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Minimum Continuing Capital and Surplus Requirements
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    255 Albert Street Ottawa, Canada K1A 0H2 www.osfi-bsif.gc.ca   Guideline Subject:   Minimum Continuing Capital and Surplus Requirements No: A Issue Date: December 2013 Effective Date: January 1, 2014 Subsection 515(1) of the Insurance Companies Act (ICA) requires federally regulated life insurance companies and societies to maintain adequate capital. Subsection 608(1) of the ICA requires companies operating in Canada on a branch basis to maintain an adequate margin of assets in Canada over liabilities in Canada. Guideline A:  Minimum Continuing Capital and Surplus Requirements (MCCSR) is not made pursuant to subsections 515(2) and 608(3) of the Act. However, the guideline along with Guideline A-4:  Regulatory Capital and Internal Capital Targets  provide the framework within which the Superintendent assesses whether a life insurance company maintains adequate capital pursuant to subsection 515(1) and whether a company operating in Canada on a branch basis maintains an adequate margin pursuant to subsection 608(1). Notwithstanding that a life insurance company or a company operating in Canada on a branch basis may meet these standards, the Superintendent may direct the company to increase its capital under subsection 515(3) or the branch to increase the margin of assets in Canada over liabilities in Canada under subsection 608(4). This guideline establishes standards, using a risk-based approach, for measuring specific insurer risks and for aggregating these results to calculate the amount of an insurer’s regulatory required capital to support these risks. The guideline also defines and establishes criteria for determining the amount of qualifying regulatory available capital. The MCCSR is only a component of the determination of required assets that must be maintained in Canada by foreign insurers. Foreign life insurers must also vest assets in Canada as prescribed in the  Assets (Foreign Companies) Regulations  of the ICA. Life insurers are required to apply this version of the guideline for reporting periods ending on or after January 1, 2014. Early application of this version of the guideline is not permitted.    Life A MCCSR January 2014 2   Page   Chapter 1.   Overview and General Requirements ................................5   1.1. Overview .................................................................................................5   1.2. General requirements ..............................................................................6   Chapter 2.   Definition of Capital...........................................................10   2.1. Summary of capital components ...........................................................10   2.2. Preferred shares (tier 1) .........................................................................20   2.3. Hybrid capital instruments (tier 2A) .....................................................23   2.4 Limited life instruments (tier 2B) .........................................................24   2.5 Hedging of subordinated debentures ....................................................25   2.6 Goodwill and intangible assets .............................................................26   2.7 Negative reserves and cash surrender value deficiencies .....................26   2.8. Amortization .........................................................................................30   2.9. Non-life financial corporation controlled by the company ...................31   2.10. Substantial investments without control ...............................................32   2.11. Minimum amount of capital and surplus ..............................................33   2.12. Out-of-Canada terminal dividend reserves (tier 2C) ............................33   Appendix 2-A   Principles Governing Inclusion of Innovative Instruments in Tier 1 Capital ..........................................................................................35   Chapter 3.   Asset Default (C-1) Risk ....................................................42   3.1. Asset default factors ..............................................................................42   3.2. Collateral ...............................................................................................53   3.3. Guarantees and credit derivatives .........................................................60   3.4. Asset backed securities .........................................................................65   3.5. Repurchase, reverse repurchase and securities lending agreements .....67   3.6. Index-linked products ...........................................................................68   3.7. Assets replicated synthetically and derivatives transactions ................70   3.8. Recognition of equity hedges................................................................74   Chapter 4.   Mortality, Morbidity and Lapse Risk ..............................76   4.1. Mortality risk ........................................................................................76   4.2. Disability and other morbidity risks .....................................................84   4.3. Annuities involving life contingencies .................................................84   4.4. Morbidity risk .......................................................................................85   4.5. Lapse risk ..............................................................................................89   Chapter 5.   Changes in Interest Rate Environment (C-3) Risk .........91      Life A MCCSR January 2014 3   5.1. Insurance and immediate annuities .......................................................91   5.2. Accumulation funds ..............................................................................92   5.3. Debt obligations ....................................................................................93   5.4. Asset cash flow uncertainty risk ...........................................................94   Chapter 6.   Companies Operating in Canada on a Branch Basis......95   6.1. TAAM Ratios........................................................................................95   6.2. Assets Required ....................................................................................95   6.3. Assets Available....................................................................................97   6.4. Required Margin ...................................................................................98   6.5. Other Admitted Assets ..........................................................................98   6.6. Deductions/adjustments ........................................................................99   Chapter 7.   Off-Balance Sheet Activities ............................................100   7.1. Credit conversion factors ....................................................................100   7.2. Forwards, swaps, purchased options and other similar derivative contracts ................................................................................................101   7.3. Netting of forwards, swaps, purchased options and other similar derivatives .............................................................................................104   7.4. Categories of off-balance sheet instruments .......................................108   7.5. Commitments ......................................................................................112   Chapter 8.   Segregated Fund Guarantee Risk ...................................116   8.1. Products...............................................................................................116   8.2. Documentation and reporting .............................................................117   8.3. Total gross calculated requirement .....................................................120   8.4. Classifying the asset exposure ............................................................125   8.5. Determining the risk attributes............................................................129   8.6. Retrieving the appropriate nodes ........................................................135   8.7. Use of supplied functions to determine the requirement ....................136   8.8. Margin Offset Adjustment ..................................................................144   8.9. Credit for reinsurance ceded or capital markets hedging ....................144   8.10. Custom factors and internal models ....................................................145   8.11. Analysis of results ...............................................................................146   Chapter 9.   Foreign Exchange Risk ....................................................147   9.1. Measuring the exposure in a single currency ......................................147   9.2. Treatment of options ...........................................................................148   9.3. Treatment of immaterial operations ....................................................148   9.4. Measurement of forward currency positions ......................................148   9.5. Accrued and unearned interest, income and expenses ........................148   9.6. Calculating the capital requirement for the portfolio ..........................149      Life A MCCSR January 2014 4   9.7. Unregistered reinsurance ....................................................................149   9.8. Foreign exchange de minimus criteria ................................................149   9.9. Example ..............................................................................................150   Chapter 10.   Credit for Risk Mitigation and Risk Transfer ..............151   10.1. Introduction .......................................................................................151   10.2. Definitions.........................................................................................152   10.3. Valuation basis for ceded liabilities ..................................................153   10.4. Asset default requirement for reinsurance assets ..............................154   10.5. Collateral and letters of credit ...........................................................156   10.6. Calculation of required capital/margin .............................................160  
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