define MCT credit risk

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

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Define MCT operational risk

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

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

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

(CTE = Conditional Tail Expectation)

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

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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Identify the principles of allocation regarding MCT capital requirements

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

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

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

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Identify qualitative considerations in defining MCT capital available (4)

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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Identify the 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 (category A, B or C)

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

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

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

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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Should dividends paid to stockholders be removed from capital available

Yes

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

None - not provided in text

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Briefly describe the MCT capital composition limits

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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Which regulatory adjustment to MCT capital availabe is an addition

CSM associated with title insurance contracts

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

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Adjustments to owner-occupied property valuations

Which regulatory adjustments to MCT capital available are deductions

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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

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

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

Identify the subcomponents of MCT insurance risk (4)

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

How is diversification risk accounted for regarding MCT insurance risk

- 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

Formula 1: margin(LIC)

margin(LIC) = (risk factor) x [ net LIC(issued) excl. RANF – AIC(re held) excl RANF ]

Formula 2: margin(unexpired coverage)

margin(unexpired coverage) = (risk factor) x MAX [ (net unexpired coverage) , 30% x (net premiums received past 12 months) ], where Net premium received = premiums received net of associated reinsurance premiums paid

Formula 2a: Net unexpired coverage

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

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

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

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

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

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

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

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

(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

Identify the risks of holding a reinsurance contract with a reinsurer

- reinsurer won't pay insurer what is owed - mis-assessment of required provision (the amount the insurer expects to be paid)

Define "SIR" (Self-Insured Retention)

Portion of a loss payable by the policyholder

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

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

Identify the 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

What is the formula for margin(equities)

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

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

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)

What is the formula for margin(credit risk)

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)

Briefly describe what the "risk factor" is for calculating the margin for credit risk

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

What are "off-balance sheet" exposures + 4 examples

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

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

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

Is legal risk included in operational risk?

Yes, legal risk is included as part of operational risk

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

- Strategic risk - Reputation risk

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

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

Identify scenarios linked with rapid premium growth (3)

- Mergers - New LOBs - Changes to products or U/W criteria

Briefly describe the impact of unregistered reinsurance on MCT operational risk

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

Define "diversification credit"

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

State the formula for the diversification credit

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

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

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

OSFI.MCT Flashcards

(50 cards)