Document Properties
 Type of Publication: Advisory
 Category: Capital
 Date: January 1, 2017
I. Introduction
This Advisory sets out the regulatory capital adequacy requirements for federally regulated mortgage insurers and complements OSFI’s Guideline A, Minimum Capital Test for Federally Regulated Property and Casualty Insurance Companies.
The requirements included in this Advisory are effective January 1, 2017.
II. Application of the Minimum Capital Test
Except as specified otherwise in this Advisory, mortgage insurers are subject to the capital adequacy requirements set out in the Minimum Capital Test (MCT) Guideline for federally regulated property and casualty insurance companies. The required adjustments to the MCT Guideline for the capital requirements for mortgage insurers are as follows.
 Section III Transitional Arrangements of this Advisory specifies the requirements for mortgage insurers to phasein the capital impact of the new regulatory capital requirements.
 Section IV Mortgage Insurance Risk of this Advisory describes the capital requirements for mortgage insurance risk. This section replaces Chapter 4 Insurance Risk of the MCT Guideline.
 Section V Mortgage Insurer Operational Risk of this Advisory describes a mortgage insurer’s capital requirements for operational risk. This section replaces Chapter 7 Operational Risk of the MCT Guideline.
 Chapter 8 Diversification Credit of the MCT Guideline does not apply to mortgage insurers.
III. Transitional Arrangements
1. Transitional arrangements for mortgage insurance risk
The capital required for premium liabilities associated with residential exposures is determined using the formula for required capital stated in section IV, subsection 1.1 in the following way.
The total of premium liabilities and capital T is equal to the sum of:
 the total of premium liabilities and capital for residential mortgages originated after December 31, 2016, determined in accordance with subsections 1.1.1 through 1.1.5,
 the total of premium liabilities and capital for residential mortgages originated on or before December 31, 2016 that were individually insured and had amortization at origination of 25 years or less, determined in accordance with subsections 1.1.1 through 1.1.5, and
 the total of premium liabilities and capital for residential mortgages originated on or before December 31, 2016 that were insured in bulk or that had amortization at origination greater than 25 years, determined as follows.
The total of premium liabilities and capital for residential mortgages originated on or before December 31, 2016 that were insured in bulk or that had amortization at origination greater than 25 years is equal to the smaller of:
 the total of premium liabilities and capital for such mortgages determined in accordance with subsections 1.1.1 through 1.1.5, and
 the total of premium liabilities and capital for such mortgages determined as of December 31, 2016 using the instructions referenced to prepare and file the requirements with OSFI as at that date (the previous framework), with the capital component calculated at the 220% MCT level and the liability component determined as follows.
For companies that used the unearned premium reserve schedule provided in the previous framework or their own unearned premium reserve schedule, the liability component is the sum of the liabilities for the individual mortgages. For companies that determined premium liabilities in bulk, the liability component is that portion of the bulk provision that can be attributed to the residential mortgages that were not individually insured and did not have amortization at origination of 25 years or less; in this case, the allocated portion of the bulk provision should be determined in accordance with actuarial and accounting standards but not be less than if the allocation were in proportion to outstanding balance.
Note that the amounts determined using the instructions in the previous framework are based on exposure information as of mortgage origination and may include amounts for mortgages that are no longer inforce as of the reporting date. Moreover, the amounts determined using the instructions in the previous framework are calculated once based on December 31, 2016 information and do not decline as these mortgages age or are paid down. Consequently, the total of premium liabilities and capital for residential mortgages originated on or before December 31, 2016 that were insured in bulk or that had amortization at origination greater than 25 years will remain constant in dollar terms until such time that the total of premium liabilities and capital for these mortgages determined in accordance with subsections 1.1.1 through 1.1.5 is lower.
2. Determination of adjustment factors for credit quality
The new capital framework for mortgage insurance risk differentiates capital requirements according to borrower credit score, and will eventually take into consideration the age of the credit score as well, as described in subsection 1.1.4. However, as a temporary measure, the credit quality adjustment factor m defined in subsection 1.1.4 is to be determined as follows:
 If a mortgage insurer is able to obtain credit scores as of December 31, 2015 or later for at least 90% of the mortgage loans originated on or before December 31, 2015, then this credit score should be used to define the credit quality adjustment factor m with the corresponding mvalues as in subsection 1.1.4 i) Credit scores of individual mortgage loans updated annually.
 If a mortgage insurer is unable to obtain credit scores as of December 31, 2015 or later for at least 90% of the mortgage loans originated on or before December 31, 2015 then the credit score as of mortgage origination should be used to define the credit quality adjustment factor m with the corresponding mvalues as in subsection 1.1.4 iii) No regular updating of credit scores or credit score migration characteristics. In this case the age of the credit score should be determined as of December 31, 2016.
 For mortgage loans originated after December 31, 2015, the credit score as of mortgage origination should be used to define the credit quality adjustment factor m with the corresponding mvalues as in subsection 1.1.4 i) Credit scores of individual mortgage loans updated annually.
3. Transitional arrangements for operational risk
Mortgage insurers are required to phasein the impact that the mortgage insurance risk requirements of this Advisory have on their operational risk capital requirements. The phasein should be done on a straightline basis, over twelve quarters, starting with the first quarter of 2017.
