Difference between revisions of "OSFI.Concentration"

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|| <span style="font-size: 18px;">'''NEW for 2024-Spring:'''
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|| <span style="font-size: 18px;">'''NEW for 2025-Fall: Content now AVAILABLE!'''
 
* This is a new reading for 2025-Fall.
 
* This is a new reading for 2025-Fall.
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* We are currently working on the content and it will be posted here when we're done!
 
 
|}
 
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'''Reading''': ...
+
'''Reading''': “Property and Casualty Large Insurance Exposures and Investment Concentration,” January 2025 [https://www.osfi-bsif.gc.ca/en/guidance/guidance-library/property-casualty-large-insurance-exposures-investment-concentration<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Official Link'''</span>]
  
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'''Author''': ...
+
'''Author''': OSFI (Office of the Superintendent of Financial Institutions Canada)
  
−
[insert link<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
+
[https://www.battleactsmain.ca/vanillaforum/categories/osfi-concentration<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
  
 
{| class='wikitable' style='background-color: navajowhite;
 
{| class='wikitable' style='background-color: navajowhite;
 
|-
 
|-
−
|| '''BA Quick-Summary''': <span style="color: green;>'''title'''</span>
+
|| '''BA Quick-Summary''': <span style="color: green;>'''Large Exposures & Investment Concentration'''</span>
  
−
info
+
This reading applies to federally regulated P&C insurers (including foreign branches) and covers these topics:
  
−
* info
+
* '''Insurance Exposure''':
−
* info
+
:* <span style="color: red;">'''Limits'''</span> large exposures to protect against major single-event losses.
−
 
+
* '''Investment Caps''':
−
info
+
:* <span style="color: red;">'''Limits'''</span> investments in one entity/group to 5% of total assets.
 +
* '''Governance''':
 +
:* <span style="color: green;">'''Requires'''</span> internal policies, monitoring, and compliance with OSFI reviews.
  
 
|}
 
|}
  
 
==Pop Quiz==
 
==Pop Quiz==
 +
 +
What are the 4 qualitative considerations for determining capital available?
  
 
==Study Tips==
 
==Study Tips==
  
−
...your insights...
+
{| class='wikitable' style='background-color: navajowhite;'
 +
|-
 +
|| <span style="color: green;">'''Key Focus Areas:'''</span>
 +
|}
 +
 
 +
* This guideline establishes OSFI's expectations for managing two critical risk areas: '''large insurance exposures''' and '''investment concentration'''
 +
* Focus on the '''quantitative limits''' and '''policy requirements'''
 +
* Pay special attention to the differences between '''insurance companies''' and '''foreign branches'''
 +
 
 +
{| class='wikitable'
 +
|-
 +
|| '''Study Tips Summary''':
 +
|}
 +
 
 +
This OSFI guideline is all about '''risk management limits'''. The key is understanding the '''numerical thresholds''' and '''policy requirements''' that P&C insurers must follow. The material is straightforward but detail-oriented.
 +
 
 +
Possible topics on the exam:
 +
 
 +
: '''Section II''': Large Insurance Exposures - <span style="color: red;">'''Focus on the exposure limits and Net Retention calculations'''</span>
 +
: '''Section III''': Investment Concentration - <span style="color: red;">'''Know the 5% investment limit'''</span>
 +
: '''Definitions (Annex 1)''': Critical terminology - <span style="color: red;">'''especially Single Insurance Exposure and Net Retention'''</span>
 +
 
 +
{| class='wikitable'
 +
|-
 +
|| '''Before You Start''':
 +
|}
 +
 
 +
This guideline is relatively short but dense with specific requirements. This is a rules-based rather than conceptual paper. That means:
 +
* '''Exact percentages matter''' - don't approximate
 +
* '''Definitions are critical''' - I don't think they will test you on this directly, but it is good to have a strong knowledge base
 +
* '''Policy requirements''' are as important as numerical limits
 +
 
 +
'''Estimated study time''': a few hours
 +
 
 +
==Key Concepts & Exam Focus==
 +
 
 +
===Section I: Purpose and Scope===
 +
 
 +
:{| class='wikitable'
 +
|-
 +
| '''Question''': What entities does this guideline apply to? [Hint: <span style="color: red;">'''P&C FRIs'''</span>]
 +
|}
 +
 
 +
:* '''All federally regulated property and casualty insurers (P&C FRIs)'''
 +
:* Applies to '''insurance companies''' (individual and consolidated basis)
 +
:* Applies to '''individual foreign branches'''
 +
 
