Minimum Capital Test 2023 – Adjustments and clarifications

Information
Publication type
Adjustments and clarifications
Category
Capital Adequacy Requirements
Date
Sector
Property and Casualty Companies
Table of contents

Summary of key updates

Modifications

  • Clarified the determination of the amount of unamortized insurance acquisition cash flows
  • Added “reinsurance commissions” and footnote to formula to Formula 1 in section 4.2.2.1
  • Added  “unamortized reinsurance commission” and footnote to Formula 2 in section 4.2.2.1
  • Footnote 44 removed “and receivable”

This communication sets out adjustments and clarifications to the Minimum Capital Test Guideline (MCT) 2023 and associated instructions and forms since their publication in July 2022. Items reflected on this list will be incorporated into the PC4 Instructions and may also be incorporated into a future version of the MCT guideline, as appropriate.

Summary of adjustments and clarifications

Any questions should be addressed to MCT-TCM@osfi-bsif.gc.ca.

1. Unexpired coverage for insurance contracts issued (page 40.05)

OSFI remarks

OSFI is clarifying when an insurance contract is included for the determination of the unexpired coverage for insurance contracts issued in section 4.2.2 of the MCT 2023 guideline.

Clarification and page impacted in the PC4 Instructions

Page 40.05

Insurance contracts issued in accordance with paragraphs 25 to 28 of the IFRS 17 standard are recognized for capital purposes in the MCT 2023 Guideline, unless otherwise specified. To determine the unexpired coverage for insurance contracts issued in section 4.2.2 of the MCT 2023 Guideline, only insurance contracts that have the earliest of:

  1. the date the coverage begins, and
  2. the date on which the first payment of the premium is due,

on or prior to the reporting date should be considered recognized. For greater clarity, this means that only insurance contracts that individually meet the recognition criteria (a) or (b) set out in paragraph 25 of IFRS 17, by the reporting date, are to be treated as insurance contracts issued for purposes of the MCT’s requirements for unexpired coverage.

Updated date

November 2022

2. Cryptoassets (page 20.00)

OSFI remarks

OSFI published an advisory on the interim capital treatment for cryptoasset exposures on August 18, 2022. Per the advisory, Group 1 cryptoasset exposures receive a capital treatment consistent with that of comparable traditional assets, including credit, market and/or other risks. Group 2 cryptoasset exposures, including the absolute value of short positions, the full notional amount of long option positions, and the full notional amount of long forward contracts, are deducted from capital available.

Clarification and page impacted in the PC4 Instructions

Page 20.00

Group 2 cryptoasset exposurers are to be reported on the line 225 “Other (specify)” line of MCT with “Group 2 cryptoasset exposures” specified as the description.

Updated date

November 2022

3. Captive fronting arrangements (pages 40.11 and 40.21)

OSFI remarks

OSFI is clarifying the appropriate capital treatment for arrangements referred to as “captive fronting arrangements”. In these arrangements, a federally regulated insurer issues a policy to a policyholder in Canada, and then subsequently cedes the risk to an entity within the same group as the policyholder.

Clarification and page impacted in the PC4 Instructions

Pages 40.11 and 40.21

Federally regulated insurers are expected to include on this schedule all reinsurance ceded to unregistered reinsurers, including captive arrangements, irrespective of whether or not the captive arrangement is accounted for as insurance contracts under IFRS 17.

Updated date

January 2023

4. Unexpired coverage for reinsurance contracts issued (page 40.05)

OSFI remarks

OSFI is making a clarification with respect to the determination of the unexpired coverage for insurance contracts issued in section 4.2.2 of the MCT 2023 guideline.

Clarification and page impacted in the PC4 Instructions

Page 40.05

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.

  1. 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.
  2. 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.

Updated date

January 2023

5. Unamortized insurance acquisition cash flows (pages 20.00, 30.00, 40.05 and 40.40)

OSFI remarks

OSFI is issuing this clarification in response to questions received regarding unamortized insurance acquisition cash flows, which is defined in footnote 23 in the MCT 2023. Insurers should determine their unamortized insurance acquisition cash flows in accordance with the instructions provided below. These instructions are also being incorporated into the instructions for the MCT. OSFI intends to remove footnote 23 from the MCT in the future.