The capital impact for mortgage insurers’ operational risk to be phasedin is equal to the difference between capital required for operational risk under the previous framework and the capital required for operational risk under this Advisory (the new framework). In order to determine the phasein amount, mortgage insurers are required to calculate two sets of operational risk capital requirements as at December 31, 2016. The operational risk requirements under the previous framework are the same as those prepared and filed with OSFI for regulatory compliance purposes. The capital requirements under the new framework as at December 31, 2016 do not need to be filed with OSFI.
For example, a mortgage insurer must file with OSFI its operational risk requirement under the previous framework as at December 31, 2016 and must calculate an amount for operational risk under the new framework as at the same date. The difference in capital required for operational risk is the capital impact to be amortized evenly over the next twelve quarters. The amortization of capital required for operational risk must be reported each quarter until December 31, 2019.
The phasein amount is a onetime impact based on December 31, 2016 that will uniformly unwind to zero over the next twelve quarters. The phasedin capital required for operational risk is then determined using the following formula:
Phasedin Capital Required for operational risk = Capital Required for operational risk under this Advisory  n/12 x (Capital Required for operational risk under this Advisory at December 31, 2016 – Capital Required for operational risk as filed with OSFI for regulatory compliance purposes as at December 31, 2016)
Where n declines from 11 in the first quarter 2017 to 0 in the fourth quarter 2019.
IV. Mortgage Insurance Risk
Mortgage insurance risk is the risk that the provisions that a mortgage insurer holds to cover its obligations under the mortgage insurance contracts it has written are insufficient under a severe but plausible scenario.
The capital requirement for mortgage insurance risk consists of:
 a capital requirement for future losses, i.e., losses associated with defaults that occur after the reporting date, referred to as the capital required for premium liabilities;
 a capital requirement for losses that have already occurred and for which settlement is not yet complete, referred to as the capital required for unpaid claims; and,
 a capital requirement for the possible inadequacy of any provisions for premium deficiencies.
For the purposes of this Advisory, a residential mortgage is a mortgage on a property that is designed for occupancy by not more than four family units or is a singlefamily unit of a condominium. A mortgage that is not considered to be a residential mortgage according to this definition will be referred to as a commercial mortgage.
Section 1 describes the calculation of the capital requirement for residential exposures while section 2 describes the calculation for commercial exposures. Section 3 describes the calculation of the additional policy provision. For residential exposures, the additional policy provision is an allocation of the requirement determined in section 1; for commercial exposures, it is an amount that is held in addition to the requirement determined in section 2.
1. Residential exposures
1.1. Capital required for premium liabilities
Premium liabilities are the liabilities that a mortgage insurer holds to cover future losses, i.e., losses associated with defaults that occur after the reporting date.
The capital required for premium liabilities associated with residential exposures is defined as
max(T  L,F)
where:
 T represents the total of premium liabilities and capital for residential exposures and is defined in subsections 1.1.1 through 1.1.3,
 L is the amount of premium liabilities that the mortgage insurer actually holds for residential exposures and is defined by accounting standards^{Footnote 1}, and
 F represents a floor on the capital requirements for residential exposures and is currently set at 0.
1.1.1. Total requirement
The total amount T required for residential exposures is the sum of the total amounts required for individual residential mortgages, whether insured individually or as part of a portfolio, that are inforce as of the reporting date and for which there is no claim outstanding^{Footnote 2}. The total amount required for an individual mortgage loan is the sum of the base total requirement for the mortgage loan and, if applicable, a supplementary capital requirement.
The formula for calculating the base total requirement for an individual mortgage loan is provided in subsection 1.1.2. The formula for calculating the supplementary capital requirement is provided in subsection 1.1.3. The following data inputs are used in the calculation of the base total requirement and the supplementary capital requirement for an individual mortgage loan:
 outstanding loan balance as of the reporting date;
 remaining amortization for the mortgage loan as of the reporting date;
 credit score of the borrower(s) determined as described in section 1.1.4; and
 property value, determined as described in subsection 1.1.5.
1.1.2. Base total requirement for an individual mortgage loan
The base total requirement for an individual mortgage loan that is inforce on the reporting date and for which there is no claim outstanding is determined by the formula
T_{B} = α_{B} + β_{B} × outstanding loan balance
where the outstanding loan balance is the loan balance as of the reporting date in units of $100,000 and
α_{B} = m × A
β_{B} = m × B
where m is the adjustment factor for credit quality defined in subsection 1.1.4, and where the quantities A and B are defined as follows.
i) Formula for A
where LTV represents the loantovalue ratio^{Footnote 3} for the mortgage loan as defined in subsection 1.1.5 and μ_{1}, μ_{2}, σ_{1}, σ_{2}, C_{1}, C_{2} are defined as follows:
If the remaining term of insurance for the mortgage loan as of the reporting date is five years or less then
where T* represents the remaining amortization for the mortgage loan as of the reporting date and is measured in years^{Footnote 4}.
Otherwise,
ii) Formula for B
where LTV represents the loantovalue ratio for the mortgage loan as defined in subsection 1.1.5 and in this case μ_{1}, μ_{2}, σ_{1}, σ_{2}, C_{1}, C_{2} are defined as follows:
If the remaining term of insurance for the mortgage loan as of the reporting date is five years or less then
where T* represents remaining amortization for the mortgage loan as of the reporting date and is measured in years.
Otherwise,
1.1.3. Supplementary capital requirement for an individual mortgage loan
