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Office of the Superintendent of Financial Institutions

Office of the Superintendent of Financial Institutions. Bureau du surintendant des institutions financières. Update on Changes to MCCSR (PD-12) CIA Seminar for the Appointed Actuary September 21, 2004 by: Bernard Dupont. AGENDA. Major changes since 2000

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Office of the Superintendent of Financial Institutions

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  1. Office of the Superintendent of Financial Institutions Bureau du surintendant des institutions financières Update on Changes to MCCSR (PD-12)CIA Seminar for the Appointed Actuary September 21, 2004by: Bernard Dupont

  2. AGENDA • Major changes since 2000 • Future Direction of Life Insurance Capital Requirements • Initiatives Underway • Long Term views

  3. Major Changes Since 2000 2001 • 150% MCCSR/TAAM designated as the Supervisory Target Level • 105% minimum Tier 1 ratio

  4. Major Changes Since 2000 2002 • Mortality factors reduced for non-par Individual Life products • Index-linked products: - Required capital factor = 100% - correlation factor

  5. Major Changes Since 2000 • C-1 factor for par business - 50% of normal MCCSR requirement • Segregated Funds: - Company’s own model can be used for entire company with OSFI’s prior approval

  6. Major Changes Since 2000 2003 • Expanded lapse component to cover all durations and all individual products • Continued to deduct negative reserves from Tier 1 (adjusted for taxes) and include in Tier 2C • Removed 25% haircut and 33% of Tier 1 limit

  7. Major Changes Since 2000 Impact of new methodology:  Full implementation impact is capital neutral in aggregate  Only a handful of companies materially negatively impacted  Better reflects risks Therefore, no recalibration anticipated

  8. Future Direction OSFI is preparing a “Think Piece” on the future of MCCSR. Reasons for this assessment: - Various CLHIA proposals - IAIS Standards - New Basel Accord - IAA Solvency paper

  9. Initiatives Underway (for 2005) • New company-specific factors for mortality  New segregated fund approach  New definitions of negative reserves and CSV deficiencies

  10. Initiatives Underway (for 2005) Mortality: • OSFI is favourable towards the CIA’s draft proposal • We are concerned by impact on certain segments of the industry • A more comprehensive survey might be required

  11. Initiatives Underway (for 2005) Segregated Funds: - Investment return data updated - Lapse rates now vary by MV and GV (avg. 8%) - Creation of thousands of factors differentiated by product, age, duration, etc.

  12. Initiatives Underway (for 2005) Segregated Funds: • Call utility will produce the capital factors • No need to interpolate, less manual intervention • OSFI will test the factors this year

  13. Initiatives Being Assessed New Negative Reserve definition:  To be calculated policy-by-policy for all lines of business New CSV deficiency definition:  Only policies with CSVs allowed in aggregation

  14. Future Direction Long Term views:  Encourage enhanced risk management  Explicit on what the risks are and how they are reflected

  15. Future Direction • When supported by the data, move towards: - Company-specific approaches - Total Balance Sheet approaches - Own-company models

  16. Future Direction Diversification - Cannot be implemented in isolation - New approaches will allow consideration of risk diversification

  17. Future Direction - Diversification should take into account correlations between and within the risk categories. - Needs to be integrated into companies’ risk management processes and capital allocation

  18. Future Direction Comprehensive models • Development will take time • Supervisory criteria are needed • Should be part of risk management framework and used to set internal targets

  19. Future Direction • More than one test? - Liquidation basis? • Work closely with the CIA and the CLHIA

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