OSFI outlines industry reporting for new MCT

With property and casualty insurers having begun solvency reporting to the Office of the Superintendent of Financial Services (OSFI) under the new minimum capital test (MCT) since the beginning of this year, the federal regulator used the recently held Insurance Bureau of Canada’s (IBC) annual Financial Affairs Symposium to outline the new rules and the potential impact on companies.

The “risk-based” MCT replaces the minimum asset test (MAT), which had been long-used by the federal regulator to determine the minimum capital requirements of companies. Although MAT has been phased out by the federal regulator, the former capital test will continue to be used in some provinces such as Alberta and British Columbia, while others like Ontario and Quebec will eventually bring in MCT at the provincial level of testing once legislation is amended, says Jeff Bee, manager of accounting & financial information division at OSFI. Quebec will continue to require federally licensed insurers to complete the provincial test, he adds.

Bee notes that the planning behind MCT began in 1995 following a Canadian Council of Insurance Regulators (CCIR) initiative to harmonize the four solvency tests used by the federal regulator, Ontario, Quebec and Alberta. Further industry consultation revealed an opportunity to not only harmonize the solvency rules, but introduce a more risk-based approach to matching capital to policy liabilities. The new MCT underwent a full test based on 2002’s preliminary financial returns, Bee says. “We’ve had four years of trial results, including the year just ended, and we feel comfortable enough that we have done enough trial runs to launch the new kid into the real world.”

There are three major changes in MCT from MAT, Bee explains. MCT applies risk-based factors to all on-balance-sheet assets and for the first time makes allowance for “off-balance-sheet” assets and liabilities. MCT also adjusts the value of investments to “market value” rather than the previously applied “investment valuation reserve” (IVR) system which had been regarded by the industry as overly complex. Furthermore, under MCT, the calculation of capital on policy liabilities is now determined by class of insurance for unpaid claims and a “straight, across-the-board 8% on unearned premiums, for a combined number of about 10%, compared to the current level of around 15%”.

Under the new testing requirements, insurers will have to report an interim return, Bee says, with this year’s due by May 15. Companies will not have to provide comparable prior-year numbers for their interim statements, he adds. Bee also points out that OSFI has removed the new solvency test from the federal legislation and installed it into an “OSFI Guideline” in order to facilitate easier future changes. “Having said that, we want to be sure to keep the next two years frozen so that we can all get used to the test.”