 +
This guideline addresses '''two main risk areas''':
 +
* '''Large insurance exposures''' - losses from single large exposures and unregistered reinsurance counterparty failure
 +
* '''Investment concentration''' - concentration risk in investment portfolios
 +
 
 +
===Section II: Large Insurance Exposures===
 +
 
 +
====Gross Underwriting Limit Policy (GUWP)====
 +
 
 +
:{| class='wikitable'
 +
|-
 +
| '''Question''': What are the key requirements for a Gross Underwriting Limit Policy? [Hint: <span style="color: red;">'''DEL'''</span>]
 +
|}
 +
 
 +
The GUWP should:
 +
 
 +
:: <span style="color: red;">'''D'''</span>efine what constitutes a Single Insurance Exposure by class
 +
:: <span style="color: red;">'''E'''</span>stablish limits by class for maximum gross insurance risk
 +
:: Review by Senior Management at <span style="color: red;"> '''L'''</span>east annually
 +
 
 +
====Single Insurance Exposure by Class====
 +
 
 +
:{| class='wikitable' style='background-color: lightblue;'
 +
|-
 +
| '''MEMORIZE THIS''': Single Insurance Exposure definitions by class [Hint: <span style="color: red;">'''PCST'''</span>]
 +
|}
 +
 
 +
:: <span style="color: red;">'''P'''</span>roperty: Aggregated exposures at a '''single location'''
 +
:: <span style="color: red;">'''C'''</span>redit: Aggregated exposures to '''one buyer or group of connected buyers'''
 +
:: <span style="color: red;">'''S'''</span>urety: Aggregated exposures to '''one contractor or group of connected contractors'''
 +
:: <span style="color: red;">'''T'''</span>itle: Aggregated exposures related to '''legal title for a single location'''
 +
 
 +
==== Insurance Exposure Limits ====
 +
 
 +
This is probably the '''most important section''':
 +
 
 +
:{| class='wikitable' style='background-color: pink;'
 +
|-
 +
| Net Retention + Largest Net Counterparty Unregistered Reinsurance Exposure ≤ Limit (described below)
 +
|}
 +
 
 +
For Insurance Companies:
 +
* '''100% of Total Capital Available''' if control chain includes:
 +
  - Widely held company, '''AND/OR'''
 +
  - Regulated financial institution
 +
* '''25% of Total Capital Available''' otherwise
 +
 
 +
For Foreign Branches:
 +
* '''100% of Net Assets Available'''
 +
 
 +
:{| class='wikitable'
 +
|-
 +
| '''Question''': What are eligible Counterparty Risk Mitigation (CRM) techniques? [Hint: <span style="color: red;">'''ELO'''</span>]
 +
|}
 +
 
 +
:: <span style="color: red;">'''E'''</span>xcess collateral
 +
:: <span style="color: red;">'''L'''</span>etters of Credit
 +
:: <span style="color: red;">'''O'''</span>ther techniques deemed acceptable by OSFI
 +
 
 +
[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Concentration&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 1]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>
 +
 
 +
===Section III: Investment Concentration===
 +
 
 +
Much simpler:
 +
 
 +
:{| class='wikitable' style='background-color: lightgreen;'
 +
|-
 +
| '''SIMPLE RULE''': Investment concentration limit in any entity = <span style="color: red;">'''5% of Assets'''</span>
 +
|}
 +
 
 +
* Insurance Companies: 5% of company's Assets
 +
* Foreign Branches: 5% of company's Assets in Canada
 +
 
 +
:{| class='wikitable'
 +
|-
 +
| '''Question''': What should P&C FRIs consider beyond balance sheet investments?
 +
|}
 +
 
 +
:* '''Off-balance sheet items''': options, futures, forward contracts
 +
:* '''Unfunded portions''' of committed loans
 +
 
 +
===Section IV: Guideline Administration===
 +
 
 +
:{| class='wikitable'
 +
|-
 +
| '''Question''': What can OSFI do for non-compliance?
 +
|}
 +
 
 +
:* '''Heightened supervisory activity'''
 +
:* '''Discretionary authority''' to adjust capital requirements
 +
:* Other '''corrective measures''' on case-by-case basis
 +
 
 +
==Core Definitions (Annex 1)==
 +
 
 +
These definitions are imo the most important:
 +
 
 +
:{| class='wikitable' style='background-color: yellow;'
 +
|-
 +
| '''Definition''': Net Retention
 +
|}
 +
 
