1 point question on determining company's financial condition

jc2018

Hi,

In both 2015 Spring 29a and 2017 Fall 22a, the question asks to determine if the two companies are in good financial condition and is given 1point for it.
In the first question, the examiner's report goes on to explain in length on how a company's financial condition is determined through DCAT, but in the latter, it just goes straight into No, because this, Yes because this.
Is it normally necessary to explain like in the first question or was the examiner's report just being more detailed?

Thank you,

graham

If I were answering this question, I would first briefly explain the conditions that must be satisfied for an insurer to be in good financial condition. Then I would perform the check and state my conclusion.

As you said, this is what they did in 2015, but in my opinion they were far too wordy. I would quickly write this:

• need MCT >= 150% for base scenario, all yrs
• need assets >= liabs for base & all adverse scenarios, all yrs

Then I would check the conditions.

I would not answer as they did in 2017, without first explaining the condition. I assume the examiner's accepted that answer, this time, but the examiners for another exam might not. In fact, if you read further down in the examiner's report, it says:

• Candidates were expected to clearly set out the two criteria that are used to assess a company’s financial condition. In addition, candidates were expected to apply the criteria to the two companies to reach the correct conclusion.

I don't think they followed their own advice in the sample answer!

OVERALL ADVICE ON THE EXAM:

• Time-permitting, you should include explanatory details, but learn how to do it in a brief manner. This is why it's important to have a good time management strategy for the exam.
• If you see you have time, you can write a little more on a particular question. But if you're running short of time, then get main points down quickly and move on. The worst thing is to leave 2 or 3 questions totally blank because you ran out of time. It's often easy to get partial credit, but sometimes difficult to get full credit regardless of how much you write.

deborahjia1

@graham In 2014 Spring 28, why is the solution determining OSFI intervention for adverse scenario based on MCT? Or is the intervention criteria different from good financial condition criteria?

chrisboersma

Question A asks:

Explain whether the insurer's financial condition is currently satisfactory

And the answer is always the same as the usual DCAT answer:

Sample 2 Yes, it is a good financial condition since he is able to meet all future financial obligation under adverse scenario (surplus >0) and MCT > 150 % (supervisory ratio) under base scenario

Question B:
relates to DCAT-->Method-->Approach

Identification of possible regulatory actions for each scenario that causes the insurer to fall below the supervisory target capital requirement. For best practices purposes, it would be preferable also to identify possible regulatory actions that may be triggered as a result of falling below any other thresholds set by the regulator(s).

The question asks:

Evaluate the likelihood of the OSFI to intervene in the future, given each adverse scenario actually happens. Assume Capital Required is the same for all scenarios.

Since OSFI interferes when MCT < 150% --> any scenario that falls below 150% will require OSFI intervention in the future (after it drops below 150%). Until the company actually falls below 150% it will not require intervention

javid

@deborahjia1, I would re-iterate what Graham said earlier in this post. We need two conditions:
1. Need MCT >= 150% for base scenario, all yrs
2. Need assets >= liabs (or equivalently surplus >= 0) for base & all adverse scenarios, all yrs. So here, we are looking at surplus for the base & adverse scenarios (and this is what was done in the 2017 exam: https://www.casact.org/admissions/studytools/exam6c/f17-6C.pdf)

chrisboersma

OFSI Interference is Defined and described in "Target Capital" Paper. It has no specific involvement in the DCAT analysis (which is a specific analysis that relates to SOP 2500). Regulator actions would be considered as part of any ripple effects in a DCAT report (which is what part B is alluding to). The DCAT is intended for the board of directors.

So back to your original question:

Or is the intervention criteria different from good financial condition criteria?

Yes the intervention criteria is different from good financial condition criteria. The intervention criteria is defined in "target capital". The good financial condition criteria is a actuarial opinion that forms part of the DCAT report created by the AA:

From Target Capital:

Supervisory Target Capital

OSFI’s mandate includes an early intervention approach. This is partly addressed by establishing supervisory target capital levels (Supervisory Targets) above the Minimums that provide an early signal so that intervention will be timely and for there to be a reasonable expectation that actions can successfully address difficulties.

Target Capital (set by ORSA or similar)

OSFI understands that an insurer’s Available Capital levels may fall below its Internal Targets on unusual and infrequent occasions. If this happens, or is anticipated to happen within two years, the insurer should inform OSFI promptly and provide plans on how it expects to manage the risks and/or restore its Available Capital levels to its Internal Targets within a relatively short period of time.

In summary,

If you create a DCAT report and notice that in the base scenario in 2-years you fall below your company's target capital you have to inform OSFI of this and provide plans on how you expect to return over target capital levels. You do not need to inform OSFI of poor MCT ratios in adverse scenario. Nor is there mention of advising OSFI if there is negative surplus in any of the adverse scenarios. You will note OSFI is not mentioned in the DCAT paper specifically (besides material references).

At this point OSFI would retain discretion on interference (but very unlikely they would interfere if your plan is reasonable). If your "plans" aren't good they will interfere immediately (ie. if you say we're going to sell 50% more policies to get more cash).

However, due to the supervisory clause above, we can say with 100% confidence that OSFI will interfere with your company AS SOON AS your MCT hits 150% as per their requirement above (supervisory target capital). If a DCAT report shows you are in "poor financial condition" there is no strict regulatory requirement for OSFI to interfere.

Note: I fixed some typos/errors in my previous post that should help with clarity.

deborahjia1

@chrisboersma Thanks for the detailed explanation! That's very clear