Minimum Capital Test for General Insurance Companies and Branches operating in Jamaica Presented by: Angela Beckford Chief Actuary December 3, 2010
Agenda 1. Reasons for change to Jamaican MCT 2. Proposed structure of test i. Capital Available ii. Capital Required 3. Proposed Requirements 4. Consultation
Main reasons for change Minimum Asset Test = Adjusted Assets/ Adjusted Liabilities Minimum Capital Test = Capital Available/ Capital Required Wind-up view It is not risk-based. Different from approaches used in supervision of other financial institutions As a Going Concern It is risk-based Consistent with approaches used in supervision of other financial institutions
CAPITAL AVAILABLE (CA) Not split between Tier 1 and Tier 2 capital CA general insurer = Equity less deductions Equity e.g. share capital, RE and reserves, capital available of Regulated Financial Institution Subsidiaries Redeemable Preference shares are not to be included in CA CA Branch = Assets in Jamaica minus Liabilities, deferred taxes and deductions
CAPITAL REQUIRED Capital for assets Margins for unearned premiums, premium deficiencies and unpaid claims Capital required for Regulated Financial Institutions Subsidiaries Margin for Catastrophes Margin for foreign exchange risk
CAPITAL FOR ASSETS 1. Risk Factors higher the risk, the higher the factor 2. Counterparty Grades Government, Bank, Investment and Not-Investment 3. Repo and COPs factor variable
CAPITAL FOR ASSETS CONT D 4. Accounts Receivables aged, factors increase with time 5. Reinsurance Recoverable like accounts receivable but time periods longer and factors lower
MARGIN FOR UNEARNED PREMIUMS, PREMIUM DEFICIENCIES AND UNPAID CLAIMS Unearned Premiums 15% accident and sickness, 10% all other lines Premium Deficiencies 10% Unpaid Claims 7.5% property, 12.5% motor vehicle, 15% accident and sickness, 20% all other lines
MARGIN FOR CATASTROPHES Default Method and Model Generated Method Insurers can chose which one to use If chose the Model-Generated Method but cannot move back to Default Method
MODEL GENERATED METHOD Margin = Greater of (a) PML 250, Windstorm less Reinsurance Collectable and (b) PML 250-500, Earthquake less Reinsurance Collectable Less Reinsurance Allowance PML 250 = Probable Maximum Loss from catastrophe with a return period of 250 years or 1/250%, 0.4% probability of occurring PML 250-500 = PML 250 increasing to PML 500 over 5 years
MODEL GENERATED METHOD SIMPLIFIED Margin = Loss from catastrophe (from model) less Amount can collect from re-insurers less Retention Allowance
DEFAULT METHOD Sum of Per Event Retention for all lines exposed to catastrophe losses, and Cost of one re-instatement of reinsurance cover in cases where the reinstatement reinsurance cover has not been pre-paid by the insurer Per Event Retention = (Default Percentage for line * Aggregates) less Reinsurance Collectable
DEFAULT METHOD SIMPLIFIED Margin = Loss from catastrophe (default percentage * sums insured) less Amount can collect from re-insurers
MARGIN FOR FOREIGN EXCHANGE RISK For currency mismatch 5% of the net assets or liabilities denominated in foreign currency, converted to Jamaican dollars.
SUMMARY MINIMUM CAPITAL TEST (MCT) RATIO CALCULATIONS SUMMARY PAGE Capital (J$'000) Capital Required for: Assets 1 Policy Liabilities 2 Subsidiaries - Regulated Financial Institution (subject to FSC approval) 3 Catastrophes - Default Method or Model-Generated Method 4 Foreign Exchange Risk 5 Other (specify) 6 Total Capital Required sum of 1 to 6 Total Capital Available A B MCT Ratio (B/A)x100
PROPOSED REQUIREMENTS Minimum Capital Requirement 200% increasing each year for the next 3 years to 250% Must always be achieved If company believes it will fail the test it must notify the FSC immediately and send a plan of action to achieve the additional capital required File annually in December
REQUIREMENTS cont d Appointed Actuary in report, must Confirm whether the MCT was calculated correctly State if the company has sufficient capital available to meet the solvency standards of the FSC
Consultation Extensive Meetings with individual companies and the industry association (IAJ) all members and task force Regular and Adhoc Formal and Informal Letters, Email, Website
Jamaican Minimum Capital Test Thank you for your attention. QUESTIONS?