On September 24, 2014 the Office of the Superintendent of
Financial Institutions Canada (OSFI) announced that recent
revisions to the Minimum Capital Test (MCT) Guideline will come
into effect on January 1, 2015 (subject to a 3-year phase in
period). This is not breaking news for Canadian federally regulated
property and casualty insurers. The changes have been brewing for
some time. In May of 2013, OSFI published for public consultation a
discussion paper on proposed changes to the regulatory capital
framework for federally regulated property and casualty insurers.
Then on December 20, 2013, OSFI published the draft 2015 MCT
Guideline for industry consultation. After receiving a good number
of submissions, the 2015 MCT Guideline has now been
finalized.
The noteworthy aspect of this development for outside observers is
that it is part of a continuing OSFI initiative to stay in step
with developments in risk-based regulation of financial
institutions. The 2015 MCT Guideline has been updated to become a
more vigorous risk-oriented test that aligns capital requirements
to the level of risk encountered by the property and casualty
insurance industry. Under the revised capital framework, the
supervisory target level of capital required for Canadian property
and casualty insurers and margin required for foreign property and
casualty branches (capital required) will be derived explicitly,
based on a pre-determined confidence level. According to OSFI, this
approach is more consistent with the risk-based regulation concept
and is in line with international regulatory developments.
The 2015 MCT Guideline provides for new and updated risk factors
and margins plus a revised definition of "available
capital". According to OSFI, these revisions were finalized
based on the public consultation, industry input, and comprehensive
testing and analysis.
The new risk-based capital framework results in a 2.8 percentage
point net decrease in the capital ratio (MCT and Branch Adequacy of
Assets Test (BAAT) combined) on average across the entire property
and casualty industry. Interestingly, on an individual basis, the
new framework resulted in a total impact of +3.6 percentage points
in the MCT and a -27.4% percentage point impact in the BAAT.
Although the decline in the overall capital ratio (combined) is not
material, OSFI notes that the impact may vary by individual company
as the new framework better aligns each insurer's capital
requirements with its risk profile.
OSFI has stated that it will continue to monitor emerging issues
and developments in the property and casualty insurance industry
and will revise the MCT Guideline accordingly to ensure that the
MCT continues to accurately reflect risks.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2014
