OSFI.TargCap Flashcards
1st step in OSFI’s risk assessment process
For all significant activities, evaluate:
- Inherent risk
- Quality of risk management
Define OSFI’s “ONR” (Overall Net Risk)
ONR = Weighted average of risks of Significant Activities
- Intuitively, ONR is the consolidated rating OF potential adverse impact OF insurer activities ON earnings & capital
Define OSFI’s “CRR” (Composite Risk Rating)
It is a rating (with trend direction) based on an assessment of earnings & capital relative to ONR
Factors other than regulatory capital in OSFI’s capital assessment criteria (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
Types of regulatory capital (2)
Minimum capital, supervisory capital
Define Minimum Capital Required
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)
Define supervisory capital required
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
Define Internal Capital Target
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
Briefly describe two reasons a company’s internal target capital ratio should be higher than the supervisory target
- 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
Desribe an approach an insurer could use to determine its internal target capital ratio
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.
Who is protected by this (higher) Internal Capital Target
Protects policyholders & creditors in a wind-up
Items excluded from Supervisory/Internal Capital Target (3)
- 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
Is it ok to consider future capital injections when determining the Internal Capital Target?
It is not appropriate to consider a future injection of capital when setting the internal target capital ratio, unless this injection is planned & certain.
When can normally excluded items be included when considering capital targets? (Head-office guarantees, future capital injections, other management actions)
When determining the level at which insurer will operate ABOVE the internal capital target
Required management action if capital available FALLS BELOW Internal Capital Target (for ex: when capital availble is below MCT)
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