If a mortgage loan originated after December 31, 2016 corresponds to a property that is located in one of the 11 metropolitan areas listed in Appendix A and if the value of the supplementary capital requirement indicator (SCRI) for this metropolitan area is greater than the threshold value for this metropolitan area then a supplementary capital requirement must be determined for this mortgage loan and added to the base total requirement for this mortgage loan to determine the total amount for this loan.
The calculation of the SCRI is described in Appendix A.
If a supplementary capital requirement must be determined for a particular mortgage loan, it is calculated using the following formula:
S = r × T_{B}
where T_{B} is as defined in subsection 1.1.2 and where the quantity r is defined as follows.
r = a + b × exp(0.1·T*)
where a and b are defined as follows:
If the remaining term of insurance for the mortgage loan as of the reporting date is five years or less then
where:
 LTV represents the loantovalue ratio for the mortgage loan as defined in subsection 1.1.5, and
 T* represents remaining amortization as of the reporting date and is measured in years.
Otherwise,
Note that for a given mortgage loan, LTV and T* have the same values as in the calculation of the base total requirement in subsection 1.1.2.
1.1.4. Adjustment factor for credit quality of an individual mortgage loan
The adjustment factor for credit quality, m, used in the formulas for α_{B} and β_{B} to determine the base total requirement for an individual mortgage loan depends on
 the most recent credit score for the mortgage loan,
 the age of that credit score, and
 if applicable, the probability of the credit score migrating from one credit score range to another over time.
The credit score used to determine the value of m for a particular mortgage loan should come from a reputable credit bureau and should also be used as part of the mortgage insurer’s business and risk management processes. It should not be acquired for the sole purpose of determining regulatory capital requirements.
In cases where a mortgage insurer obtains credit scores from more than one credit bureau, the mortgage insurer should select the bureau whose scores the mortgage insurer primarily uses in the management of its business, and use the scores of this credit bureau consistently for all mortgage loans and from one reporting period to the next. The only exception is if there is no credit score available for a particular mortgage loan from the credit bureau whose scores the mortgage insurer primarily uses to manage its business; in this situation, the mortgage insurer may use the credit score from another reputable credit bureau until such time that a credit score becomes available from the bureau whose scores the mortgage insurer primarily uses.
For mortgage loans with more than one borrower, the credit score used to determine the value of m is the maximum of the credit scores of the individual borrowers. In cases where the credit scores of the individual borrowers are from different credit bureaus, the maximum is calculated using only the credit scores from the bureau whose scores the mortgage insurer primarily uses to manage its business. In cases where none of the credit scores of the individual borrowers is from the credit bureau whose scores the mortgage insurer primarily uses to manage its business, the maximum is calculated using the available scores.
The age of the credit score used to determine the value of m for a particular mortgage loan is the time in years that has elapsed from the date that the credit score was obtained to the reporting date. For mortgage loans with more than one borrower, the age of the credit score used to determine the value of m is the age of the credit score that corresponds to the maximum credit score determined in the preceding paragraph.
The value assigned to the adjustment factor for credit quality, m, for an individual mortgage loan depends on the frequency with which the mortgage insurer updates the credit scores on its portfolio of residential exposures and the extent to which it has credible information on the migration of credit scores from one credit score range to another over time.
i) Credit scores of individual mortgage loans updated annually
If 90% or more of a mortgage insurer’s mortgage loans that are considered residential exposures have a credit score that is no more than one year old then the value assigned to the adjustment factor for credit quality, m, for an individual mortgage loan is given by the following table:
Most Recent
Credit Score 
m 
< 600 
3.00 
[600,620) 
2.05 
[620,640) 
1.80 
[640,660) 
1.60 
[660,680) 
1.35 
[680,700) 
1.10 
[700,720) 
0.90 
[720,740) 
0.65 
[740,760) 
0.55 
[760,780) 
0.45 
≥ 780 
0.40 
The value assigned to the adjustment factor for credit quality, m, of a mortgage loan with no credit score is 1.3 unless more than 5% of a mortgage insurer’s mortgage loans considered residential exposures have no credit score, in which case the value assigned to the adjustment factor for credit quality, m, of a mortgage loan with no credit score is 3.0.
ii) Migration characteristics of credit scores determined annually
If less than 90% of a mortgage insurer’s mortgage loans that are considered residential exposures have a credit score that is at most one year old and if the mortgage insurer has credible information on the probabilities of migrating from one credit score range to another over time then the value assigned to the adjustment factor for credit quality, m, for a particular mortgage loan is determined based on the calendar year of the most recent credit score for the mortgage loan in the following way.
Assume that credit scores are segmented into 11 bands as indicated in the following table:
Segment 
Credit Score
Band 
1 
< 600 
2 
[600,620) 
3 
[620,640) 
4 
[640,660) 
5 
[660,680) 
6 
[680,700) 
7 
[700,720) 
8 
[720,740) 
9 
[740,760) 
10 
[760,780) 
11 
≥ 780 
Let p_{i>j} denote the probability that a mortgage loan in segment i at the beginning of a calendar year moves to segment j by the end of the year. In general, the probabilities p_{i>j} will change from one calendar year to the next to reflect changes in the mortgage insurer’s book of business and the overall credit environment. Let P_{y} denote the matrix of probabilities p_{i>j} for calendar year y and write P_{y} as follows:
Note that P_{y} is an 11×11 matrix since there are 11 credit score bands; moreover, the sum of each row of P_{y} equals one since the p_{i>j} represent probabilities.
Now consider the collection of mortgage loans whose most recent credit score was obtained in calendar year y* and suppose that the calendar year of the reporting period is y* + n. Let
