OSFI’s proposed capital requirements would lower MCT ratios by 14%

The Office of the Superintendent of Financial Institutions (OSFI)’s proposed changes to the 2012 Minimum Capital Test (MCT) would decrease federally-regulated Canadian P&C insurers’ aggregate MCT ratio by 14%, to 212.6%.
When applied to the Branches Adequacy of Assets Test (BAAT), foreign property and casualty branches would see their aggregate BAAT ratio drop by 31.9% to 284.5%.
In its discussion paper, OSFI examined the impact on the property and casualty industry that its proposed changes to the 2012 Minimum Capital Test (MCT) and the Branches Adequacy of Assets Test (BAAT) would have. The proposed changes included, among other items:

• capital requirements for interest rate risk;
• applying a “robust” foreign exchange risk capital requirement to the MCT and BAAT; and
• the introduction of a capital factor on all collateral held as security for unregistered reinsurance.

“OSFI expects that P&C insurers will mitigate the impact of the proposed changes, for example, by modifying their investment portfolio to reduce their interest rate exposure, so that the MCT/BAAT ratios will move back to current levels over time,” the discussion paper said.
OSFI is initiating industry consultations regarding the results of the impact study during the remainder of 2010 and early 2011. By spring 2011, it hops to issue a formal draft guidance regarding the changes.
A final guideline and annual return documents will be released in September 2011 for a Jan. 1, 2012 implementation date.