FSCO lays out MCT guidance

The Financial Services Commission of Ontario (FSCO) has published its guidance on the new minimum capital test (MCT), with p&c insurers set to implement the new test on 2004 annual returns, filed by February 28, 2005. The MCT, a risk-based system of assessing capital requirements, has actually been in place on a trial basis since 2002.
The MCT mirrors the test in place at the federal level with the Office of the Superintendent of Financial Institutions (OSFI) for federally-regulated p&c insurers. FSCO notes OSFI shares MCT scores with the provincial regulator.
Like OSFI, FSCO expects insurers to hit a minimum 150% score on the test – meaning they would carry 150% of the capital required to meet all their liabilities but that the regulator may set a target above this level based on the insurer’s risk profile. “Although it will not be required that companies maintain capital above statutory limits, FSCO will encourage companies to avoid operating at the minimum levels,” notes the guidance.
In fact, FSCO wants to see each insurer set a target above the limit, “both to cope with volatility in markets and economic conditions, innovations in the industry, consolidation trends and international developments, and to provide for risks not explicitly addressed in the calculation of policy liabilities or the MCT. Such risks include systems, data, strategic, management, fraud, legal and other operational and business risks.”
The full document can be viewed at www.fsco.gov.on.ca.