Funds Withheld

danielle4nandanielle4nan
edited October 2018 in OSFI.MCT

Hi,

I've been taking a look at the annual returns and wanted to confirm whether Reinsurance Collateral - funds withheld is included or excluded within all of the capital available and capital requirement MCT calculations? Such as those found within tab 70.60 of the annual return. It seems to me that it is excluded, so of all collateral held with respect to unregistered reinsurance, only letters of credit and non-owned deposits can contribute. However the annual return isn't so easy to follow without it being populated so I thought I'd double check.

I also notice that, within the capital requirement calculation for credit risk - unregistered reinsurance, the denominator of the ratio of excess to total collateral would in this case include funds withheld in total collateral, but the numerator would exclude it if my above observation is correct, which intuitively feels strange to me...

Thanks in advance!

Comments

  • chrisboersmachrisboersma

    4.3.3.2. Deduction from capital available

    Amounts receivable and recoverable from an unregistered reinsurer, as reported on the balance sheet, are deducted from capital available to the extent that they are not covered by amounts payable to the assuming reinsurer or acceptable collateral. Acceptable collateral is defined as non-owned deposits under a RSA, other acceptable non-owned deposits, funds held to secure payment from an assuming reinsurer, and letters of credit held as security from an assuming reinsurer.

  • grahamgraham

    Yes, basically, funds held to secure payment are included in MCT capital available. Thanks chrisboersma for the reference to 4.3.3.2.

    Your question is going to a depth that is probably not required for the exam, but it always enhances understanding to go beyond that basic requirements, especially if this forms part of your work. It would certainly be much more helpful if the sample returns were populated.

    In any case, I looked at the exhibit labeled Step 1 on p33 of the MCT paper and it seems to imply that the fund withheld are included in the numerator and denominator. The $100 of funds withheld is definitely part of the $1200 in the denominator, but I don't see that it is subtracted out in the value of $490 for the numerator. The insurer could just hang on to the reinsurance premiums (both the earned and unearned portions) as collateral against the unregistered reinusrer.

  • danielle4nandanielle4nan

    Thanks Graham!

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