The Canadian property and casualty insurance industry has collectively added about $300 million in capital, and allocated a greater share of capital to market and operational risk, under the industry’s new capital rules, according to an analysis published Monday by the Office of the Superintendent of Financial Institutions (OSFI).
The impact of the new minimum capital test (MCT) guidelines for P&C insurers is detailed in an industry letter published by OSFI.
The guidelines, which took effect on Jan. 1, aim to generate more robust risk-based capital requirements that better align capital allocations with industry risks.
First quarter data “indicates that industry-wide capital impact results are largely in line with expectations,” OSFI reports. Under the new framework, aggregate industry capital has risen from $32.3 billion under the old capital regime to $32.6 billion under the new framework, which represents about a 1% increase. At the same time, margin required is down about 2%, and the industry’s overall MCT ratio has increased by about 8.6 percentage points.
Overall, the industry’s capital ratio has improved, although OSFI notes that the results vary by company, given that each firm has a unique risk profile. “Reported data indicates that the P&C industry is well positioned to meet the new capital requirements,” OSFI concludes.
As well, under the new regime, insurance risk now represents about 58% of the industry’s capital requirements, down from 68% under the old regime, OSFI reports, and market risk now accounts for 27.2%, up from 18.5%. Credit risk is down to 9.5% from 13.3%, OSFI adds, and operational risk, which wasn’t part of the previous regime, now represents 15.5% of required capital.
Firms are now also receiving a credit for diversification under the new regime, which represents a 10% reduction in capital requirements overall. However, the addition of the operational risk component and the diversification credit distort these comparisons to some degree, OSFI notes.