${\overrightarrow{\mathbf{m}}}_{\mathbf{y*}}$
denote the vector of m values by credit score band for this collection of mortgage loans and write
${\overrightarrow{\mathbf{m}}}_{\mathbf{y*}}$
as follows:
Note that, with this representation, m_{i}^{(y*)} is the m value for segment i. Then the vector
${\overrightarrow{\mathbf{m}}}_{\mathbf{y*}}$
is determined from the following matrix equation:
where
$\overrightarrow{\mathbf{m}}$
is the vector of m values for the collection of mortgage loans whose most recent credit score is no more than one year old, in particular,
where the m_{i} are as given in the following table:
i 
m_{i} 
1 
3.00 
2 
2.05 
3 
1.80 
4 
1.60 
5 
1.35 
6 
1.10 
7 
0.90 
8 
0.65 
9 
0.55 
10 
0.45 
11 
0.40 
The components of the matrices P_{y} for the various calendar years y must be determined in a statistically sound manner and have values that are statistically credible. In particular, the probabilities p_{i>j} for calendar year y should be determined by selecting a random sample of mortgage loans with credit score in segment i at the beginning of calendar year y and considering the distribution of these mortgage loans by credit score segment at the end of the calendar year. The random samples should be of sufficient size to produce estimates of p_{i>j} that are reasonably credible.
The stability of the estimates should be tested by repeating the sampling procedure several times and comparing results. For segments where the estimates are not reasonably stable, e.g., due to a paucity of mortgage loans in a particular credit score band, the values of the probabilities p_{i>j} should be selected in a conservative manner; this generally means increasing the probability that a mortgage loan moves to a lower credit score band and decreasing the probability that it moves to a higher band or remains in its existing band.
If it is not possible to obtain stable estimates for at least 75% of the probabilities p_{i>j} then the m values for mortgage loans cannot be assigned using a credit score migration approach and one of the other methods for assigning m values must be used.
For a mortgage loan with no credit score, the value assigned to the adjustment factor for credit quality, m, is 1.3 unless more than 5% of a mortgage insurer’s mortgage loans considered residential exposures have no credit score, in which case the value assigned to the adjustment factor for credit quality, m, is 3.0.
iii) No regular updating of credit scores or credit score migration characteristics
If less than 90% of a mortgage insurer’s mortgage loans that are considered residential exposures have a credit score that is at most one year old and there is insufficient information on the probabilities of migrating from one credit score range to another by calendar year then the adjustment factor for credit quality, m, for a particular mortgage loan is given by the following table:
Most Recent
Credit Score 
Age of Credit Score 
≤ 1 year 
(1,2]
years 
(2,3]
years 
(3,4]
years 
(4,5]
years 
> 5
years 
< 600 
3.00 
3.00 
3.00 
3.00 
3.00 
3.00 
[600,620) 
2.05 
2.05 
2.05 
2.05 
2.05 
2.05 
[620,640) 
1.80 
1.80 
1.80 
1.80 
1.80 
1.80 
[640,660) 
1.60 
1.60 
1.60 
1.60 
1.60 
1.60 
[660,680) 
1.35 
1.35 
1.35 
1.35 
1.35 
1.35 
[680,700) 
1.10 
1.10 
1.10 
1.10 
1.10 
1.10 
[700,720) 
0.90 
1.00 
1.00 
1.00 
1.00 
1.00 
[720,740) 
0.65 
0.90 
1.00 
1.00 
1.00 
1.00 
[740,760) 
0.55 
0.65 
0.90 
1.00 
1.00 
1.00 
[760,780) 
0.45 
0.55 
0.65 
0.90 
1.00 
1.00 
≥ 780 
0.40 
0.45 
0.55 
0.65 
0.90 
1.00 
The value assigned to the adjustment factor for credit quality, m, of a mortgage loan with no credit score is 1.3 unless more than 5% of a mortgage insurer’s mortgage loans considered residential exposures have no credit score, in which case the value assigned to the credit quality adjustment factor m of a mortgage loan with no credit score is 3.0.
1.1.5. Loantovalue ratio for an individual mortgage loan
This subsection describes the calculation of the LTV input for the formulas given in subsections 1.1.2 and 1.1.3. Note that if the value of LTV determined in this subsection is greater than 100% then an LTV input of 100% should be used in the formulas in subsections 1.1.2 and 1.1.3.
The value of the LTV input for the formulas in subsections 1.1.2 and 1.1.3 depends on the origination date of the mortgage.
i) Mortgages originated after December 31, 2015
For mortgages originated after December 31, 2015, the LTV input is calculated by dividing the outstanding loan balance on the reporting date by the property value on the origination date or the date of the most recent appraisal, provided that the appraisal was commissioned by an independent third party entity other than a mortgage insurer.
ii) Mortgages originated after December 31, 2004 but on or before December 31, 2015
For mortgages originated after December 31, 2004 but on or before December 31, 2015, the LTV input is calculated by dividing the outstanding loan balance on the reporting date by the property value that is determined as follows.
1. If the property is located in one of the 11 Census Metropolitan Areas specified in Appendix A and defined by Statistics Canada then the property value used to calculate the LTV input is
$\mathrm{Property\; Value\; at\; Origination}\times \frac{\mathrm{Teranet\; index\; value\; as\; of\; December\; 2015}}{\mathrm{Teranet\; index\; value\; as\; of\; origination\; month\; and\; year}}$
where “Teranet index value” refers to the value of the TeranetNational Bank House Price Index for the particular metropolitan area as of the end of the indicated month. If the property is located in one of these metropolitan areas but the mortgage was originated in December 2015 or later then the property value used to calculate the LTV input is the property value on the origination date.
2. If the property is not located in one of these metropolitan areas then the property value used to calculate the LTV input is
$\mathrm{Property\; Value\; at\; Origination}\times \frac{\mathrm{Teranet\; composite\; index\; value\; as\; of\; December\; 2015}}{\mathrm{Teranet\; composite\; index\; value\; as\; of\; origination\; month\; and\; year}}$
where “Teranet composite index value” refers to the value of the TeranetNational Bank National Composite House Price Index for the particular metropolitan area as of the end of the indicated month.
iii) Mortgages originated prior to 2005
For mortgages originated prior to 2005, the LTV input is calculated by dividing the outstanding loan balance on the reporting date by the property value that is determined as follows.
1. If the property is located in one of the 11 Census Metropolitan Areas specified in Appendix A and defined by Statistics Canada then the property value used to calculate the LTV input is
