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CAS EXAM 6C SPRING 2023 > OSFI.MCT-IFRS > Flashcards

OSFI.MCT-IFRS Flashcards

1
Q

MCT Ratio formula

A

MCT Ratio = Capital Available / (minimum Capital Required/1.5)

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2
Q

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

A

150%

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3
Q

What is the MCT ratio requirement for federally insured regulated insurers

A

100%

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4
Q

What are the 5 principles of allocation to determine capital requirements

A
  • Free from bias
  • Accurate when allocation revenue & costs
  • Consistent with allocation methods used by the insurer for other business decision-making purposes
  • Consistent over time
  • Systematic & reasonable
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5
Q

Identify considerations in defining MCT capital available (4)

A
  • Availability: is the capital element fully paid and available to absorb losses
  • Permanence: until when is the capital element available
  • Absence of encumbrances & mandatory servicing costs: ask whether capital has an absence of encumbrances & mandatory servicing costs
  • Subordination: is the capital element subordinated to rights of policyholders and creditors in an insolvency or winding-up
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6
Q

Main components of MCT Capital Available (3+1)

A

Category A Capital
Category B Capital
Category C Capital
non-controlling interests in subsidiaries, subject to certain conditions

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7
Q

Define ‘target capital required’ (give statistical definition)

A

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

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8
Q

Identify subcomponents of Category A capital available (6)

A
  • Residual Interest (non-stock)
  • Common Shares
  • Contributed Surplus
  • Other Capital
  • Retained Earnings
  • Nuclear and Other Reserves
  • Accumulated Other Comprehensive Income (AOCI)
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9
Q

MCT Capital Available composition limits on Category B and C Capital

A

Category B + Category C <= 40% x (total capital available - AOCI)
Category C <= 7% x (total capital available - AOCI)

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10
Q

Which regulatory adjustment to MCT capital available is an addition

A

CSM associated with title insurance contracts

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11
Q

Which regulatory adjustment to MCT is an addition or deduction

A

adjustments to owner-occupied property valuations

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12
Q

4 main components of MCT capital required

A

Insurance Risk
Market Risk
Credit Risk
Operational Risk

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13
Q

Define MCT insurance risk

A

Risk of loss for the potential for claims and payouts from policyholders and beneficiaries

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14
Q

Define MCT market risk

A

Risk of loss from changes in prices in various markets

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15
Q

Define MCT credit risk

A

Risk of loss from counterparty’s potential inability or unwillingness to fully meet contractual obligations due to the insurer

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16
Q

Define MCT operational risk

A

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

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17
Q

Subcomponents of MCT insurance risk (4)

A
  • LIC
  • unexpired coverage
  • unregistered reinsurance
  • earthquake and nuclear catastrophes
18
Q

How is the diversification risk accounted for regarding MCT insurance risk

A

Risk factors for each class of business contain an implicit diversification factor (based on the assumption that insurers have well-diversified portfolios)

19
Q

Formula margin(LIC)

A

(risk factor) x [(net* LIC issued excl. RANF) - (AIC for reinsurance contracts held excl. RANF)]

*net of S&S

20
Q

Formula margin(unexpired coverage)

A

(risk factor) x MAX[(net unexpired coverage), 30% x (net premiums received in the past 12 months)]

net premiums received = premiums received net of associated reinsurance premiums paid

21
Q

Formula net unexpired coverage

A

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

22
Q

Define Self-Insured Retention

A

portion of a loss payable by the policyholder

23
Q

Condition for admitting recoverability of Self-Insured Retentions (condition for it to be deduced in capital required)

A

OSFI must be satisfied of collectability, OSFI may require collateral such as letter of credit (LOC)

24
Q

Formula Earthquake Risk Exposure (Model Approach)

A

[(East Canada PML500)^1.5 + (West Canada PML500)^1.5)]^(1/1.5)

25
Q

Formula Earthquake Risk Exposure (Standard Approach)

A

MAX[(East Canada PTIV - applicable deductible), (West Canada PTIV - application deductible)]

26
Q

Formula margin for Earthquake Risk

A

1.25 x (EPR - ERC)
EPR: Earthquake Premium Reserve
ERC: Earthquake Risk Component
ERX: Earthquake Risk Exposure

ERC = ERX - Financial Resources

Financial Resources can be:
- Capital & surplus (max 10%)
- Reinsurance
- Earthquake Premium Reserve
- Capital market financing

27
Q

Subcomponents of MCT market risk (6)

A

Interest rate risk
Foreign exchange risk
Equity risk
Real estate risk
Right-of-use asset risk
Other market risks

28
Q

Formula for margin(interest rate risk)

A

A = (asset duration) x Δy x (asset values)
B = (liability duration) x Δy x (liability values)
F = | A – B |

29
Q

Formula Modified duration

A

Macaulay duration = SUMPROD(t, PVCF@t)/(market value)
Modified duration = Macaulay duration / (1 + Yield)

30
Q

Formula Effective duration

A

[(Fair value if yields decline) - (Fair value if yields rise)]/[2 x (initial price) x (change in yield in decimal)]

31
Q

Contrast modified duration and effective duration

A

Effective duration accounts for situations where the cash flows may change as a result of changes in interest rates. Modified duration does not.

32
Q

Formula for margin(foreign exchange risk)

A

10% x MAX[(aggregate net long positions for each currency, aggregate net short positions for each currency)]

33
Q

Formula for margin(equity risk)

A

30% x [(Common Shares) + (Joint Ventures with <= 10% ownership) + (futures) + (forwards) + (swaps)]

34
Q

Formula for margin(real estate risk)

A

(risk factor) x (value of owner occupied properties) + (risk factor) x (value of investment properties)

35
Q

Formula for margin(credit risk)

A

(asset value) x (risk factor)

36
Q

What are the 2 different options of risk factors used in calculating the margin for credit risk

A

either:
- external credit rating of the counter-party
- prescribed factor determined by OSFI

37
Q

Formula for margin(operational risk)

A

MIN{(30% x CR0), [(8.5% x CR0) + (2.5% x direct prem. received) + (1.75% x prem. received reins. issued) + (2.5% x prem. paid for reins. held) + (2.5% x prem. growth above 20% threshold)] + MAX[(0.75% x prem. received reins. issued arising from intra-group pooling), (0.75% x prem. received reins. held arising from intra-group pooling)]

38
Q

Identify risks that are excluded from MCT operation risk

A
  • reputation risk
  • strategic risk
39
Q

Define diversification credit

A

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

40
Q

Formula diversification risk

A

DC = A + I - SQRT(A^2 + I^2 + 2RAI)

R = correlation for diversification
A = asset risk (market risk + credit risk)
I = insurance risk

CAS EXAM 6C SPRING 2023 (46 decks)

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