OSFI - Target Cap

Question 1

Define the Minimum Capital Requirement.

Answer 1

MinCapReq = 100% x BaseCap

• it is the capital required to cover risks specified in capital guidelines
• if CapAvail < MinCapReq, then there are critical viability concerns for the insurer

Question 2

Define Supervisory Capital Requirement.

Answer 2

SupCapReq = 150% x BaseCap

• it is the capital required to cover risks specified in capital guidelines PLUS a margin
• if CapAvail < SupCapReq, then the insurer is subject to supervisory attention (early intervention status)

Question 3

Define Internal Capital Target.

Answer 3

• a capital target determine by ORSA that is above the supervisory capital target
• includes risks specified in capital guidelines AND all insurer specific risks

Question 4

Reasons for having an Internal Capital Target. (2)

Answer 4

• gives management time to address issues (before potentially entering early intervention status)
• captures insurer-specific risks not address by industry-wide capital guidelines

Question 5

Describe an approach an insurer could use to determine its Internal Target Capital ratio. (3)

Answer 5

• include insurer-specific risks in capital assessment
• assessment uses stress-testing
• capital level must withstand a specified level of loss without falling below supervisory capital over specified time horizon

Question 6

Is it okay to consider future capital injections when determining the Internal Capital Target?

Answer 6

• no, unless planned and certain
• also, cannot consider head-office guarantees and other managements actions EXCEPT for setting targets above the Internal Target

Question 7

What management action is required if Capital Available FALLS BELOW Internal Capital Target?

Answer 7

If this happens (or is expected to happen within 2 years), then OSFI must be notified and management must submit a plan to restore capital to the internal target level reasonably quickly.