Changes to MCT guidelines finalized

The long-awaited changes to the Minimum Capital Test Guidelines have finally been approved, with one of the major changes affecting operational risk margin.

Risk Management News

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The long-awaited changes to the Minimum Capital Test Guidelines have finally been approved, with one of the major changes affecting operational risk margin.

“We have revised the formula, and have reduced the operational risk margins by an average of 15 per cent,” says Judith Roberge, director of the capital division at the Office of the Superintendent of Financial Institutions Canada. “The phase-in period will be extended to 12 quarters instead of eight quarters. The cap will remain unchanged at 30 per cent of capital required.”

Companies with an October 31 year-end will calculate the phase-in amounts on October 31 of this year, says Roberge, and will implement the phase-in impact starting on January 31, 2015.

The original formula draft for the 2015 MCT guideline had a 10 per cent capital required; with a +3 direct premiums written; +2 per cent premiums assumed; +3 per cent premiums ceded; and +3 per cent growth premiums.

The revised approved formula is:
8.5% capital required;
+2.5% direct premiums written;
+1.75% premiums assumed;
+2.5% premiums ceded; and
+2.5 per cent growth premiums.

While speaking at the recent Canadian Insurance Financial Forum, Roberge pointed out that the ‘capital required’ numbers are before the diversification credit and operational risk margin. (continued.)
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Other changes to the MCT include the audit opinion and clarifications to the language within the guideline.

“The filing date has been extended from 60 to 90 days following fiscal year-end,” says Roberge, “and the language used in the MCT guideline has been clarified for deferred tax assets, goodwill, structured settlements and intra-pool investment partnerships.”

The capital impact on individual insurers will vary across the industry, Roberge points out, but there will be some general increases.

“The revised operational risk formula increases the average MCT/BAAT ratio by 6.3 percentage points,” she says, “and the MCT/BAAT ratio is reduced by 2.8 percentage points under the 2015 MCT guideline – including the impact of the revised operational risk formula.”



 

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