Minimum Continuing Capital and Surplus Requirements

Document Properties

  • Type of Publication: Guideline Impact Analysis Statement
  • Date: November 2015

I. Background

OSFI's Guideline A, Minimum Continuing Capital and Surplus Requirements (MCCSR) for life insurance companies and fraternal benefit societies was originally released in 1992. Each year, OSFI considers whether changes are required to improve the risk measures, address emerging issues, and encourage improved risk management.

The MCCSR, along with other capital guidelines, provides the framework within which OSFI assesses whether a life insurance company maintains adequate capital and whether a company operating in Canada on a branch basis maintains an adequate margin. The 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 capital needed to support these risks (Base Required Capital / Required Margin). The guideline also defines and establishes criteria for determining the amount of qualifying regulatory available capital (Available Capital / Available Margin).

This Guideline Impact Analysis Statement discusses whether and how the current MCCSR Guideline should be updated.

II. Problem Identification

OSFI has received a number of inquiries and requests for clarification regarding the MCCSR, most of which should be incorporated into the guideline to ensure that all life insurers are aware of how OSFI dealt with the issues.

Also, recognizing the significance of capital requirements for holding companies, it is important to align these requirements with those of Canadian operating life insurance companies. The financial strength of regulated insurance holding companies and non-operating insurance companies (referred to as holding companies) is closely tied to their regulated subsidiaries / life operating companies. OSFI is of the view that increased transparency, as well as consistent and comparable reporting of capital requirements for all regulated life insurers, whether they are holding or operating companies, can complement OSFI's supervisory efforts.

III. Objectives

The revisions to the MCCSR Guideline this year include:

  • Requiring that retained earnings be adjusted for property that has been re-classified (between investment and owner-occupied and vice-versa) so that it is the same as if the property had originally been classified into its re-classified category from the outset. The revised approach looks at the difference between current retained earnings for MCCSR purposes (which includes all of the adjustments to bring property to the MCCSR cost basis) and what retained earnings would have been had the property been originally classified into its new category from the outset. Retained earnings are then adjusted to eliminate this difference;
  • Requiring that the deduction of non-life solvency regulated financial corporations be floored at zero so that negative positions in equity, caused by differences in accounting standards across jurisdictions, cannot be deducted to increase Available Capital;
  • Addressing the treatment of foreign subsidiaries that write a mixed business consisting of life and P&C insurance within the same legal entity. The guideline changes specify how companies should partition such entities into life and P&C segments and apply the appropriate capital regime to each segment (MCCSR or Minimum Capital Test (MCT) requirements);
  • Requiring that a 0% credit risk factor for a foreign public sector entity only be allowed if the public sector entity's sovereign is eligible for a 0% factor based on its rating;
  • Integrating capital related advisories into the guideline: a number of advisories have been incorporated directly into the MCCSR Guideline – mainly those affecting Chapter 2 "Qualifying Regulatory Available Capital". These changes do not represent new policy decisions; they are past policy decisions that had not been integrated directly into the guideline; and
  • The scope of the MCCSR Guideline has been expanded. As a result, E-19, Own Risk and Solvency Assessment and A-4, Regulatory Capital and Internal Capital Targets will be amended and Guideline A-2, Capital Regime for Regulated Insurance Holding Companies and Non-Operating Life Companies will be repealed. Effective January 1, 2016, all federally regulated life insurance companies, including holding companies and non-operating life insurance companies, will be required to prepare and file audited MCCSR returns, disclose (in the notes to their financial statements) their MCCSR ratios and establish internal capital targets through their Own Risk and Solvency AssessmentFootnote 1.

IV. Consultations

On July 30, 2015, OSFI issued the draft guideline for public consultation and received comments from industry stakeholders on the proposed revisions and other related matters which were considered in the preparation of the final version of the guideline. The cover letter accompanying the final MCCSR Guideline includes a table of comments and how they have been addressed by OSFI.

V. Recommendation

We recommended that the MCCSR, as well as guidelines E-19 and A-4, be updated as outlined in section III. The modifications to the guidelines will provide clarity to its users with respect to the calculation of qualifying regulatory available capital and more closely align the Base Required Capital / Required Margin calculation with the nature of the risks.

VI. Implementation

The changes to the MCCSR as well as to guidelines E-19 and A-4 will be effective as of January 1, 2016. Early adoption of the 2016 MCCSR will not be permitted.

Footnotes

Footnote 1

With the exception that OSFI Supervisory Targets (defined in Guideline A-4 and referenced in Guidelines A and E-19) do not apply to regulated insurance holding companies and non-operating insurance companies.

Return to footnote 1