$\mathrm{Property\; Value\; at\; Origination}\times \frac{\mathrm{Teranet\; index\; value\; as\; of\; December\; 2015}}{\mathrm{Teranet\; index\; value\; as\; of\; December\; 2004}}$
where “Teranet index value” refers to the value of the TeranetNational Bank House Price Index for the particular metropolitan area as of the end of the indicated month.
2. If the property is not located in one of these metropolitan areas then the property value used to calculate the LTV input is
$\mathrm{Property\; Value\; at\; Origination}\times \frac{\mathrm{Teranet\; composite\; index\; value\; as\; of\; December\; 2015}}{\mathrm{Teranet\; composite\; index\; value\; as\; of\; December\; 2004}}$
where “Teranet composite index value” refers to the value of the TeranetNational Bank National Composite House Price Index for the particular metropolitan area as of the end of the indicated month.
1.2. Capital required for unpaid claims
Claim liabilities are the liabilities that a mortgage insurer holds to cover losses that have already occurred and for which settlement is not yet complete. This includes mortgage loans that are currently delinquent or in arrears. The capital required for unpaid claims associated with residential exposures is calculated by multiplying the claim liabilities associated with residential exposures by 20%.
1.3. Capital required for premium deficiencies
The capital required for premium deficiencies associated with residential exposures is calculated by multiplying the provision for premium deficiencies associated with residential exposures by 10%.
2. Commercial exposures
2.1. Capital required for premium liabilities
The capital required for premium liabilities associated with commercial exposures is the sum of the capital requirements for individual commercial exposures, where the sum is calculated over all commercial mortgage loans that were expected to be inforce on the reporting date based on the mortgage’s amortization schedule at the time of mortgage origination. Unlike the situation for residential exposures, an amount must be calculated and held for all commercial mortgages that were expected to be inforce on the reporting date based on the mortgage’s original amortization schedule, regardless of whether the mortgage is still inforce on the reporting date.
The capital required for an individual mortgage loan is determined by the formula
F_{1}×F_{2}×F_{3}× A
where:
 F_{1} is a factor that depends on the age of the loan and is defined in subsection 2.1.1,
 F_{2} is a factor that depends on whether the mortgage’s loantovalue ratio at origination is greater or less than 80% and whether the underlying mortgage is a first or second mortgage and is defined in subsection 2.1.2,
 F_{3} is a factor that depends on the settlement option stated in the master policy and the mortgage’s loantovalue ratio at origination and is defined in subsection 2.1.3, and
 A is the mortgage balance, including any mortgage insurance premium amounts added to the balance, as of origination, measured in units of $100.^{Footnote 5}
2.1.1. Calculation of F_{1}
The value of F_{1} for an individual mortgage loan depends on the number of years that have elapsed since the mortgage loan was issued and is defined by the following table.
Mortgage loan
age (years) 
Value of F_{1} 
0 
1.3750 
1 
1.3750 
2 
1.3375 
3 
1.2250 
4 
1.0875 
5 
0.9125 
6 
0.6750 
7 
0.4125 
8 
0.1250 
≥ 9 
0 
The values for fractional ages can be determined by interpolation.
2.1.2. Calculation of F_{2}
The value of F_{2} for an individual mortgage loan depends on whether the mortgage’s loantovalue ratio at origination is greater or less than 80% and whether the underlying mortgage is a first or second mortgage, and is defined by the following table.
LoantoValue Ratio at Origination 
Priority 
First Mortgage 
Second Mortgage 
≤ 80% 
1.00 
1.50 
> 80% 
1.50 
1.50 
2.1.3. Calculation of F_{3}
The value of F_{3} for an individual mortgage loan depends on the settlement option stated in the master policy and the mortgage’s loantovalue ratio at origination.
If the maximum amount payable on an individual mortgage loan after all recoveries is 100% or more of the mortgage balance at origination then the value of F_{3} is as defined in the following table.
LoantoValue Ratio at Origination 
Value of F_{3} 
≤ 50% 
100% 
50% < LTV ≤ 65% 
100% 
65% < LTV ≤ 75% 
100% 
75% < LTV ≤ 80% 
105% 
80% < LTV ≤ 85% 
110% 
85% < LTV ≤ 90% 
115% 
90% < LTV ≤ 95% 
140% 
LTV > 95% 
150% 
If the maximum amount payable on an individual mortgage loan after all recoveries is less than 100% of the mortgage balance at origination then the value of F_{3} is as defined in the following table.
Maximum Amount
Payable
(% of Balance at
Origination) 
Value of F_{3} 
10% 
73% 
15% 
80% 
20% 
84% 
25% 
100% 
If the amount payable on an individual mortgage loan is a fixed percentage of the lender’s loss net of recoveries then the value of F_{3} is determined by multiplying this fixed percentage by the value of F_{3} in the case where the maximum amount payable is 100% of the mortgage balance at origination. For example, if the master policy provides coverage for 50% of the lender’s loss net of recoveries and the loantovalue ratio at origination is 85% then the value of F_{3} would be 55% (= 50% × 110%).
2.2. Capital required for unpaid claims
The capital required for unpaid claims associated with commercial exposures is calculated by multiplying the claim liabilities associated with commercial exposures by 20%.
2.3. Capital required for premium deficiencies
The capital required for premium deficiencies associated with commercial exposures is calculated by multiplying the provision for premium deficiencies associated with commercial exposures by 10%.
3. Additional policy provisions
This section describes the calculation of the additional policy provision for residential and commercial exposures.
An additional policy provision must be determined for every mortgage that was expected to be inforce on the reporting date based on the mortgage’s original amortization schedule, regardless of whether the mortgage is still inforce on the reporting date.
When calculating the MCT ratio, the total of the additional policy provisions for residential mortgages is to be deducted from the capital required for premium liabilities that is determined in section 1.1 and then added to the capital required for catastrophes, and the total of the additional policy provisions for commercial exposures is to be multiplied by 1.25 and simply added to the capital required for catastrophes.
The additional policy provision for an individual mortgage loan is given by the following table.

