minCapReq

miermier

Hi Graham,

I am confused on the minCapReq definition in context of OSFI Target Capital v.s. minCapReq definition in OSFI MCT?

shouldn't those be consistent?
when we calculate minCapReq = CapReq/1.5 in the context MCT, while here is minCapReq=100% x BaseCap?

could you please give more detailed explanation or am i understand in a wrong way?

thanks.

chrisboersma

Yes I realize they call it a Minimum Capital Test and we remember it starts at 150% (supervisory), but the guideline is a little more detailed if you read it explicitly. By the time you hit minimum OFSI will mean business.....

First recall that there are 2 levels of regulatory capital: minimum, which is 100% x (base capital) and supervisory, which is 150% x (base capital).
The Internal Target Capital is higher than either of these:
it is calculated using ORSA (Own Risk Solvency Assessment)
it includes risks specified in MCT capital guidelines, and all insurer-specific risks

OFSI - MCT:

This guideline outlines the capital framework, using a risk-based formula, for target and minimum capital/margin required, and defines the capital/assets that are available to meet the minimum standard. The MCT determines the minimum capital/margin required and not the level of capital/margin required at which property and casualty companies must operate.

....

Federally regulated P&C insurers are required, at a minimum, to maintain an MCT ratio of 100%. OSFI has established an industry-wide supervisory target capital ratio (supervisory target) of 150% that provides a cushion above the minimum requirement and facilitates OSFI’s early intervention process. The supervisory target provides additional capacity to absorb unexpected losses and addresses capital needs through on-going market access

Where are you lost?

miermier

Thanks a lot Chrisboersma, I thought I was just overwhelmed for those definitions. I am clear now. Your answer is pretty helpful.

Battleacts2

"First recall that there are 2 levels of regulatory capital: minimum, which is 100% x (base capital) and supervisory, which is 150% x (base capital)."

There is no definition on "base capital" in the paper. Is base capital just the minimum capital required, which is CapitalRequired/1.5?

graham

Yes, the 2 levels of capital are minimum and supervisory. The post above is using the term "base capital" to mean the same thing as "minimum capital".