Actuarial Notes

P&C Minimum Capital Test and Branch Adequacy of Assets Test Quarterly Return

By Office of the Superintendent of Financial Institutions · 2023 · PC4

Study guide: Exam 6C

The quarterly return on which federally regulated P&C insurers report their Minimum Capital Test (MCT) or Branch Adequacy of Assets Test (BAAT). The 2023 form (PC4) serves as the MCT/BAAT return for all federally regulated insurers, including Canadian branches of foreign property and casualty insurers, and is submitted to OSFI via its Regulatory Reporting System. An authorized official or chief agent confirms on the cover that it is completed in accordance with OSFI's Minimum Capital Test guideline and related instructions; the form pages build capital (or net assets) available and the capital (margin) required for insurance, market, credit and operational risk into the MCT (BAAT) ratio.

On the syllabus

  • Exam 6C — objectives C1–C4; the whole return (2023, Excel file), with no pages excluded.

Attestation

  • Senior management attests that the report is accurate, complete and prepared in accordance with the Minimum Capital Test guideline and related instructions, or explains why it cannot.
  • The internal auditor's opinion (signed at a minimum once every three years) covers whether the processes and internal controls for the report are operating as designed and effective; the external auditor gives an opinion, on reasonable assurance, on whether the information is prepared in accordance with applicable criteria.

10.00 MCT (BAAT) Ratio - Summary Calculations

  • Capital (margin) required at target is the sum of insurance risk (unexpired coverage, liability for incurred claims, earthquake and nuclear catastrophe reserves, reinsurance held with unregistered insurers), market risk (interest rate, foreign exchange, equity, real estate, other), credit risk (counterparty default for balance sheet items and off-balance sheet exposures, collateral held for unregistered reinsurance and self-insured retention) and operational risk, less a diversification credit.
  • Minimum capital (margin) required is the total capital (margin) required at target divided by 1.5.
  • The ratio is total capital available (for a branch, total net assets available) as a percentage of total minimum capital (margin) required:

\text{MCT (BAAT) ratio} = \frac{\text{total capital available (net assets available)}}{\text{total minimum capital (margin) required}} \times 100\%

20.00 MCT: Capital Available

  • For Canadian insurers: qualifying category A common shares, contributed surplus and retained earnings (net of adjustments), earthquake reserves, nuclear and general and contingency reserves and accumulated other comprehensive income (net of adjustments), residual interest of mutual entities, qualifying category B and C instruments, and non-controlling interests.
  • Deductions include interests in and loans to non-qualifying subsidiaries, associates and joint ventures, receivables and recoverables from unregistered insurers not covered by acceptable collateral, uncollateralized self-insured retentions, assets for insurance acquisition cash flows, goodwill and intangible assets; additions are the net contractual service margin on title insurance contracts and on business combinations and portfolio transfers on or before June 30, 2019.
  • Validation tests apply a 40% limit to category B and C capital instruments and a 7% limit to category C.

30.00 BAAT: Net Assets Available

  • For foreign insurers: total vested assets less total net liabilities (total liabilities less insurance contract assets, reinsurance contract held assets with registered and with unregistered reinsurers, and other allowable recoverables), followed by regulatory adjustments.

40.00 MCT (BAAT) Insurance Risk: Capital (Margin) Required for Liabilities for Incurred Claims

  • By class of insurance, the liability for incurred claims for insurance contracts issued less the asset for incurred claims for reinsurance contracts held, each less the risk adjustment, is multiplied by a risk factor.
  • The total is taken inclusive of a multiplier (1.10), and the risk adjustment is then added. See Insurance Risk Margin.

40.05 MCT (BAAT) Insurance Risk: Capital (Margin) Required for Unexpired Coverage

  • By class of insurance, net unexpired coverage (insurance contracts issued less reinsurance contracts held, for groups measured under the GMM and under the PAA, including discounting and excluding the risk adjustment).
  • The margin applies a risk factor to the greater of net unexpired coverage and 30% of net premiums received in the past 12 months.

40.11 MCT: Reinsurance Contracts Held Summary - Unregistered Reinsurance

  • For each unregistered assuming insurer, grouped as associated and non-qualifying subsidiary or non-associated and non-subsidiary: premiums associated with unexpired coverage (PAA and GMM), the asset for incurred claims, and the reinsurance collateral held (funds held, non-owned deposits in an RSA, premiums payable and other acceptable non-owned deposits, and letters of credit). See Unregistered Reinsurance.
  • The MCT calculation takes a 20% margin on the premiums associated with unexpired coverage and the AIC, and compares recoverables with acceptable collateral to give the margin required or the excess collateral.

40.21 BAAT: Reinsurance Contracts Held Summary - Unregistered Reinsurance

  • The corresponding summary for foreign insurers.

40.40 MCT (BAAT) Insurance Risk: Capital (Margin) Required for Accident and Sickness Business

50.00 MCT (BAAT) Market Risk: Capital (Margin) Requirements

  • Separate margins for interest rate risk (the larger of the capital required for an increase and for a decrease of Δy = 1.25% in the fair value of interest rate sensitive assets, liabilities and allowable derivatives, using their modified or effective durations), foreign exchange risk, equity risk, real estate and other market risk exposures. See Market Risk Margin.

60.00 MCT (BAAT) Credit Risk: Capital (Margin) Required for Balance Sheet (Vested) Assets Based on External Credit Ratings

  • By category and rating, and by remaining term to maturity, balance sheet value adjusted for the redistribution of exposure for collateral and guarantees, multiplied by risk factors. See Credit Risk Margin.

60.05 MCT Credit Risk: Capital (Margin) Required for Balance Sheet (Vested) Assets Based on External Credit Ratings (Quebec*)

  • For provincially incorporated Quebec insurers.

60.20 MCT Credit Risk: Capital Required for Selected Balance Sheet Items and Recoverables/Receivables

60.30 BAAT Credit Risk: Margin Required for Selected Balance Sheet Items and Recoverables/Receivables

60.40 MCT (BAAT) Credit Risk: Capital (Margin) Required for Off-Balance Sheet Exposures

60.50 MCT (BAAT) Credit Risk: Capital (Margin) Required for Collateral Held for Unregistered Reinsurance Exposures

  • The capital (margin) required for acceptable non-owned deposits and letters of credit held as collateral, by category, rating and term to maturity (for letters of credit, the rating of the issuing or confirming bank), less the portion for excess collateral.

70.00 MCT (BAAT) Operational Risk: Capital (Margin) Required

  • The operational risk margin combines a premium component (direct premiums received, premiums received and paid for reinsurance, and premium growth above a 20% threshold) with a component based on total capital (margin) required excluding operational risk and the diversification credit, subject to a cap.

Related readings

  • OSFI MCT — the Minimum Capital Test guideline, in accordance with which the return is attested to be completed
  • OSFI Memorandum — Appendix II lists the actuarial items the appointed actuary provides for pages 40.00, 40.05 and 50.00 of this return
  • CCIR Instructions — the instructions the content outline assigns for the pages of this return and the other three

Sources