Additional Policy Reserve as Per Cent of Single Premium
Original Term of the Policy 
Completed Policy
Duration in Years 
Up to 5 yrs 
Over 5 to
10 yrs 
Over 10 to
15 yrs 
Over 15 to
40 yrs 
1 
2.0 
3.0 
4.0 
4.0 
2 
1.0 
2.0 
4.0 
4.0 
3 
0.5 
1.0 
3.5 
4.0 
4 

1.0 
3.0 
5.5 
5 

0.5 
3.0 
6.0 
6 

0.5 
2.0 
5.0 
7 

0.0 
1.0 
3.5 
8 


1.0 
2.0 
9 


1.0 
1.5 
10 


1.0 
1.5 
11 


0.0 
1.0 
12 



1.0 
13 



0.5 
14 



0.5 
15 



0.5 
16 



0.5 
17 



0.5 
18 



0.5 
19 



0.5 
≥ 20 



0.0 
V. Mortgage Insurer Operational Risk
Operational risk is the risk of loss due to inadequate or failed internal processes, people and systems, or external events. It includes legal risk but does not include strategic or reputational risk.
The capital required for a mortgage insurer’s operational risk is calculated using the following formula:
Operational risk capital required = 20% × [TC – SC]
where:
TC is the mortgage insurer’s total capital required, before the calculation of the requirement for operational risk.
SC is, if applicable, the supplementary capital required for mortgage insurance risk (reference subsection 1.1.3).
Appendix A. Determining supplementary capital requirement indicators
This appendix describes how mortgage insurers are to calculate the supplementary capital requirement indicators (SCRIs) for the purpose of determining whether a supplementary capital requirement is applied to a given residential mortgage loan.
The data sources necessary to calculate the SCRIs are outlined in Section 1 of this appendix. The Teranet – National Bank National Composite House Price Index (“Teranet index”)^{Footnote 6} is used to measure house prices and Statistics Canada household disposable income and population data are used to measure per capita income.
An SCRI is to be determined for 11 metropolitan areas in the Teranet index. For each metropolitan area, an SCRI is calculated on a quarterly basis and is determined as follows:
$\frac{H}{I}\times s$
where:
 H is the smoothed value of the Teranet index for a metropolitan area as determined in Section 2;
 I is the per capita income value as determined in Section 3; and
 s is the scaling factor for the particular metropolitan area as indicated in Section 4.
OSFI will review the use of the 11 metropolitan areas and may decide to expand the calculation of SCRIs outside of these 11 metropolitan areas in the future.
The SCRI for a metropolitan area is compared to a threshold value for that particular area as defined in Section 5. If the SCRI exceeds the threshold value for that metropolitan area, then supplementary capital requirements will apply at the beginning of a mortgage insurer’s next quarterly fiscal reporting period, according to the schedule presented in Section 6, for the life of the loan for newly originated mortgages in that metropolitan area^{Footnote 7}.
An example illustrating how to calculate SCRIs is provided in Section 7.
1. Data sources
Mortgage insurers need to access the following data sources to calculate the SCRIs:
 Teranet index data source: Teranet index, monthly (June 2005 = 100, Monthly to present)
 Per capita income data sources:
 Statistics Canada Current and Capital Accounts – Households, quarterly – CANSIM table 3800072
 Statistics Canada Labour force survey estimates (LFS) by sex and age group, monthly, seasonally adjusted – CANSIM table 2820087
The SCRIs are to be determined using as of dates of March 31, June 30, September 30 and December 31. As the income data in CANSIM table 3800072 is the last item to be released, approximately two months after the calendar quarter ends, its release date determines when the SCRIs can be calculated.
2. Metropolitan area house price indices
The Teranet index values are available on a monthly basis for the following 11 metropolitan areas:
Calgary 
Edmonton 
Halifax 
Hamilton 
Montréal 
OttawaGatineau 
Québec 
Toronto 
Vancouver 
Victoria 
Winnipeg 

