Advisory. Category: Capital

Transcription

1 Advsory Category: Captal NOTICE* Subject: Alternatve Method for Insurance Companes that Determne the Segregated Fund Guarantee Captal Requrement Usng Prescrbed Factors Date: Ths Advsory descrbes an alternatve factor-based method that may be used to determne the segregated fund guarantee captal requrement for lfe nsurance companes. Ths method s avalable to lfe nsurance companes who currently determne the segregated fund guarantee captal requrement usng the factors prescrbed by OSFI. Ths Advsory complements the followng OSFI gudance: Gudelne A: Insurance Captal Adequacy Test (LICAT) Background Sectons 7. through 7.8 of the LICAT descrbe the method for determnng the segregated fund guarantee captal requrement for companes usng prescrbed factors. On October 28, 2008, OSFI announced changes to the segregated fund guarantee captal requrements for companes usng an approved captal model. These changes provde companes wth an approved captal model the opton of usng an alternatve method to determne the segregated fund guarantee captal requrement effectve year-end Ths Advsory descrbes an alternatve factor-based method ( Alternatve Factor-Based Method ) that s broadly consstent wth the prevously announced alternatve method for companes wth an approved nternal model. Subject to the condtons outlned n ths Advsory, companes that currently determne the segregated fund guarantee captal requrement usng the factors prescrbed by OSFI may elect to use the Alternatve Factor-Based Method effectve yearend Albert Street Ottawa, Canada K1A 0H2

2 Descrpton of the Alternatve Factor-Based Method Calculaton of Total Requrement and Requred Captal for Year-end 2008: Under the Alternatve Factor-Based Method, the total requrement for year-end 2008 s determned n the followng way. Segregated fund guarantee contracts are parttoned nto three groups based on tme-to-maturty and annutant age characterstcs as of year-end: Defnng Characterstcs 1 Contracts wth tme to maturty less than or equal to 1 year or annutant age greater than or equal to 85 2 Contracts wth tme to maturty greater than 1 year and annutant age less than 85 but not ncludng contracts wth tme to maturty greater than 5 years and annutant age less than 80 years Contracts wth tme to maturty greater than 5 years and annutant age less than 80 years Contract-specfc total requrements are then calculated accordng to the followng rules: Total Requrement 1 CTE(95) + 50% (CTE(95) CTE(80)) 2 CTE(95) CTE(95) 25% (CTE(95) CTE(80)) In ths table, CTE(95) refers to the contract-specfc total gross calculated requrement (TGCR) determned usng the exstng method and OSFI software tool referred to n chapter 7 of the LICAT and CTE(80) refers to the contract-specfc actuaral lablty calculated usng the same OSFI software tool. The total requrement for the portfolo s the sum of the contract-specfc total requrements calculated n accordance wth the descrbed method. Segregated fund guarantee requred captal s then determned as 125% of the dfference between the total requrement for the portfolo and the segregated fund guarantee lablty for the portfolo. In ths context, the segregated fund guarantee lablty s the lablty reported by the company on ts fnancal statements, whch s determned n accordance wth actuaral Standards of Practce. Requrement for Insurance Companes Usng Prescrbed Factors Page 2 of 5

3 Calculaton of Requred Captal n Subsequent Quarters: In subsequent quarters, requred captal s determned usng the steps that follow. Step #1: Partton of contracts nto three groups Segregated fund guarantee contracts are parttoned nto three groups based on tme-to-maturty and annutant age characterstcs as of that quarter-end: Defnng Characterstcs 1 Contracts wth tme to maturty less than or equal to 1 year or annutant age greater than or equal to 85 2 Contracts wth tme to maturty greater than 1 year and annutant age less than 85 not ncludng contracts wth tme to maturty greater than 5 years and annutant age less than 80 years Contracts wth tme to maturty greater than 5 years and annutant age less than 80 years Step #2: Allocaton of the segregated fund guarantee lablty to the three groups The segregated fund guarantee lablty for the portfolo as whole, whch s determned n accordance wth actuaral practce standards, s allocated to the three groups based on the CTE(80) requrements determned by the OSFI software tool. In partcular, f L represents the segregated fund guarantee lablty for the portfolo as a whole determned n accordance wth actuaral practce standards, R represents the sum of the CTE(80) requrements for contracts n group determned by the OSFI software tool and L s postve then the lablty allocated to group s where L L max( R,0). max( R,0) max( R,0) max(,0) 1 2 R If L 0 then the lablty allocated to each group s 0. Step #: Calculaton of requred captal for contracts n group 1 Requred captal for contracts n group 1 s determned as 125% of the dfference between the total requrement for contracts n group 1 and L 1, the lablty allocated to group 1. The total requrement for contracts n group 1 s the sum of the contract-specfc total requrements for group 1. The contract-specfc total requrements for group 1 are determned as CTE(95) + 50% (CTE(95) CTE(80)), where the CTE(80) and CTE(95) values are calculated usng the OSFI software tool. Requrement for Insurance Companes Usng Prescrbed Factors Page of 5