 +
:* Amount of insurance exposure a P&C FRI '''retains for its own account'''
 +
:* Does '''NOT''' pass on to another insurer/reinsurer
 +
:* '''Include''' reinstatement premiums
 +
 
 +
:{| class='wikitable' style='background-color: yellow;'
 +
|-
 +
| '''Definition''': Largest Net Counterparty Unregistered Reinsurance Exposure
 +
|}
 +
 
 +
:* '''Largest amount''' of ceded unregistered reinsurance from a reinsurance group
 +
:* Measured on '''net basis''' (after CRM techniques)
 +
 
 +
:{| class='wikitable' style='background-color: yellow;'
 +
|-
 +
| '''Definition''': Total Capital Available
 +
|}
 +
 
 +
:* For '''insurance companies''': consolidated total available capital per MCT/MICAT calculation
 +
 
 +
:{| class='wikitable' style='background-color: yellow;'
 +
|-
 +
| '''Definition''': Net Assets Available
 +
|}
 +
 
 +
:* For '''foreign branches''': This is analogous to capital available
  
−
'''Estimated study time''': x mins, or y hrs, or n<sub>1</sub>-n<sub>2</sub> days, or 1 week,... ''(not including subsequent review time)''
+
:{| class='wikitable' style='background-color: yellow;'
 +
|-
 +
| '''Definition''': '''Investments''' (for concentration purposes)
 +
|}
  
−
==BattleTable==
+
:* Assets acquired for '''income or appreciation'''
 +
:* '''EXCLUDES''': loans to/guaranteed by Government of Canada, provinces, or OECD members
  
−
No past exam questions are available for this reading.
+
[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Concentration&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 2]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>
  
−
: {| class='wikitable' style='width: 1000px;'
+
[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Concentration&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>
  
 +
==Practice Questions==
 +
 +
::1. What percentage limits apply to investment concentration?
 +
::2. Under what conditions can an insurance company have 100% vs 25% exposure limits?
 +
::3. How is a Single Insurance Exposure defined for each class (PCST)?
 +
::4. What must be included in Net Retention calculations?
 +
::5. What are the three eligible CRM techniques?
 +
::6. How often must the GUWP be reviewed?
 +
 +
==Practice Questions Answer Key==
 +
 +
'''Question 1: What percentage limits apply to investment concentration?'''
 +
 +
{| class='wikitable' style='background-color: lightgreen;'
 
|-
 
|-
−
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)
+
|| '''Answer: <span style="color: red;">5%</span> across the board'''
 +
|}
  
 +
:* '''Insurance Companies:''' 5% of the company's Assets
 +
:* '''Foreign Branches:''' 5% of the company's Assets in Canada
 +
 +
''(This applies to aggregate market value of Investments in any one Entity or group of Affiliated Companies)''
 +
 +
'''Question 2: Under what conditions can an insurance company have 100% vs 25% exposure limits?'''
 +
 +
{| class='wikitable' style='background-color: lightyellow;'
 
|-
 
|-
−
||  
+
|| '''100% of Total Capital Available''' when control chain includes:
−
||
+
|}
−
||
 
−
||
 
−
||
 
  
 +
:* '''Widely held company''', <span style="color: red;">'''AND/OR'''</span>
 +
:* '''Regulated financial institution'''
 +
 +
{| class='wikitable' style='background-color: lightcoral;'
 +
|-
 +
|| '''25% of Total Capital Available''' '''otherwise'''
 +
|}
 +
 +
''(This refers to the limit for Net Retention + Largest Net Counterparty Unregistered Reinsurance Exposure)''
 +
 +
'''Question 3: How is a Single Insurance Exposure defined for each class (PCST)?'''
 +
 +
{| class='wikitable' style='background-color: lightblue;'
 +
|-
 +
|| '''Answer: <span style="color: red;">PCST</span> Classifications'''
 +
|}
 +
 +
:: <span style="color: red;">'''P'''</span>roperty: '''Aggregated insurance exposures at a single location'''
 +
::: ''(including any exposures subject to the location)''
 +
 +
:: <span style="color: red;">'''C'''</span>redit: '''Aggregated insurance exposures to any one single buyer or group of connected buyers'''
 +
 +
:: <span style="color: red;">'''S'''</span>urety: '''Aggregated insurance exposures to any one single contractor or group of connected contractors'''
 +
 +
:: <span style="color: red;">'''T'''</span>itle: '''Aggregated insurance exposures related to the legal title for a single location'''
 +
 +
'''Question 4: What must be included in Net Retention calculations?'''
 +
 +
{| class='wikitable' style='background-color: navajowhite;'
 +
|-
 +
|| '''Answer: Net Retention Definition'''
 
|}
 
|}
  
−
==In Plain English!==
+
'''Net Retention''' = The amount of insurance exposure which a P&C FRI retains net for its own account and does '''NOT''' pass on to another insurer (or reinsurer)
−
E(r)-1/2 Aσ^2
+
 
