Office of the Superintendent of Financial Institutions
On July 30, 2015, OSFI published a draft version of the 2016 Minimum Continuing Capital and Surplus Requirements (MCCSR) guideline for public consultation. The annual review of the MCCSR guideline reflects OSFI’s continuing practice of monitoring for, and responding to, emerging issues and issues raised by stakeholders. As a result of the review, revisions have been made to the guideline to ensure it remains effective and reflective of developments in the life insurance industry. The revised guideline will come into effect on January 1, 2016.
OSFI would like to thank all industry stakeholders for submitting comments on the proposed revisions and related matters. All comments and representations were considered in preparation of the final guideline. A summary table of comments received and how they have been addressed by OSFI is enclosed with this letter.
Key changes to the guideline include:
The scope of the MCCSR Guideline has been expanded. As a result, effective January 1, 2016, OSFI is amending its Guideline E-19, Own Risk and Solvency Assessment and Guideline A-4, Regulatory Capital and Internal Capital Targets and is repealing Guideline A-2, Capital Regime for Regulated Insurance Holding Companies and Non-Operating Life Companies.
Questions concerning the guideline may be addressed to your OSFI Lead Supervisor or to Henri Boudreau, Managing Director, Capital Division (email@example.com).
We understand OSFI's intent behind this change, and agree that a deduction of a negative equity value for a subsidiary should generally be disallowed. However, we believe that under special circumstances where a negative equity value would stem from a strong performance rather than financial difficulties, no capital support from a parent would be needed for the subsidiary to meet its obligations and therefore a deduction of a negative equity value would be appropriate.
We ask OSFI to remain open to consider exceptional cases to the zero-floor requirement as established by footnote 50. Such an approach would provide flexibility if this becomes an issue or if new developments emerge.
Footnote 51 is written as if the main capital regime was MCT rather than MCCSR. We believe that the overriding guidance should be the MCCSR Guideline with some MCT rules applicable to specific P&C business risks which are not covered in the MCCSR Guideline (specifically, insurance risk). As a result, the MCCSR would apply for all C-1 risks and available capital calculations.
The footnote should also specify that for insurance risks where MCT cannot be directly applied, OSFI should be consulted.
Our understanding is that MCCSR and MCT will be mostly aligned in 2018 so this may strictly be a question of handling 2016 and 2017 years.
OSFI's proposed revision had the appearance of treating the composite subsidiaries as a subsidiary of a main P&C parent with a small life insurance business residual. We believe the underlying principle should be the opposite. The MCCSR rules should apply whenever possible, with some MCT rules applicable to the P&C business that is not covered by the MCCSR rules. Most, if not all, assets should be determined using the MCCSR Asset Default Risk rules.
On the asset side, assets could be bucketed into those backing surplus, life insurance liabilities, and P&C liabilities. We would suggest that if not all the assets are following the MCCSR Guideline, then at least the first two buckets would and the third one would follow the MCT requirements.
In short, we suggest that since on a consolidated basis the MCCSR Guideline is applied to Life insurers, the MCCSR Guideline should be the guideline of principal reference. We note that the Credit Risk treatment of these assets is planned to be aligned after 2018 so the absolute dollar of the amount of capital is not the motivation of this request, rather at issue is that the MCCSR be the prevailing capital guideline. This is also attractive since it is operationally much simpler in the interim period leading up to the 2018 planned alignment.
We suggest the footnote 51 be amended to state: "The MCCSR required capital is the sum of the MCCSR credit and insurance risk components and MCT insurance risk component." The other aspects of the MCT would be excluded, most notably operational risk as it would otherwise result in a double counting (since minimum and supervisory target MCCSR ratios are 120% and 150% respectively, not 100% and 125%).
Please refer to appendix B for the list of advisories integrated into the MCCSR Guideline.
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