Premium Allocation Approach (PAA)

Important Update for Property and Casualty Insurers in Canada: OSFI Clarifies Minimum Capital Test Calculations

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Capital Test Calculations

The Situation:

The Office of the Superintendent of Financial Institutions (OSFI) recently released adjustments and clarifications to the 2024 Minimum Capital Test (MCT) for property and casualty insurers in Canada. These changes, effective January 1, 2024, affect the way insurers calculate capital requirements related to unexpired coverage for reinsurance contracts held.

What Changed?

The focus of the adjustments is on how unexpired coverage for reinsurance contracts is factored into the MCT calculations. There are two main updates:

  1. General Measurement Method (GMM): The calculation now excludes premium and reinsurance commission cash flows that are already due when estimating future cash flows for reinsurance contracts held. Essentially, OSFI clarifies that only future cash flows are considered.
  2. Premium Allocation Approach (PAA): Similar to the GMM, the PAA calculation clarifies that “expected premiums payable” and “associated reinsurance commissions receivable” refer only to those amounts not yet due. Payments already due are not factored in.

The Impact:

These changes may lead to either increases or decreases in the capital requirements for some insurers, depending on their specific reinsurance arrangements and calculation methods.

What You Should Do:

Federally regulated property and casualty insurers in Canada are strongly advised to:

  • Review the Amendments: Carefully analyze the details of the OSFI adjustments to understand the potential impact on your company’s capital requirements.
  • Consult with an Actuary: Discuss the changes with your appointed actuary to determine how they affect your specific calculations and ensure compliance with the updated MCT.

Dentons Canada Can Help:

Dentons Canada’s Corporate and Regulatory Insurance Group is here to assist you. We can answer your questions about the revised MCT and provide guidance on applying these changes to your company’s capital requirements.

Don’t wait! Get in touch with Dentons Canada today to ensure a smooth transition under the updated Minimum Capital Test.