The Office of the Superintendent of Financial Institutions has published a revised capital guideline for property and casualty insurers.

On Thursday, OSFI published a revised draft of the Minimum Capital Test Guideline, which will take effect on January 1, 2011. The revised guideline incorporates comments received on a version of the guideline published earlier this year. The guideline includes a new minimum gross capital level, an audit requirement for the MCT, and it clarifies the treatment of loans to/investments in associates.

OSFI says that the new minimum gross capital level acts as a capital floor and requires insurers to maintain a 25% minimum amount of capital on unearned premiums, unpaid claims and adjustment expenses and premium deficiencies.

“The capital floor regarding the minimum gross capital level is to encourage insurers to make prudent underwriting and pricing decisions by forcing them to maintain capital that would otherwise not be required because of excessive cessions,” it says.

Additionally, it says that as these capital tests will have greater risk sensitivity and require more detailed calculations, OSFI has decided to require an annual audit of them.

The regulator is now seeking industry comments on the revised draft by November 30.

IE