The Teranet indices for the metropolitan areas as published are not seasonally adjusted. Given the seasonal nature of the housing market, the indices need to be smoothed to ensure the stability of the SCRIs. Without smoothing there is a risk that an index could exhibit shortterm fluctuations above and below its threshold, which would not be a desirable outcome. Therefore, a simplified approach is used to determine the smoothed Teranet indices for use in the SCRIs; an average of the last 12 months of each Teranet Index’s monthly metropolitan area values must be calculated.
3. Calculation of per capita income
The per capita income for use in the SCRI is determined as:
$\mathrm{Per\; capita\; income}=\frac{\mathrm{1,000}\times \mathrm{Household\; disposable\; income}}{\mathrm{Population}}$
where:
 The “Household disposable income” is a quarterly data series from the CANSIM table 3800072. The data characteristics for this table necessary to calculate the per capita income are:
 Estimates = Household disposable income (× 1,000,000)
 Geography = Canada
 Seasonal adjustment = Seasonally adjusted at annual rates
 The “Population” is a monthly data series and is part of the CANSIM table 2820087. The data characteristics for this table necessary to calculate the per capita income are:
 Labour force characteristics = Population (× 1,000)
 Geography = Canada
 Sex = Both sexes
 Age group = 15 years and over
 Data type = Seasonally adjusted
To determine the “Per capita income” on a quarterly basis, the “Population” data series must be converted from a monthly basis to a quarterly basis by calculating a three month average of the data series.
4. Calculation of metropolitan area SCRIs
The quarterly SCRI before scaling for each metropolitan area is determined as:
$\mathrm{SCRI\; before\; scaling}=\frac{\mathrm{Smoothed\; quarterend\; Teranet\; house\; price\; index\; for\; a\; metropolitan\; area}}{\mathrm{Per\; capita\; income}}$
The SCRI for a metropolitan area needs to be scaled before being compared to the threshold values to determine whether the mortgages originated in that area are subject to a supplementary capital requirement. The SCRIs are determined by multiplying the ratio of the smoothed Teranet index for a metropolitan area over the per capita income by the scaling factors in the following table.
Metropolitan area 
Scaling factor 
Calgary 
2,500 
Edmonton 
2,100 
Halifax 
1,900 
Hamilton 
2,000 
Montréal 
2,500 
OttawaGatineau 
2,400 
Québec 
1,700 
Toronto 
3,300 
Vancouver 
4,200 
Victoria 
3,300 
Winnipeg 
1,400 
5. Threshold values
Each metropolitan area has its own threshold value that has been determined by OSFI using an algorithm that ensured consistency across metropolitan areas^{Footnote 8}. Threshold values will remain stable over time but are subject to periodic review.
The following table shows the threshold values for each metropolitan area used to determine whether a newly originated mortgage in a given area is subject to a supplementary capital requirement. For each metropolitan area, if the calculated SCRI has breached its threshold value then effective the beginning of the next quarterly fiscal reporting period, any mortgage loan originated in that area is subject to the supplementary capital requirement for the life of the loan.
Metropolitan area 
Threshold values 
Calgary 
10.0 
Edmonton 
9.0 
Halifax 
8.5 
Hamilton 
9.5 
Montréal 
11.0 
OttawaGatineau 
11.0 
Québec 
9.0 
Toronto 
14.0 
Vancouver 
18.5 
Victoria 
12.5 
Winnipeg 
7.5 
Exposures in those areas remain subject to the supplementary capital requirements until the SCRI for a metropolitan area falls below the threshold value. In this case, the supplementary capital requirement would no longer be required for mortgage loans originated in the next quarterly fiscal reporting period.
6. Timing of the calculation
The following table provides a summary of the timing for performing the SCRI calculation and determining when the supplementary capital requirement applies.
As at date for data 
SCRI calculations performed^{Footnote 9} 
Application of supplementary capital requirements 
December 31 
March 1 
April 1 
March 31 
June 1 
July 1 
June 30 
September 1 
October 1 
September 30 
December 1 
January 1 
7. Example
This example illustrates how to calculate the SCRIs for Q4 2015 for the 11 metropolitan areas in the Teranet index.
Step 1: Calculation of metropolitan area smoothed Teranet indices
The following table provides the monthly Teranet values for the 11 metropolitan areas for 2015 as well as the December 2015 smoothed values (determined as the 12month average of the January through December 2015 values).
2015 
Calgary 
Edmonton 
Halifax 
Hamilton 
Montréal 
OttawaGatineau 
January 
184.68 
182.74 
137.60 
157.15 
146.81 
140.58 
February 
184.10 
181.24 
136.72 
157.60 
146.42 
137.65 
March 
184.45 
181.93 
138.36 
157.07 
147.49 
137.20 
April 
184.85 
183.11 
139.39 
156.99 
148.92 
136.30 
May 
178.84 
184.28 
142.62 
157.97 
151.34 
138.30 
June 
183.23 
184.27 
142.05 
161.85 
152.61 
140.58 
July 
179.75 
182.93 
140.56 
166.27 
153.10 
143.75 
August 
186.70 
182.02 
140.05 
170.33 
152.35 
144.64 
September 
187.98 
182.04 
142.71 
172.53 
151.72 
143.88 
October 
186.51 
182.33 
140.30 
172.08 
151.32 
143.00 
November 
184.20 
180.77 
138.32 
172.52 
151.65 
141.22 
December 
181.10 
180.21 
140.45 
171.51 
149.74 
139.19 
December smoothed 
183.87 
182.32 
139.93 
164.49 
150.29 
140.52 
2015 
Québec 
Toronto 
Vancouver 
Victoria 
Winnipeg 
January 
173.71 
166.18 
185.94 
139.41 
194.74 
February 
173.46 
165.99 
188.66 
140.04 
192.88 
March 
176.09 
166.42 
189.14 
139.70 
193.33 
April 
179.12 
166.44 
189.20 
139.47 
197.00 
May 
180.71 
169.10 
191.58 
140.19 
197.39 
June 
179.74 
171.86 
193.90 
143.87 
196.80 
July 
178.61 
175.91 
196.94 
146.36 
195.89 
August 
176.59 
178.75 
198.08 
145.89 
197.08 
September 
173.15 
179.79 
201.20 
147.08 
194.32 
October 
172.84 
180.35 
202.42 
147.55 
198.09 
November 
173.58 
180.53 
205.15 
150.15 
197.48 
December 
174.52 
180.82 
207.40 
150.17 
194.55 
December smoothed 
176.01 
173.51 
195.80 
144.16 
195.80 
Step 2: Calculation of per capita income
Given the following values for the data series “Household disposable income” (CANSIM table 3800072) and “Population” data series (CANSIM table 2820087), the per capita income for Q4 2015 is determined as follows. The average population has to be rounded to the first decimal.

