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Few changes to 2016 MCT, insurers advised to keep an eye on international developments: OSFI’s Roberge


April 23, 2015   by Angela Stelmakowich, Editor


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Few changes are anticipated for the 2016 version of the minimum capital test (MCT), which requires federally regulated property and casualty insurance companies in Canada to maintain adequate capital, says Judith Roberge, director of property and casualty insurance, capital division for the Office of the Superintendent of Financial Institutions (OSFI).

The plan is to move forward with the introduction of a capital charge on equity derivatives: OSFI

“The biggest change is going to be with respect to the capital treatment of equity derivatives,” Roberge noted during the Canadian Solvency and Capital Developments session at Insurance Bureau of Canada’s 19th Annual Financial Affairs Symposium in downtown Toronto Wednesday.

The plan is to move forward with the introduction of a capital charge on equity derivatives, as well as recognition of equity hedging strategies as they pertain to both exact hedging and inexact hedging, she explained to attendees.

“We are working with the companies producing derivatives,” Roberge said, pointing out that a consultation document was circulated to some affected companies to gather feedback on the OSFI proposals. Noting that results were received earlier this month, “we are right in the middle of looking at those results to see if we need to have another proposed approach,” she said.

“So, there is work going on behind the scenes and you will see all of those things once we go out for public consultation in June,” Roberge told attendees.

As well, the definition of capital will be clarified in 2016 MCT to help ensure better consistency across the financial services sector and with international standards.

The definition changes for 2016 MCT are “basically to converge and to be consistent in the wording,” Roberge explained. “With the capitalization of our p&c industry, I do not expect significant impact,” she added.

The timetable for the 2016 MCT is public consultation with industry in June; OSFI adjustments based on feedback in July through Sept.; final MCT guideline published in Sept.; and the new MCT in effect as of Jan. 1, 2016.

MCT plans for 2017 and beyond may also include changes to the definition of capital with respect to clarification for instruments issued, treatment of encumbered assets and deferred tax assets.

Judith Roberge, director of property and casualty insurance, capital division for the Office of the Superintendent of Financial Institutions

Judith Roberge, director of property and casualty insurance, capital division for the Office of the Superintendent of Financial Institutions

Farther down the road is the possibility of a concentration risk charge, something in line with international trends. Such a charge is “on OSFI’s radar,” Roberge (pictured right) said, but emphasized that, at this point, it is a longer-term consideration.

Around the world, Roberge noted that there is plenty of activity – unfolding at a rapid pace – related to the insurance industry. “There is significant work being done internationally and it may impact the Canadian capital regime,” she said.

Developments currently under way include work around the basic capital requirement (BCR), higher loss absorbency (HLA) and the insurance capital standard (ICS – with a planned implementation of 2019, the idea is that the ICS will replace the BCR). With the ICS, “it is up to supervisors to determine how they will apply this international standard domestically,” Roberge said.

OSFI has involvement in the proposed ICS, including serving as lead on several work streams and supplying recommendations for risk factors, she reported.

“Canada is one of the five countries that have been asked to provide proposed risk factors for the field testing of the ICS,” Roberge told symposium attendees.

Field testing – of which there are two components: BCR and HLA for globally systemic important insurers (G-SII) and ICS for internationally active insurance group (IAIG) – is scheduled for launch at the end April.

Canada supports global developments, Roberge said, but emphasized “it is, however, too early to determine the implications. We need to see the outcome, first of all, of the field testing. That will be very revealing.”

On a positive note, the expectation is that the ICS, while a more refined test than the BCR, will not be as refined as the current MCT. This is “good news, because as I said earlier, in Canada, we’re going to decide how we’re going to implement the factors” to meet the global standards, Roberge suggested.

“That means, at least at the start, we might not have to change drastically like other countries where they don’t even meet the minimum,” she said.

The timetable for ICS – which Roberge characterized as “a more refined test than BCR” and one that is “calibrated at a higher level” – is very aggressive. “We will see if that will be possible, but most definitely, the work is progressing rapidly and it looks like it might be very possible,” she said.

“So, I do encourage the industry – p&c and also the life industry, in fact – to get acquainted, to follow the international work being done,” Roberge recommended, “because, eventually, it will happen and it will have an impact.”

More coverage on the 19th Annual Financial Affairs Symposium

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