4 Step #4: Calculaton of requred captal for contracts n group 2 Requred captal for contracts n group 2 s determned as 125% of the dfference between the total requrement for contracts n group 2 and L 2, the lablty allocated to group 2. The total requrement for contracts n group 2 s the sum of the contract-specfc total requrements for group 2. The contract-specfc total requrements for group 2 are determned as CTE(95), where the CTE(95) values are calculated usng the OSFI software tool. Step #5: Calculaton of requred captal for contracts n group Requred captal for contracts n group s determned as the sum of: 95% of the prevous quarter-end requred captal amount for contracts classfed as group as of at the prevous quarter-end, and 5% of 125% of the excess of the current quarter CTE(95) amounts for group over L subject to a floor of 1.25 [CTE(95) 25% (CTE(95) CTE(80)) L ], and a cap of 1.25 [CTE(95) L ]. Here CTE(80) and CTE(95) represent respectvely the sums of the current quarter CTE(80) and CTE(95) amounts for group determned usng the OSFI software tool. Step #6: Requred captal for the portfolo as a whole Requred captal for the portfolo as a whole s the sum of the requred captal amounts determned n Steps, 4 and 5. Addtonal Informaton The Alternatve Factor-Based Method s optonal. However, companes electng to use the Alternatve Factor-Based Method n a partcular quarter must contnue to use the method n all subsequent quarters. Companes wshng to use the Alternatve Factor-Based Method must begn dong so no later than the frst quarter of Companes mplementng the Alternatve Factor-Based Method after year-end 2008 should determne requred captal as f the method had been adopted for year-end Companes mplementng the Alternatve Factor-Based Method after year-end 2008 should contact OSFI for further nformaton on ths. Companes ntendng to use the Alternatve Factor-Based Method must notfy ther Relatonshp Manager of ther ntent to do so and report the mpact of the change at the tme the Alternatve Factor-Based Method s mplemented. Requrement for Insurance Companes Usng Prescrbed Factors Page 4 of 5

5 Companes usng the Alternatve Factor-Based Method must dsclose ths n the Apponted Actuary s Report and provde nformaton on the requred captal amounts accordng to the defned tme-to-maturty and annutant age groups. Companes usng the Alternatve Factor-Based Method are expected to perform on annual bass, or more frequently as necessary, forward projectons of captal requrements, partcularly when the tme-to-maturty and annutant age profles of the company s contracts are such that a large number of contracts are expected to mgrate from one of the defned groups to another. The Alternatve Factor-Based Method may only be elected by companes that currently determne the segregated fund guarantee captal requrement usng prescrbed factors. Companes that determne the segregated fund guarantee captal requrement usng an approved captal model may elect to use the alternatve method descrbed n the Advsory: Supplementary Informaton for Insurance Companes that Determne Segregated Fund Guarantee Captal Requrements Usng an Approved Model Revsed Verson dated Aprl * Advsores descrbe how OSFI admnsters and nterprets provsons of exstng legslaton, regulatons or gudelnes, or provde OSFI s poston regardng certan polcy ssues. Advsores are not law; readers should refer to the relevant provsons of the legslaton, regulaton or gudelne, ncludng any amendments that came nto effect subsequent to the Advsory s publcaton, when consderng the relevancy of the Advsory. Requrement for Insurance Companes Usng Prescrbed Factors Page 5 of 5