OSFI releases revised minimum capital test guidelines

The Office of the Superintendent of Financial Institutions (OSFI) has revised its Minimum Capital Test (MCT) guidelines for property and casualty insurers, effective Jan. 1, 2012.OSFI requested industry feedback for a draft MCT guideline in May. As a result of the feedback from industry, OSFI it made the following “key changes” to its MCT, among others:• The addition of a subsection called ‘Other Factors’ in Section 3.4, dealing with capital factors for asset risk. The new subsection will introduce greater granularity of the credit risk factors for invested assets based on credit rating and term to maturity.• The removal of the margin factors on the Provision for Adverse Deviation (PfAD) portion of the claims liability (Section 4.2 Margins for unearned premiums, unpaid claims and premium deficiencies).• The addition of Section 4.4 ‘Risk Mitigation and Risk Transfer – Reinsurance.’ The section serves as the introduction for 2012 of capital factors on collateral held as security for unregistered reinsurance.• The addition of Section 4.5 ‘Self-insured Retention.’ The section clarifies under what circumstances some SIRs may require collateral.• The addition of Chapter 5, ‘Interest Rate Risk.’ This chapter takes into consideration the previously unaccounted for risk of economic loss resulting from market changes in interest rates. OSFI has also decided to postpone the implementation of the foreign exchange risk margin for Canadian P&C insurers until 2013 while branches of foreign insurers maintain the existing foreign exchange risk margin.