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Minimum Capital Test

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Assets focused (cover cost of liquidation) not Capital focused (absorb ... used in supervision of other financial sectors e.g. banking and life insurance ... – PowerPoint PPT presentation

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Title: Minimum Capital Test


1
Minimum Capital Test
  • INSURANCE SEMINAR
  • Capital and Risk Management
  • Hilton, Kingston
  • March 30, 2006

Angela Beckford Chief Actuary Financial Services
Commission
2
Minimum Asset Test (MAT)
  • The Insurance Regulations, 2001, Section 28
  • Available Assets/Required Assets
  • As at 2005, Minimum Percentage 110

3
MAT - Assets Available
  • Total Assets less adjustment for non-admitted
    assets
  • Non-admitted assets include
  • Receivables in arrears
  • Furniture and fixtures
  • Computer hardware and equipment

4
MAT Required Assets
  • Required Assets
  • total liabilities
  • reserves for reinsurance ceded to
    unlicensed/ineligible reinsurers
  • margin for unearned premiums and claims (accident
    and sickness policies)
  • greatest of
  • Margin for unearned premiums and claims reserves
    (other than sickness and accident),
  • Margin for premiums written, and
  • Margin for incurred claims

5
MAT
  • Excess of Assets test
  • Assets owned adjusted for availability to pay
    claims in a run off situation exceeds required
    assets (liabilities margins)

Assets
Liabilities
Capital
6
Main Weaknesses of MAT
  • Assets focused (cover cost of liquidation) not
    Capital focused (absorb unforeseen losses
    cushion to safeguard policyholders)
  • Does not relate capital required to the risks
    assumed
  • Investment risk not addressed
  • Does not distinguish between the short term (e.g.
    property) claims and longer term (e.g. liability)
    claims
  • Inconsistent with approaches used in supervision
    of other financial sectors e.g. banking and
    life insurance

7
Minimum Capital Test (MCT)
  • Capital Available/Capital Required

Assets
Liabilities
Capital
8
Minimum Capital Test
  MINIMUM CAPITAL TEST
  Capital Available
01 Equity
03 Subordinated Indebtedness Preference Shares
05 Investments - Adjustment to Market
07 Less Assets with a Capital Requirement of 100
09 Total Capital Available
  Capital Required
20 On Balance Sheet Assets
22 Unearned Premiums/Unpaid Claims
24 Catastrophe Margins
26 Foreign Exchange Exposure
29 Total Capital Required
90 Line 09 as a of line 29
9
Capital Available
  • Includes equity, subordinated indebtedness,
    preference shares
  • Core and supplementary treated the same
  • Adjustments Excess of market over book and
    assets with 100 capital requirement

Core
Supplementary capital
Best
Good/Acceptable
10
Capital Required
  • Capital for Assets reported on Balance Sheet
  • Covers the potential losses resulting from asset
    default
  • Factor value of asset
  • Factor reflects the assets inherent riskiness to
    general insurance business

11
Capital Required
  • Off-Balance Sheet Exposures
  • E.g. Structured settlements, letters of credit,
    derivatives
  • (Value of instrument collateral or guarantee)
  • credit conversion factor
  • factor reflecting risk of default of
    counterparty

12
Capital Required
Asset Value Factor Capital Required
Cash 100 0.00 0
Term Deposit, Bonds, Debentures
One year or less (I/G) More than one year (I/G) 100 100 2.00 4.00 2 4
Commercial mortgage 100 8.00 8
Preference Shares (I/G) 100 10.00 10
Ordinary shares 100 15.00 15
13
Capital Required
  • Margins for Unearned Premiums and Unpaid Claims
  • Covers potential losses due to possible abnormal
    negative variation in amount calculated by the
    actuaries
  • Note Margins added by actuaries are mainly
    intended to cover expected variations
  • Factor per type of business measure of exposure
  • Reflects an insurers risk profile

14
Capital Required
Exposure Factor Capital Required
Unearned Premium
Property 100 10.00 10
Liability 100 10.00 10
Unpaid Claims
Property 100 6.25 6.25
Liability 100 18.75 18.75
15
Capital Required
  • Catastrophe Margin
  • Cover the risks associated with catastrophes e.g.
    earthquake, hurricanes
  • Approaches being investigated
  • fn of Probable Maximum Loss (PML) for an event
    return period of 250 or 500 years
  • of aggregates
  • of net premiums

16
Capital Required
  • Foreign Exchange Risk Component
  • Allows for the depreciation of assets denominated
    in foreign currency when that currency declines
    in value against the Jamaican dollar or for the
    appreciation of liabilities denominated in
    foreign currency when that currency increases in
    value against the Jamaican dollar
  • Absolute value of assets less liabilities
    exchange rate
  • If assets and liabilities denominated in foreign
    currency are equal then no additional capital is
    required

17
Next Step - Consultation
  • Discussion Paper on MCT which will be circulated
    to industry for comment

18
Minimum Capital Test
  • Thank you.
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