June 21, 2018

OSFI proposed the draft version of the 2019 Minimum Capital Test (MCT) guideline for property and casualty (P&C) insurers in Canada. The potential amendments to the guideline are to be implemented over two years. Comments must be received by August 16, 2018. A summary of industry comments received, along with the OSFI responses, will be posted on the OSFI website, when the final guideline is released.

The guideline covers all federally regulated P&C insurance companies. OSFI proposes to increase the margin required for reinsurance ceded to unregistered reinsurers from 15% to 20%, with effect from January 01, 2020. Other key proposed changes that will be effective from January 01, 2019 are as follows:

  • Introduce credit risk capital charges to right-of-use assets resulting from the implementation of IFRS 16
  • Adjust net assets available for Canadian branches to admit the right-of-use asset for owner-occupied property leases resulting from the implementation of IFRS 16
  • Introduce counterparty credit risk capital charges on amounts receivable and recoverable from registered associated reinsurers
  • Recognize accounts payable created under a funds held reinsurance arrangement between Canadian insurance companies and unregistered associated insurers as acceptable collateral to reduce the margin required for cessions to unregistered reinsurers, subject to a condition
  • Update the credit risk factors for securitized assets and transfer the updated risk factors from Guideline B-5 – Asset Securitizationto the MCT guideline
  • Implement other minor edits or clarifications; for example: clarify the capital treatment of funds' withheld reinsurance assets for calculating the credit risk charge and clarify the definition of interest-rate-sensitive assets and liabilities to measure the interest rate risk margin for funds' withheld arrangements

OSFI conducts periodic reviews of the MCT guideline to monitor for, and respond to, emerging trends and issues raised by stakeholders so that the MCT remains effective and reflective of the property and casualty insurance industry developments. OSFI is also undertaking a broad review of the reinsurance framework applicable to federally regulated insurers. To this effect, OSFI has released a draft version of the 2019 MCT guideline for consultation. 

 

Related Links

Comment Due Date: August 16, 2018

Effective Date: January 01, 2019  and January 01, 2020 (reinsurance margin increase)

Keywords: Americas, Canada, Insurance, MCT Guideline, Property and Casualty Insurers, Capital Requirements, OSFI

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