 +
'''Must Include:'''
 +
:* '''Any reinstatement premiums''' should be included in the Net Retention value
 +
 
 +
'''Key Point:''' This is the amount the FRI keeps '''for itself''' after all reinsurance arrangements.
 +
 
 +
'''Question 5: What are the three eligible CRM techniques?'''
 +
 
 +
{| class='wikitable' style='background-color: lightgreen;'
 +
|-
 +
|| '''Answer: <span style="color: red;">ELO</span> Techniques'''
 +
|}
 +
 
 +
:: <span style="color: red;">'''E'''</span>xcess collateral
 +
:: <span style="color: red;">'''L'''</span>etters of Credit
 +
:: <span style="color: red;">'''O'''</span>ther CRM techniques deemed acceptable by OSFI
 +
 
 +
''(CRM = Counterparty Risk Mitigation techniques used to measure ceded unregistered reinsurance exposures on both gross and net basis)''
 +
 
 +
'''Question 6: How often must the GUWP be reviewed?'''
 +
 
 +
{| class='wikitable' style='background-color: pink;'
 +
|-
 +
|| '''Answer: <span style="color: red;">Annually</span> (at minimum)'''
 +
|}
 +
 
 +
'''Full Requirement:''' The Gross Underwriting Limit Policy (GUWP) should be '''reviewed by Senior Management''' of the P&C FRI, '''at a minimum, annually'''.
 +
 
 +
===Quick Reference Summary===
 +
 
 +
{| class='wikitable' style='background-color: lightcyan;'
 +
|-
 +
! '''Question Type''' !! '''Key Answer''' !! '''Memory Aid'''
 +
|-
 +
| Investment Concentration || 5% of Assets || "5 floors in the building"
 +
|-
 +
| 100% vs 25% Limits || Widely held AND/OR regulated || "100 widely-held people vs 25 others"
 +
|-
 +
| PCST Definitions || Location/Buyer/Contractor/Title || "PCST classes"
 +
|-
 +
| Net Retention || Include reinstatement premiums || "What you keep + reinstatements"
 +
|-
 +
| CRM Techniques || Excess/Letters/Other || "ELO techniques"
 +
|-
 +
| GUWP Review || Annual minimum || "Once per year minimum"
 +
|}
 +
 
 +
===Key Formulas ===
 +
 
 +
{| class='wikitable' style='background-color: yellow;'
 +
|-
 +
|| '''Critical Formula:''' Net Retention + Largest Net Counterparty Unregistered Reinsurance Exposure ≤ Limit
 +
|}
 +
 
 +
'''Where Limit ='''
 +
:* '''100%''' of Total Capital Available ''(if widely held and/or regulated)''
 +
:* '''25%''' of Total Capital Available ''(otherwise)''
 +
:* '''100%''' of Net Assets Available ''(for foreign branches)''
 +
 
 +
{| class='wikitable' style='background-color: lightgreen;'
 +
|-
 +
|| '''Bottom Line:''' These are '''specific regulatory limits''' that must be memorized exactly. Unlike conceptual readings, precision in numbers and definitions is critical for exam success!
 +
|}
 +
 
 +
==Quick Reference Summary==
 +
 
 +
{| class='wikitable' style='background-color: lightcyan;'
 +
|-
 +
! Risk Type !! Key Limit !! Applies To
 +
|-
 +
| Large Insurance Exposures || 100% or 25% of Total Capital || Insurance Companies
 +
|-
 +
| Large Insurance Exposures || 100% of Net Assets Available || Foreign Branches 
 +
|-
 +
| Investment Concentration || 5% of Assets || Both
 +
|-
 +
| GUWP Review || Annual (minimum) || All P&C FRIs
 +
|}
  
 
==POP QUIZ ANSWERS==
 
==POP QUIZ ANSWERS==
 +
 +
Availability, Permanence, Absence, Subordination

Latest revision as of 18:07, 5 September 2025

NEW for 2025-Fall: Content now AVAILABLE!
  • This is a new reading for 2025-Fall.

