Difficulty to link Deductions and Qualitative Considerations for MCT Capital Available

MrGameNWatchMrGameNWatch
in OSFI.MCT

Hi,

I've red the MCT Capital Guidelines and I still have some difficulty to understand the link between all the deductions from Capital Available and the qualitative considerations for MCT Capital Available (Availability, Permanence, Absence and Subordination).

Does someone has a mapping of all deductions terms (or additions such as CSM or adj. for owned-occupied property valuation) and the reason why they are deducted (or added) from the capital available ?

I believe such a mapping list can help to increase the understanding behind the calculation of MCT Ratio.

Thank you,

Comments

  • grahamgraham

    I'm not 100% what you're looking for here but below is a list of the deductions and additions for MCT capital available.

    These guidelines aim to ensure that insurers maintain a buffer of high-quality capital that is readily available to absorb losses, thereby protecting policyholders and maintaining financial stability in the insurance sector.

    Deductions from Capital Available:

    1. Non-Qualifying Subsidiaries and Associates: Investments in or loans to non-qualifying subsidiaries and associates are deducted because they might not be readily available to absorb losses or meet obligations to policyholders, affecting the company's liquidity and financial stability.

    2. Unregistered Reinsurance Exposures: Amounts recoverable from unregistered reinsurers are deducted unless covered by acceptable collateral. This is due to the higher risk associated with recoveries from unregistered entities, which may not be as reliable or timely as those from registered ones.

    3. Insurance Acquisition Cash Flows: These are deducted as they represent future outflows or obligations that could impact the insurer’s ability to cover losses or meet policyholder obligations.

    4. Goodwill and Other Intangible Assets: Deducted because they do not represent tangible financial resources that can be used to absorb losses or meet policyholder claims.

    5. Deferred Tax Assets: Deducted because their realization is contingent on future profitability, which may not be certain, especially during periods of financial stress.

    6. Defined Benefit Pension Fund Assets: Deducted to the extent they are surplus and reported as an asset, as they may not be readily available to absorb losses due to regulatory or contractual restrictions.

    Additions to Capital Available:

    1. Contractual Service Margin (CSM) for Title Insurance Contracts: Added because it represents future profitability from these contracts, enhancing the insurer's financial stability and ability to absorb losses.

    2. Adjustments for Owner-Occupied Property Valuations: Adjustments are made to ensure that the valuations of such properties are accurately reflected in capital calculations, recognizing any unrealized gains or losses that could affect financial stability.

    And then below are the qualitative considerations regarding adjustments to the MCT capital available.

    Qualitative Considerations:

    • Availability: Capital elements must be fully paid and readily available to cover losses.
    • Permanence: The period and extent to which capital is available are considered to ensure long-term stability.
    • Absence of Encumbrances: Capital must be free from mandatory payments or encumbrances that could limit its availability to absorb losses.
    • Subordination: The extent to which capital is subordinated to the rights of policyholders and creditors in insolvency is crucial for determining its quality and reliability in stressful situations.
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