The Financial Services Commission of Ontario has issued a guideline outlining minimum capital requirements for property and casualty insurers.

The Insurance Act requires P&C insurance companies to maintain adequate capital. The guideline sets out the minimum and supervisory target capital standards, and provides the framework within which the Superintendent assesses whether a P&C insurance company maintains adequate capital.

This guideline outlines the capital framework, using a risk-based formula for minimum capital required, and defines the capital that is available to meet the minimum standard. The financial information used in calculations under this guideline should be determined in accordance with Canadian GAAP, except when otherwise required under the guideline.

In 2002, the Minimum Capital Test (MCT) applied to P&C insurance companies on a trial basis and in parallel with the then existing P&C solvency tests. Now, FSCO says that P&C insurance companies will be required to file the MCT on a compliance basis effective with the 2004 annual return due by February 28, 2005.

Federally incorporated P&C insurance companies will only be required to file the MCT with the Office of the Superintendent of Financial Institutions. OSFI will share the filing with FSCO.

FSCO says it expects each institution to establish a target capital level that provides a cushion above minimum requirements, both to cope with volatility in markets and economic conditions, innovations in the industry, consolidation trends and international developments, and to provide for risks not explicitly addressed in the calculation of policy liabilities or the MCT. Such risks include systems, data, strategic, management, fraud, legal and other operational and business risks.

FSCO and OSFI expect each institution to establish a target capital level, and maintain ongoing capital, at no less than the supervisory target of 150% MCT. Although FSCO allows that it may, on a case-by-case basis, establish in consultation with an institution an alternative supervisory target level based upon that individual institution’s risk profile.