2024 P&C Minimum Capital Test and Branch Adequacy of Assets Test PC4 instructions
Information
Introduction
All federally regulated insurers (except mortgage insurers) are required to complete a Minimum Capital Test/ Branch Adequacy of Assets Test (MCT/BAAT) return each quarter. This return (“PC4 return”) is designed to enable regulators to monitor the adequacy of capital or margin in Canada of insurers, as well as certain compliance requirements.
Insurers incorporated in Quebec must complete the PC4 return in compliance with the l’Autorité des marchés financiers guideline on capital adequacy requirements.
Accounting principles – Quarterly returns
The Canadian Accounting Standards Board (AcSB) has adopted International Financial Reporting Standards (IFRS) as Canadian Generally Accepted Accounting Principles (CGAAP) for publicly accountable enterprises (PAEs). As federally regulated property and casualty insurers have fiduciary responsibilities, they are considered to meet the definition of a PAE, and are required to report using IFRS for fiscal years beginning on or after January 1, 2011.
For the purposes of the regulatory return instructions, the term "IFRS" will refer to requirements under "Part I - International Financial Reporting Standards" of the CPA Canada Handbook.
Language preference
The PC4 return and related instructions are available in both official languages.
Comments
OSFI is interested in your comments on any aspect of the PC4 return and/or instructions. Please direct your comments to the:
Office of the Superintendent of Financial Institutions
Regulatory Data Management
255 Albert Street, 12th floor
Ottawa, ON K1A 0H2
Email: RA-RRS.Support@osfi-bsif.gc.ca
General
The PC4 return is designed to be self-explanatory, and accordingly, the text on each page of the return is considered to be part of the instructions. Below are additional points to assist in the preparation of the PC4 return.
- The filing deadlines are the dates by which the regulators must receive the quarterly PC4 return and annual auditor’s report. A February 28 deadline refers to the last day of February. The specific filing deadlines are on OSFI’s website: Reporting Requirements for Federally Regulated Property and Casualty Insurance Companies.
- The full name of the insurer, the reporting date, and other requested information must be shown on the cover page. The insurer is required to be identified on every page; an abbreviated form of the name is acceptable on the inside pages.
- All monetary amounts reported in the PC4 return are to be reported in Canadian dollars. Insurers are to follow the requirements of the applicable accounting standards with regard to foreign currency conversion.
- Monetary amounts must be rounded to the nearest thousand dollars. Individual items must be adjusted so that the total is not affected by rounding to the nearest thousand dollars.
- Only PC4 returns that are complete and accurate will be considered filed.
- Dates are to be reported using the numeric convention YYYY-MM-DD.
- For a list of all current validation rules, please refer to OSFI's website.
Mailing address
Regulatory Data Management
Office of the Superintendent of Financial
Institutions Canada
255 Albert Street, 12th Floor
Ottawa, ON K1A 0H2
Penalties for late filing
The PC4 return must be received at the regulator's office at the latest on the applicable due date. There are penalties for late filing, and depending on the circumstances, late filing is an offence that may result in prosecution and fines.
Electronic filing
For electronic filing instructions, please refer to the Regulatory Reporting System (RRS) – Manage Financial Returns User Guide located on the OSFI website.
PC4 return detailed instructions
Detailed instructions are provided to assist insurers in clarifying filing requirements; they are not provided for every page of the PC4 return.
The PC4 return must be completed in compliance with the MCT Guideline. This document is available on OSFI's website. Canadian insurers are required to provide an annual External Auditors Report for the MCT. Federally regulated branches of foreign companies are required to provide OSFI with an annual External Auditor Report for the BAAT. The annual audit of the MCT/BAAT is required to be a separate audit report from the one provided for the audited financial statements.
Capital requirements apply on a consolidated basis. Refer to the MCT Guideline, chapter 1, subsection 1.1.3 for further details.
Insurers seeking OSFI’s Supervisory approval for intra-group reinsurance pooling arrangements must submit the reinsurance agreements and an audit opinion that the reinsurance pooling arrangement meets the criteria to be accounted for as reinsurance under IFRS 17.
If any non-zero values are filled in for lines that are labeled "other (specify)," then the insurer should send an explanation to OSFI of what these values represent in a separate document.
