To: Chief Executive Officers Property and Casualty Insurers Licensed in Ontario (insurers)
Re: Minimum Capital Test

The Minimum Capital Test (MCT) will come into effect as the sole mandatory solvency test for insurers in the fourth quarter of 2004. You have been filing the MCT calculation since 2000.

A new regulation, Ontario Regulation 259/04, introduces the MCT by reference to a Superintendent's Guideline. As of October 1, 2004, all insurers other than life insurers, fraternal societies, reciprocal insurance exchanges and mutual insurance corporations that are members of the Fire Mutuals Guarantee Fund must meet the capital requirements of the "Minimum Capital Test Guideline for Property and Casualty Insurance Companies, Superintendent's Guideline No. 08/04". The current Minimum Asset Test (MAT) will be repealed at that time.

The Superintendent's 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. FSCO expects each insurer to establish a target capital level, and maintain ongoing capital, at no less than the supervisory target of 150% MCT. This expectation is similar to the Office of the Superintendent of Financial Institutions (OSFI)'s. FSCO expects that each insurer will establish a target capital level that provides an excess above minimum requirements, in order to cope with volatility in markets and economic conditions, innovations in the industry, consolidation trends and international developments, as well as to provide for risks not explicitly addressed in the calculation of policy liabilities or the MCT. Also, FSCO may, on a case-by-case basis, establish in consultation with an insurer an alternative supervisory target level based upon that individual insurer's risk profile.

Property and casualty insurers licensed in Ontario will be required to file the MCT with their 2004 Annual Returns. The MCT is applicable to all insurers licensed in Ontario with the exception of those insurers noted above. The federally regulated P&C insurers filing the MCT with the Office of the Superintendent of Financial Institutions (OSFI) are not required to file with FSCO. The P&C insurers incorporated in other provinces but licensed in Ontario are required to file the MCT with FSCO. FSCO will work with other provincial regulators toward streamlining filing requirements when the MCT has been adopted by the other jurisdictions. The reciprocals and mutual insurers are exempt from complying with the MCT because they have either a subscribers' agreement (reciprocals) or membership in the Fire Mutuals Guarantee Fund (mutuals) to provide support for their capital. Although the reciprocals and mutuals are exempt from meeting the test, they are still required to file the test as it provides an evaluation of these companies on a basis comparable to other insurers.

For your convenience, a copy of the Superintendent Guideline No. 08/04 and Ontario Regulation 259/04 are attached.

If you have any questions regarding this matter, please contact Anita Sastri, Senior Manager B Market Conduct Compliance, at (416) 590-7245 or asastri@fsco.gov.on.ca
Yours truly,


Chief Executive Officer and
Superintendent of Financial Services

Attachments:

• Minimum Capital Test Guideline for Property and Casualty Insurance Companies (PDF)
• Worksheet - Capital Required: Accident and Sickness Business (Excel)
• Minimum Capital Test Worksheet (Excel)