Reading: “Property and Casualty Large Insurance Exposures and Investment Concentration,” January 2025 Official Link

Author: OSFI (Office of the Superintendent of Financial Institutions Canada)

Forum

BA Quick-Summary: Large Exposures & Investment Concentration

This reading applies to federally regulated P&C insurers (including foreign branches) and covers these topics:

  • Insurance Exposure:
  • Limits large exposures to protect against major single-event losses.
  • Investment Caps:
  • Limits investments in one entity/group to 5% of total assets.
  • Governance:
  • Requires internal policies, monitoring, and compliance with OSFI reviews.

Pop Quiz

What are the 4 qualitative considerations for determining capital available?

Study Tips

Key Focus Areas:
  • This guideline establishes OSFI's expectations for managing two critical risk areas: large insurance exposures and investment concentration
  • Focus on the quantitative limits and policy requirements
  • Pay special attention to the differences between insurance companies and foreign branches
Study Tips Summary:

This OSFI guideline is all about risk management limits. The key is understanding the numerical thresholds and policy requirements that P&C insurers must follow. The material is straightforward but detail-oriented.

Possible topics on the exam:

Section II: Large Insurance Exposures - Focus on the exposure limits and Net Retention calculations
Section III: Investment Concentration - Know the 5% investment limit
Definitions (Annex 1): Critical terminology - especially Single Insurance Exposure and Net Retention
Before You Start:

This guideline is relatively short but dense with specific requirements. This is a rules-based rather than conceptual paper. That means:

  • Exact percentages matter - don't approximate
  • Definitions are critical - I don't think they will test you on this directly, but it is good to have a strong knowledge base
  • Policy requirements are as important as numerical limits

Estimated study time: a few hours

Key Concepts & Exam Focus

Section I: Purpose and Scope

Question: What entities does this guideline apply to? [Hint: P&C FRIs]
  • All federally regulated property and casualty insurers (P&C FRIs)
  • Applies to insurance companies (individual and consolidated basis)
  • Applies to individual foreign branches

This guideline addresses two main risk areas:

  • Large insurance exposures - losses from single large exposures and unregistered reinsurance counterparty failure
  • Investment concentration - concentration risk in investment portfolios

Section II: Large Insurance Exposures

Gross Underwriting Limit Policy (GUWP)

Question: What are the key requirements for a Gross Underwriting Limit Policy? [Hint: DEL]

The GUWP should:

Define what constitutes a Single Insurance Exposure by class
Establish limits by class for maximum gross insurance risk
Review by Senior Management at Least annually

Single Insurance Exposure by Class

MEMORIZE THIS: Single Insurance Exposure definitions by class [Hint: PCST]
Property: Aggregated exposures at a single location
Credit: Aggregated exposures to one buyer or group of connected buyers
Surety: Aggregated exposures to one contractor or group of connected contractors
Title: Aggregated exposures related to legal title for a single location

Insurance Exposure Limits

This is probably the most important section:

Net Retention + Largest Net Counterparty Unregistered Reinsurance Exposure ≤ Limit (described below)

For Insurance Companies:

  • 100% of Total Capital Available if control chain includes:
 - Widely held company, AND/OR
 - Regulated financial institution
  • 25% of Total Capital Available otherwise

For Foreign Branches:

  • 100% of Net Assets Available
Question: What are eligible Counterparty Risk Mitigation (CRM) techniques? [Hint: ELO]
Excess collateral
Letters of Credit
Other techniques deemed acceptable by OSFI

mini BattleQuiz 1 You must be logged in or this will not work.

Section III: Investment Concentration

Much simpler:

SIMPLE RULE: Investment concentration limit in any entity = 5% of Assets
  • Insurance Companies: 5% of company's Assets
  • Foreign Branches: 5% of company's Assets in Canada
Question: What should P&C FRIs consider beyond balance sheet investments?
  • Off-balance sheet items: options, futures, forward contracts
  • Unfunded portions of committed loans

Section IV: Guideline Administration

Question: What can OSFI do for non-compliance?
  • Heightened supervisory activity
  • Discretionary authority to adjust capital requirements
  • Other corrective measures on case-by-case basis

Core Definitions (Annex 1)

These definitions are imo the most important:

