CapReq(Earthquake) and Capital and Surplus

FrancoisFrancois
in OSFI.MCT

I don't this kind of question has been asked.

When we are required to calculate a MCT, normally the Catas risk capital required is given.

If we need to calculate it in order to obtain the insurance risk, how do we treat the wording "Capital and Surplus". The section in the MCT paper is not clear about this. Couldn't find the information in my company's PC1.

Is this the Capital available ? From Spring2017 #19, we know that Capital and Surplus is AT LEAST : AOCI + Retained Earnings + Common Shares

Comments

  • javidjavid

    As per section 4.5.1.2 of http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/mct2018.aspx,

    Insurers can count up to a maximum of 10% of capital and surplus as part of their financial resources to cover their earthquake risk exposure.

    Following this paragraph:

    For Canadian P&C insurers, the amount of capital and surplus corresponds to a maximum of 10% of total equity as at the end of the reporting period being filed.

    This aligns with what was done in Spring 2017 Q19 where they computed 10% of total equity, where equity has various components such as Share Capital, Contributed Surplus (or additional paid-in capital), Retained Earnings and AOCI

  • FrancoisFrancois
    edited April 2019

    So let's use my "example", the capital available we would use is the one "gross of any deductions" since it's the one that is the best proxy of Equity ?

  • chrisboersmachrisboersma

    I'm not sure I follow specifically what you're asking, but I have the following chart which shows all the places on the balance sheet that reserves impact.

    Gross Capital Available is just an intermediate calculation on the Balance sheet: 30.62 Line 29 (Subtotal: capital available gross of deductions). I don't think it is specifically used for anything (it's not specifically mentioned in the guide)

    What is used to calculate the 10% x E is different than Capital Available.

    Capital Available is a very specific calculation as completed on page 30.62 and defined by the MCT Guide. Its closest proxy is equity (assuming the insurer's equity isn't tied down by encumbrances, is permanent, is available and is not subordinated). Earthquake reserves are both added to capital available and added to capital required. The calculation of these reserves uses "equity" rather than "capital available".

    Where,

    Equity = Assets - Liabilities.

    Or, as per 20.20 - Equity =

    • Shares issued and paid
    • Contributed Surplus
    • Retained Earnings
    • Reserves
    • Accumulated Other Comprehensive Income (Loss)
  • javidjavid

    Thanks @chrisboersma. Agree here in using equity as the proxy.

  • FrancoisFrancois

    Thanks !

Sign In or Register to comment.