On September 24 2014 the Office of the Superintendent of Financial Institutions Canada (OSFI) announced that recent revisions to the Minimum Capital Test (MCT) Guideline will come into effect on January 1 2015 (subject to a three-year phase-in period). This is not breaking news for Canadian federally regulated property and casualty insurers; the changes have been brewing for some time. In May 2013 OSFI published for public consultation a discussion paper on proposed changes to the regulatory capital framework for federally regulated property and casualty insurers. Then on December 20 2013 OSFI published the draft 2015 MCT Guideline for industry consultation. After a good number of submissions were received, the 2015 MCT Guideline has now been finalised.
This is the latest move in a continuing OSFI initiative to stay in step with developments in risk-based regulation of financial institutions. The 2015 MCT Guideline has been updated to become a more vigorous risk-oriented test that aligns capital requirements to the level of risk encountered by the property and casualty insurance industry. Under the revised capital framework, the supervisory target level of capital required for Canadian property and casualty insurers and margin required for foreign property and casualty branches (capital required) will be derived explicitly, based on a pre-determined confidence level. According to OSFI, this approach is more consistent with the risk-based regulation concept and is in line with international regulatory developments.
The 2015 MCT Guideline provides for new and updated risk factors and margins, plus a revised definition of "available capital". According to OSFI, these revisions were finalised based on the public consultation, industry input and comprehensive testing and analysis.
The new risk-based capital framework results in a 2.8% net decrease in the capital ratio (MCT and branch adequacy of assets test (BAAT) combined) on average across the entire property and casualty industry. Interestingly, on an individual basis, the new framework resulted in a total impact of +3.6 % in the MCT and -27.4% in the BAAT. Although the decline in the overall capital ratio is not material, OSFI notes that the impact may vary by individual company as the new framework better aligns each insurer's capital requirements with its risk profile.
OSFI has stated that it will continue to monitor emerging issues and developments in the property and casualty insurance industry and revise the MCT Guideline accordingly, in order to ensure that the MCT continues to accurately reflect risks.
For further information on this topic please contact Carol Lyons at McMillan LLP by telephone (+1 416 865 7000), fax (+1 416 865 7048) or email ([email protected]). The McMillan LLP website can be accessed at www.mcmillan.ca.
