OSFI Framework

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OSFI Framework
2014-04-12 13:35:55
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  1. Summary of recommendations
    • encourage good risk management and capital planning
    • measure assets, liabilities and capital consistently, reflecting risk on going concern basis using comparable risk measures (VaR, CTE)
    • use TAR approach to ensure prudent capital
    • consider international principles, be transparent and use reliable processes
  2. encourage good risk management
    • internal model approaches should recognize companies that manage risk properly
    • models used for required capital calculations should also be used internally
    • same internal model should be used for all risks (no cherry picking)
  3. encourage capital planning
    • avoid pro-cyclicality
    • create high quality capital buffers
    • minimize pro-cyclicality; micro-prudential impact should be considered
  4. create sufficient capital in P&C industry to encourage systemic stability
    • consider all risks: insurance, market, credit, liquidity, operational
    • reflect risk mitigants, reinsurance, interrelationship and diversificationrisks should be aggregated
    • no diversification until evidence confirm it holds in stress
  5. determine assets, liabilities and capital requirement on a consistent basis
    • be practical, yet technically sound
    • there should be a standard approach to every risk
    • framework should have two components:
    •    standard approach
    •    internal models
  6. reflect existing risks on going concern basis and consider winding-up and restructuring
    • reg capital should allow institutions to absorb losses and protect policyholders
    • risks should not be double-counted
    • existing risks include all current commitments, whether on- or off-balance sheet
    • future new business and renewals have to be considered
  7. use measures that are comparable across risks and products (VaR, CTE)
    • risk measure should be based on statistically credible data
    • risk measure should establish a time horizon common to all institutions
    • company should hold capital above target because of economic cycles, desired ratings and differences in risk management
  8. use a total asset requirement (TAR) approach
    • current capital level and reserve margins should be considered on integrated basis
    • measurement process should be comprehensive
    • expected TAR losses should include margins for misestimation and deterioration
  9. ensure that capital is prudent
    • meaning and methodology for regulatory capital should be transparent
    • regulatory capital covers unexpected losses in stress conditions
    • although using TAR approach, capital is independently set at prudent level
  10. consider international principles and best practices
    • should be adapted to reflect the market, risks and products of Canadian companies
    • capital requirement should be risk-based
  11. allow comparison of similar risks across financial institutions
    • comparable to banks, life insurers
    • still recognize differences in nature of business and operating environment
  12. be transparent, validated and based on credible data
    • model and inputs must be disclosed in sufficient details
    • credible data can be audited
    • professional standards (both current and future) should be considered
  13. use reliable processes with assumptions sustainable in times of stress
    • rules for using models should be clear
    • review process should be implemented
    • results of models should be replicable
    • be part of intervention levels for supervisory action