OSFI.TargCap

Question 1

1st step in OSFI’s risk assessment process

Answer 1

For all significant activities, evaluate:
- Inherent risk
- Quality of risk management

Question 2

Define OSFI’s “ONR” (Overall Net Risk)

Answer 2

ONR = Weighted average of risks of Significant Activities
- Intuitively, ONR is the consolidated rating OF potential adverse impact OF insurer activities ON earnings & capital

Question 3

Define OSFI’s “CRR” (Composite Risk Rating)

Answer 3

It is a rating (with trend direction) based on an assessment of earnings & capital relative to ONR

Question 4

Factors other than regulatory capital in OSFI’s capital assessment criteria (4)

Answer 4

• Adequacy of capital to support the insurer’s risk profile & business plan, including risks that are not fully captured in the regulatory capital guidelines
• Ability to assess capital at reasonable rates to meet projected needs
• Quality of capital
• Quality or strength of the insurer’s capital management policy, including its capital management process

Question 5

Types of regulatory capital (2)

Answer 5

Minimum capital, supervisory capital

Question 6

Define Minimum Capital Required

Answer 6

The minimum level of capital necessary for an insurer to cover the risks specified in the Capital Guidelines

(if insurer’s capital approached or fell below minimum, OSFI would be very concerned about the ongoing viability of the insurer and/or the level of risk to policyholders & creditors)

Question 7

Define supervisory capital required

Answer 7

The target levels of capital necessary for an insurer to cover the risks specified in the capital guidelines as well as to provide a margin for other risks

Question 8

Define Internal Capital Target

Answer 8

The target levels of capital, as determined as part of an insurer’s ORSA, needed to cover all the risks of the insurer, including the risks specified in the capital guidelines

Question 9

Briefly describe two reasons a company’s internal target capital ratio should be higher than the supervisory target

Answer 9

• In order to absorb unexpected losses beyond those covered by the supervisory target
• Provide adequate time for management to resolve financial problems that arise, while minimizing the need for OSFI intervention

Question 10

Desribe an approach an insurer could use to determine its internal target capital ratio

Answer 10

Insurer could use an internal capital model to determine its internal ratio. It should consider its own risk appetite and profile, and also consider its risk mitigation approach. The model should be forward looking and consider stress tests and scenario tests.

Question 11

Who is protected by this (higher) Internal Capital Target

Answer 11

Protects policyholders & creditors in a wind-up

Question 12

Items excluded from Supervisory/Internal Capital Target (3)

Answer 12

• Head-office guarantees
• Future capital injections
• Other management actions

NOTE: this is different from considering a capital injection to base or adverse scenarios in a stress-test

Question 13

Is it ok to consider future capital injections when determining the Internal Capital Target?

Answer 13

It is not appropriate to consider a future injection of capital when setting the internal target capital ratio, unless this injection is planned & certain.

Question 14

When can normally excluded items be included when considering capital targets? (Head-office guarantees, future capital injections, other management actions)

Answer 14

When determining the level at which insurer will operate ABOVE the internal capital target

Question 15

Required management action if capital available FALLS BELOW Internal Capital Target (for ex: when capital availble is below MCT)

Answer 15

The insurer should inform OSFI and provide plans on how it expects to manage the risks and/or restore its Available Capital to its internal target within a relatively short period of time

Question 16

Define capital management

Answer 16

Determining & maintaining quality & quantity of capital required to support operations

Question 17

What is included in capital management policies (2)

Answer 17

• Clearly defined roles and responsibilities with respect to the design and execution of relevant policies and procedures
• A policy that states capital adequacy goals relative to risk, taking into account the insurer’s strategic focus and business plan, and that sets its Internal target

Question 18

Should the ORSA process be forward looking or should it be based on past variability?

Answer 18

The ORSA process should be forward-looking, not based on past variability