Definition: Net Retention
  • Amount of insurance exposure a P&C FRI retains for its own account
  • Does NOT pass on to another insurer/reinsurer
  • Include reinstatement premiums
Definition: Largest Net Counterparty Unregistered Reinsurance Exposure
  • Largest amount of ceded unregistered reinsurance from a reinsurance group
  • Measured on net basis (after CRM techniques)
Definition: Total Capital Available
  • For insurance companies: consolidated total available capital per MCT/MICAT calculation
Definition: Net Assets Available
  • For foreign branches: This is analogous to capital available
Definition: Investments (for concentration purposes)
  • Assets acquired for income or appreciation
  • EXCLUDES: loans to/guaranteed by Government of Canada, provinces, or OECD members

mini BattleQuiz 2 You must be logged in or this will not work.

Full BattleQuiz You must be logged in or this will not work.

Practice Questions

1. What percentage limits apply to investment concentration?
2. Under what conditions can an insurance company have 100% vs 25% exposure limits?
3. How is a Single Insurance Exposure defined for each class (PCST)?
4. What must be included in Net Retention calculations?
5. What are the three eligible CRM techniques?
6. How often must the GUWP be reviewed?

Practice Questions Answer Key

Question 1: What percentage limits apply to investment concentration?

Answer: 5% across the board
  • Insurance Companies: 5% of the company's Assets
  • Foreign Branches: 5% of the company's Assets in Canada

(This applies to aggregate market value of Investments in any one Entity or group of Affiliated Companies)

Question 2: Under what conditions can an insurance company have 100% vs 25% exposure limits?

100% of Total Capital Available when control chain includes:
  • Widely held company, AND/OR
  • Regulated financial institution
25% of Total Capital Available otherwise

(This refers to the limit for Net Retention + Largest Net Counterparty Unregistered Reinsurance Exposure)

Question 3: How is a Single Insurance Exposure defined for each class (PCST)?

Answer: PCST Classifications
Property: Aggregated insurance exposures at a single location
(including any exposures subject to the location)
Credit: Aggregated insurance exposures to any one single buyer or group of connected buyers
Surety: Aggregated insurance exposures to any one single contractor or group of connected contractors
Title: Aggregated insurance exposures related to the legal title for a single location

Question 4: What must be included in Net Retention calculations?

Answer: Net Retention Definition

Net Retention = The amount of insurance exposure which a P&C FRI retains net for its own account and does NOT pass on to another insurer (or reinsurer)

Must Include:

  • Any reinstatement premiums should be included in the Net Retention value

Key Point: This is the amount the FRI keeps for itself after all reinsurance arrangements.

Question 5: What are the three eligible CRM techniques?

Answer: ELO Techniques
Excess collateral
Letters of Credit
Other CRM techniques deemed acceptable by OSFI

(CRM = Counterparty Risk Mitigation techniques used to measure ceded unregistered reinsurance exposures on both gross and net basis)

Question 6: How often must the GUWP be reviewed?

Answer: Annually (at minimum)

Full Requirement: The Gross Underwriting Limit Policy (GUWP) should be reviewed by Senior Management of the P&C FRI, at a minimum, annually.

Quick Reference Summary

Question Type Key Answer Memory Aid
Investment Concentration 5% of Assets "5 floors in the building"
100% vs 25% Limits Widely held AND/OR regulated "100 widely-held people vs 25 others"
PCST Definitions Location/Buyer/Contractor/Title "PCST classes"
Net Retention Include reinstatement premiums "What you keep + reinstatements"
CRM Techniques Excess/Letters/Other "ELO techniques"
GUWP Review Annual minimum "Once per year minimum"

Key Formulas

Critical Formula: Net Retention + Largest Net Counterparty Unregistered Reinsurance Exposure ≤ Limit

Where Limit =

  • 100% of Total Capital Available (if widely held and/or regulated)
  • 25% of Total Capital Available (otherwise)
  • 100% of Net Assets Available (for foreign branches)
Bottom Line: These are specific regulatory limits that must be memorized exactly. Unlike conceptual readings, precision in numbers and definitions is critical for exam success!

Quick Reference Summary

Risk Type Key Limit Applies To
Large Insurance Exposures 100% or 25% of Total Capital Insurance Companies
Large Insurance Exposures 100% of Net Assets Available Foreign Branches
Investment Concentration 5% of Assets Both
GUWP Review Annual (minimum) All P&C FRIs

POP QUIZ ANSWERS

Availability, Permanence, Absence, Subordination

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