Unless specified otherwise in the MCT guideline, the PC4 return or these instructions, Liabilities for remaining coverage (LRC) or Liabilities for incurred claims (LIC) could be assets. Same for Assets for remaining coverage (ARC) or Assets for incurred claims (AIC) could be liabilities.
The Regulatory Reporting System (RRS) performs a number of plausibility checks to ensure there are no obvious inconsistencies (e.g. total capital available on page 10. 00 matches total capital available on page 20.00). The insurers should perform their own checks before submitting the PC4 return to preclude the possibility of the return being rejected. The corresponding figures must agree exactly, resolving any rounding differences. The cross-checks performed by the RRS may be found (described as "validation rules") on OSFI's website.
Cover
MCT (BAAT): Quarterly return
Insurer's name, code, date of return and contact person
The insurer should use its official name and code, and indicate the period ending date of the return. If regulatory staff has questions about the return or its content, they will generally contact the person indicated on the cover page.
Original signatures
The Attestation of authorized official on the cover page of the PC4 Return should bear the original signature of the authorized official, as designated by the insurer, to indicate verification of the return information and attest to its accuracy.
The original signature page must be retained on file for regulatory review upon request.
Page 20.00
MCT: Capital available
- Line 001 – Qualifying category A common shares
-
Report the total amount of common shares issued and paid that meet the qualifying criteria for inclusion of capital instruments in category A for regulatory capital purposes. Refer to the MCT Guideline, chapter 2 for further details.
- Line 005 – Contributed surplus
-
The total amount reported in this line should include contributed surplus resulting from the issuance of category A common shares.
- Line 020 – Minus: unrealized net after-tax fair value gains (losses) on owner-occupied properties at conversion to IFRS - cost model
-
At the point of conversion to IFRS, insurers may have elected to use the fair value option for their own-use properties in the initial IFRS balance sheet valuation. In this case, unrealized fair value gains at conversion are reflected in equity. These unrealized gains must be deducted from capital available on an after-tax basis. The amount entered in this line at conversion is an on-going deduction to capital available and can only be changed as a result of a sale of own-use properties (owned at the time of IFRS conversion) and the resulting recognition of actual gains (losses).
- Line 025 – Plus: accumulated net after-tax revaluation losses in excess of gains on owner-occupied properties - revaluation model
-
Where an insurer has chosen to use the revaluation model for own-use properties, there is a possibility that unrealized losses in fair value could exceed unrealized gains. If this occurs, the net loss will be added back to capital available to maintain the value of own-use properties at or near the value when using the cost model.
- Line 040 – Earthquake Premium Reserve (EPR) not used as part of financial resources to cover exposure
-
In the case where EPR is not used as part of financial resources to cover a P&C insurer’s earthquake risk exposure, i.e. the company has enough financial resources to cover its earthquake risk exposure without the voluntary reserve, the EPR can be deducted from Capital available instead of being added to total capital requirements. For further details, refer to section 4.5.1 of the MCT Guideline.
- Line 070 – Minus: accumulated net after-tax fair value gains (losses) due to changes in the company’s own credit risk
-
The adjustment under AOCI for Accumulated net after tax fair value gains (losses) arising from changes in institution's own credit risk refers primarily to gains (losses) recognized in OCI where an insurer has adopted IFRS 9, and reflects changes in the fair value of the insurer's own credit risk recognized in OCI unless doing so creates an accounting mismatch, in which case it would be reported as an adjustment to Retained Earnings.
- Lines 095 to 120 – Qualifying category B and category C instruments
-
The values reported in these lines must be for instruments meeting category B and/or category C qualifying criteria, not exceeding the applicable limits as per the MCT Guideline, chapter 2. The values reported in these lines also include share premium amounts resulting from the issuance of instruments meeting category B and/or C criteria.
- Line 181 – Assets for Insurance Acquisition Cash Flows
-
The value reported on this line is the amount of asset for insurance acquisition cash flows, recognized applying paragraph 28B of IFRS 17, that has been included in the carrying amount of insurance contracts issued, if any, reported on line 18 of page 20.10 of the PC1 Core Financial Statement Quarterly Return.