Clarification and pages impacted in the PC4 Instructions

Pages 20.00, 30.00, 40.05 and 40.40

How is the amount of unamortized insurance acquisition cash flows determined under the general measurement method (GMM)?

The balance of unamortized insurance acquisition cash flows at the end of a reporting period is determined by taking the insurance acquisition cash flows allocated to the group for the purpose of calculating the contractual service margin (CSM) or loss component at the date of initial recognition and removing the portion that would have been amortized under paragraph B125 of IFRS 17.

How is the amount of unamortized insurance acquisition cash flows determined under the premium allocation approach (PAA)?

Unless the entity chooses to recognize insurance acquisition cash flows as an expense (i.e., by applying paragraph 59(a) of IFRS 17), the balance of unamortized insurance acquisition cash flows at the end of a reporting period is determined by:

  • taking the insurance acquisition cash flows for a group paid at initial recognition, [see IFRS 17.55(a) (ii)]
  • adding any amount arising from the derecognition at initial recognition of any asset for insurance acquisition cash flows applying paragraph 28C of IFRS 17, [see IFRS 17.55(a) (iii) 1.]
  • adding the cumulative amount of insurance acquisition cash flows paid since the date of initial recognition, [see IFRS 17.55(b) (ii)] and
  • removing the portion that would have been amortized since the date of initial recognition under paragraph B125 of IFRS 17. [see IFRS 17.55(b) (iii) and IFRS 17.B125]

Moreover, the amount on line 185 of page 20.00, the amount on line 100 of page 30.00 and the amount on line 090 of page 40.40 cannot be negative.

Updated date

April 2023

6. Reinsurance commission (pages 40.05, 40.11, 40.21 and 40.40)

OSFI remarks

In response to questions and comments received, for greater clarity and to promote consistency, OSFI is adjusting formulas 1 and 2 for the determination of the unexpired coverage for insurance contracts issued in section 4.2.2.1 of the MCT 2023. OSFI is also modifying footnote 44 in section 4.3.3.2 of the MCT 2023 with respect to the definition of unamortized reinsurance commission.

Adjustments and pages impacted in the PC4 Instructions

Pages 40.05, 40.11, 40.21 and 40.40

Formula 1 in section 4.2.2.1 is revised as follows
  1. For groups of insurance contracts issued measured using the GMM to determine the LRC:

    Unexpired coverage for insurance contracts issued (GMM)

    = estimate of future cash flows for insurance contracts issued (excluding premium, reinsurance commissionsFootnote 34b, and acquisition expenses cash flows), adjusted for the time value of money

    Footnote 34b

    Reinsurance commissions not meeting the definition of insurance acquisition cash flows. Reinsurance commission is defined in footnote 38 of this guideline.

    Return to footnote 34b

    The estimate of future cash flows includes expenses directly attributable to fulfilling the obligations under insurance contracts, but it would not include the risk adjustment for non-financial risk.

Formula 2 in section 4.2.2.1 is revised as follows
  1. For groups of insurance contracts issued that are measured using the PAA to determine the LRC:

    Unexpired coverage for insurance contracts issued (PAA)

    = (liability for remaining coverage, excluding the loss component + unamortized insurance acquisition cash flows + unamortized reinsurance commissionFootnote 36b + premiums to be received) x ELR + costs

    Footnote 36b

    Reinsurance commissions not meeting the definition of insurance acquisition cash flows. Reinsurance commission is defined in footnote 38 of this guideline.

    Return to footnote 36b

    Unamortized reinsurance commission is equal to the amount of reinsurance commission used for the measurement of the liability for remaining coverage (LRC). The costs in unexpired coverage for insurance contracts issued (PAA) are expenses directly attributable to fulfilling the obligations under insurance contracts, excluding reinsurance commissions not meeting the definition of insurance acquisition cash flows. These costs can be implicit in the expected loss ratio (ELR), explicitly added, or a combination of implicit and explicit. Unexpired coverage for insurance contracts issued (PAA) exclude any risk adjustment for non-financial risk and may be adjusted for the time value of money.

Footnote 44 is modified as follows

Unamortized reinsurance commission is equal to the amount used for the measurement of the ARC, and includes ceding commissions that are received, and yet to be amortized.

Updated date

April 2023