OSFI introduces minimum gross capital level to MCT guideline

The Office of the Superintendent of Financial Institutions (OSFI) has introduced a minimum gross capital level in its 2011 Minimum Capital Test Guideline. OSFI is requesting comments from industry on the second phase of its draft 2011 MCT Guideline by Nov. 30, 2010.The introduction of a minimum gross capital level is one of three changes to the guideline. The other two include an audit requirement for the MCT and a clarification on the treatment of loans to/investments in associates. “The new minimum gross capital level acts as a capital floor and requires insurers to maintain a 25% minimum amount of capital on unearned premiums, unpaid claims and adjustment expenses and premium deficiencies,” an OSFI letter says.”Initially, the minimum gross capital level will not have an impact on insurers because compliance with the Reinsurance Regulations makes the existing net margins on unearned premiums, unpaid claims and adjustment expenses the operative margins,” it continued.”The margins falling out of the minimum gross capital level will only impact insurers who in the future choose to cede a material portion of their business.”The initiative is intended to encourage insurers to make prudent underwriting and pricing decisions by “forcing them to maintain capital that would otherwise not be required because of excessive cessions.”