- Line 185 - Unamortized insurance acquisition cash flows other than those arising from commissions and premium taxes
-
The amount on line 185 is floored at 0.
- Line 225 – Other
-
Group 2 cryptoassets exposures are to be reported on this line with the description Group 2 cryptoassets exposures.
- Lines 255 and 260 – Validation Test: 40% Limit for Category B and C Capital Instruments and 7% Limit for Category C Instruments
-
The values in these lines serve as a check to compare the dollar amount reported under category B and category C instruments to the allowable limits as per chapter 2 of the MCT Guideline.
- Lines 265 to 305 – Memo Items
-
The requested data points in these lines are for information and validation rules purposes.
For further details on available capital, refer to the MCT Guideline, chapter 2.
Page 30.00
BAAT: Net assets available
- Line 020 – Reinsurance contracts held assets associated with unregistered reinsurers
-
Cash and securities received to secure payment from unregistered reinsurers (funds withheld) are to be vested in order to be included as assets available. If the funds withheld assets are not vested, the amounts included in the reinsurance contract held asset are to be excluded from the amount reported line 20.
- Line 095 – Cash flow in from other insurers, subsidiaries, affiliates, associates and joint ventures
-
The amounts to enter on line 95 are equivalent to the amounts currently recorded on page 20.10, line 13 of the PC1 Core Financial Statements, if applicable. The amounts on line 95 are non-vested assets that are included in insurance contract assets (page 30.00, line 10). Therefore, since they are non-admitted assets for BAAT purposes, they are deducted as a regulatory adjustment to total net assets available.
Refer to chapter 3 of the MCT Guideline for further details on net assets available for foreign branches.
- Line 100 - Unamortized insurance acquisition cash flows other than those arising from commissions and premium taxes, 45% of unamortized insurance acquisition commission cash flows associated with accident and sickness (A&S) business
-
The amount on line 100 is floored at 0.
Page 40.00
MCT (BAAT) insurance risk: Capital (margin) required for liabilities for incurred claims
When amounts payable/receivable to/from reinsurers are tracked and settled on a net basis, the net amount is to be split into claims and premiums.
Liability for incurred claims is to be calculated as defined in the IFRS 17 Standard.
Page 40.05
MCT (BAAT) insurance risk: Capital (margin) required for unexpired coverage
For a reinsurance contract issued, all underlying insurance contracts that are within the contract boundary, including underlying insurance contracts that have not yet been issued, should be included in the determination of the unexpired coverage for insurance contracts issued in section 4.2.2 of the MCT 2023 Guideline. This includes both the group of insurance contracts issued measured using (i) the GMM and (ii) the PAA to determine the LRC.
- For the GMM, these underlying insurance contracts will be reflected in the “estimate of futures cash flows for insurance contracts issued” of formula 1 in section 4.2.2.1.
- For the PAA, these underlying insurance contracts will be reflected in the “premiums to be received, whether outstanding and not yet due, including instalment premiums” of formula 2 in section 4.2.2.1.
For reinsurance contracts held, formulas 1 and 2 for determining the unexpired coverage in section 4.2.2.2 of the MCT 2024 are replaced by the following:
-
For groups of reinsurance contracts held that are measured using the GMM to determine the ARC:
Unexpired coverage for reinsurance contracts held (GMM) =
(estimate of future cash flows for reinsurance contracts held (excluding premium and reinsurance commission cash flows that are dueFootnote 38a) + estimate of future cash flows for future reinsurance contracts held), adjusted for time value of moneyFormula 1 footnotes
- Footnote 38a
-
Premiums and reinsurance commission cash flows on risk attaching proportional reinsurance contracts held are considered due, therefore are zero.
