Insurers’ Solvency Level Holds Well Under MCT

One year into the new federal solvency test – the minimum capital test (MCT) – the industry overall maintains a capital level well above that required by regulators, according to the Insurance Bureau of Canada (IBC). The bureau says the industry’s test score is 215%, showing a favorable gain over the regulatory target of 150%.

Surprisingly, in 2001, almost 12% of the market was being served by companies failing the federal capital requirements, the IBC notes. In 2003, the number of companies falling short of the minimum capital requirements dropped to 1.6%. Generally, the property and casualty insurance industry is considered to be “capital rich” compared with other industries, largely due to tough regulatory requirements. These capital restrictions may be throwing a wrench into insurance availability, the IBC notes. “Over the past few years, the weak earnings and an increasing regulatory burden has hampered insurers’ ability to compete internationally to draw more capital to Canada and build reserves back up,” notes IBC chief economist Jane Voll. The bureau has analyzed the impact of several adverse conditions on the industry’s capital position:

A 2% increase in interest rates would drop MCT by 26.5 points;

A 5% reserve shortfall as a result of adverse claims development drops the MCT by 19.4 points;

A 25% reduction in equity markets drops MCT by 14.5 points; and

A 10% growth in premium volumes drops the MCT by 16.8 points.

However, even if all of these events were to occur at once, the industry would still be in a strong solvency position. In fact, even if the industry were at the required 150% MCT level, it would take an interest rate hike of 3.6%, plus 13.6% reserve deficiency, premium growth of 57.1% and a 69.2% drop in equity markets to have the industry approaching the 100% point (where capital required matches capital available), the IBC observes.