2015 
Statistics Canada data estimates 
Household disposable income 
Q4 
1,131,400 
Population 
October 
29,377.5 

November 
29,401.2 

December 
29,419.0 

Q4 (Average of October – December) 
29,399.2 
Then the per capita income for Q4 2015 is:
$\frac{\mathrm{1,000}\times \mathrm{1,131,400}}{\mathrm{29,399.2}}=\mathrm{38,484.0}$
The per capita income value has to be rounded to the first decimal.
Step 3: Calculation of metropolitan area SCRIs
Using the December 2015 smoothed Teranet values for the 11 metropolitan areas and the per capita income for Q4 2015, the SCRIS before and after scaling as at Q4 2015 are as follows. The SCRI before scaling has to be rounded to the fifth decimal, while the final SCRI has to be rounded to the second decimal.
Metropolitan area 
Dec. 2015
Teranet index
smoothed
(H) 
Q4 2015
SCRI before scaling
$\frac{H}{I}$ 
Scaling Factor
(s) 
Q4 2015
SCRIs
$\left(\frac{H}{I}\times s\right)$ 
Calgary 
183.87 
0.00478 
2,500 
11.95 
Edmonton 
182.32 
0.00474 
2,100 
9.95 
Halifax 
139.93 
0.00364 
1,900 
6.92 
Hamilton 
164.49 
0.00427 
2,000 
8.54 
Montréal 
150.29 
0.00391 
2,500 
9.78 
OttawaGatineau 
140.52 
0.00365 
2,400 
8.76 
Québec 
176.01 
0.00457 
1,700 
7.77 
Toronto 
173.51 
0.00451 
3,300 
14.88 
Vancouver 
195.80 
0.00509 
4,200 
21.38 
Victoria 
144.16 
0.00375 
3,300 
12.38 
Winnipeg 
195.80 
0.00509 
1,400 
7.13 
Where for example the Calgary Q4 2015 SCRI before scaling
$\left(\frac{H}{I}\right)$
is determined as:
$\frac{183.87}{\mathrm{38,484.0}}=0.00478$
And the SCRI would be calculated as:
0.00478 × 2,500 = 11.95
As the threshold value is set at 10.0 for Calgary, had this Advisory been in effect in Q22016, the supplementary capital requirements would therefore have applied for the life of a mortgage loan originated in the Calgary metropolitan area during that reporting quarter.
 END 