The estimate of future cash flows does not include the risk adjustment for non-financial risk. Estimates of future cash flows for reinsurance contracts held and future reinsurance contracts held refer to the portion of these contracts that covers the unexpired portion of underlying insurance contracts issued. These cash flows include expected losses recoverable, net of expected future reinsurance costs. -
For groups of reinsurance contracts held that are measured using the PAA to determine the ARC:
Unexpired coverage for reinsurance contracts held (PAA) =
[(asset for remaining coverage excluding loss recovery component
+ unamortized reinsurance commissionFootnote 39)
+ premiums to be paidFootnote 40 for reinsurance contracts held
+ expected premiums payable for future reinsurance contracts held] × ELRFootnote 41
− (expected premiums payableFootnote 42 for reinsurance contracts held net of associated reinsurance commissions receivableFootnote 43 + expected premiums payable for future reinsurance contracts held net of associated expected reinsurance commissions receivable)Formula 2 footnotes
- Footnote 39
-
The reinsurance commission is the ceding commission (or portion of the ceding commission) paid by the reinsurer to the ceding insurer that is not contingent on claims of the underlying contracts and generally includes a total provision for broker/agent commissions, premium taxes, and other acquisition and servicing expenses.
- Footnote 40
-
Whether outstanding or not yet due.
- Footnote 41
-
The ELR for the unexpired coverage for reinsurance contracts held (PAA) in section 4.2.2.2 is the ELR for the ceded calculations that relates to the portion of these contracts covering the unexpired portion of underlying insurance contracts issued, and is not necessarily the same as the ELR for the gross calculations in section 4.2.2.1 for the unexpired coverage for insurance contract issued (PAA).
- Footnote 42
-
This means not yet due. Premiums payable and associated reinsurance commissions receivable on risk attaching proportional reinsurance contracts held are considered due, therefore the amount of expected premiums payable for these contracts is zero.
- Footnote 43
-
Idem.
Unamortized reinsurance commission is equal to the amount of reinsurance commission used for the measurement of the asset for remaining coverage (ARC). Unexpired coverage for reinsurance contracts held (PAA) excludes any risk adjustment for non-financial risk and may be adjusted for the time value of money.
Page 40.11 and 40.21
MCT (BAAT) reinsurance contracts held summary – Unregistered reinsurance
Federally regulated insurers are expected to include on this schedule all insurance ceded to unregistered reinsurers, including captive arrangements, irrespective of whether or not the captive arrangement is accounted for as insurance contracts under IFRS 17.
- Column 1
-
The complete legal name of the reinsurer to which the insurer has a counterparty exposure. The counterparty name should be reported exactly as per the signed contract.
- Column 9
-
Type of reinsurance contract using the following two letter codes:
- FA – Facultative
- XS – Excess of loss
- QS – Quota share
- SU – Surplus
- SL – Stop loss
Each type of reinsurance should be listed separately for each reinsurer on a best-efforts basis.
- Columns 10 and 12
-
The loss-recovery component for business bound but not incepted is included in premiums associated with unexpired coverage for reinsurance contracts held.
- Column 18
-
The asset for incurred claims (column 16) is net of funds held for funds held reinsurance. The cashflow related to the funds held is added back to the asset for incurred claims before applying the margin.
Page 40.40
MCT (BAAT) Insurance risk: Capital (margin) required for accident and sickness business
- Line 090 - Unamortized insurance acquisition cash flows on commissions (Canadian insurers only)
- The amount on line 090 is floored at 0.
Page 50.00
The computation of the interest rate risk margin is a separate calculation for interest rate sensitive assets and for interest rate liabilities.
Page 60.20
MCT credit risk: Capital required for balance sheet assets
Installment premiums that were due and not paid are to be reported on line 085 or line 090 depending on the number of days outstanding. Installment premiums not yet due are not subject to credit risk (i.e., the credit risk factor is 0%) and, therefore, should not be included on line 085 or on line 090.
Loans are reported at amortized cost for the purpose of calculating capital required. The difference between the balance sheet values of loans and loans at amortized cost must be reported on line 060.
Page 60.50
MCT (BAAT) credit risk: Capital (margin) required for collateral held for unregistered reinsurance exposures
The calculation for credit risk on self-insured retentions is to be calculated separately from the credit risk margin on collateral held for unregistered reinsurance exposures and the amounts for the capital (margin) required are added together and reported on line 020.
Page 70.00
MCT (BAAT) operational risk: Capital (margin) required
Premiums received are to be calculated on a rolling 12 month basis.
Refer to chapter 7 of the MCT Guideline for further information relating to this page.