OSFI.TargCap

Reading: Regulatory Capital and Internal Capital Targets, Guideline A-4

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

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BA Quick-Summary: Target Capital This paper communicates OSFI's expectations regarding capital assessment of insurers. OSFI assesses the ONR (Overall Net Risk) of an insurer, then calculates corresponding capital requirements at various levels: minimum level supervisery level internal level higher than internallevel (It covers some of the same topics as OSFI.SupFrm.)

Pop Quiz

• From OSFI.SupFrm (Supervisory Framework), state 2 or 3 key principles of risk assessment.

BattleTable

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Fall #23)	identify AA error 1: - internal target too low	identify AA error 2: - didn't use ORSA	identify AA error 3: - not forward-looking	identify AA error 4: - used capital injection

In Plain English!

This is quite a good paper, and provides a broad outline of OSFI's risk assessment process. Questions from this paper appeared on 4 consecutive exams from 2012-2014, but nothing since then. Because of that, it's probably enough just to memorize the answers to past exam problems.

Or if you really want to save time, focus on the question that's been asked at least 4 times on: (2014.Fall #21b), (2014.Spring #21c), (2013.Fall #30b), (2012.Fall #29c)

Question: what is the required management action if Capital Available falls below the Internal Capital Target

Here is the answer:

If this happens (or is expected to happen within 2 yrs) notify OSFI and submit plan to restore capital to internal target level reasonably quickly.

This is all well and good, but you might now be wondering what in the world an Internal Capital Target is.

• First recall that there are 2 levels of regulatory capital: minimum, which is 100% x (base capital) and supervisory, which is 150% x (base capital).
• The Internal Target Capital is higher than either of these:
  • it is calculated using ORSA (Own Risk Solvency Assessment)
  • it includes risks specified in MCT capital guidelines, and all insurer-specific risks

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BattleCodes

• Memorize:
  • defn of Internal Capital Target
  • required action if Capital Available falls below Internal Capital Target

• Conceptual:
  • OSFI's risk assessment process surrounds the significant activities of an insurer.

• Calculational:
  • none

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POP QUIZ ANSWERS

• Pick 2 or 3 items frrm this list of the 7 key principles of risk assessment, according to OSFI.SupFrm.

- identify material risks
- should be forward-looking & allow for early intervention
- use sound predictive judgment
- understand risk drivers
- differentiate between inherent risks & management of those risks
- dynamic adjustment
- assess whole institution by calculation a CRR (Composite Risk Rating)