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OSFI's risk assessment process
- evaluate inherent risk within each significant activity of the insurer
- evaluate quality of risk management applied to mitigate those risks
- determine the level and direction of the net risk of each activity
- combine risks to arrive at the Overall Net Risk
- develop a composite risk rating (and direction) for the insurer, taking into account both the assessment of the overall net risk and its assessment of capital, earnings, liquidity
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Other assessment criteria
- quality of capital
- adequacy of capital to support risk profile and business plan
- sustainability of earnings
- ability to access capital at reasonable rates to meet projected needs
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Regulatory capital ratios
- minimum capital ratio: level necessary to cover risks specified in capital tests
- supervisory target capital ratio: provide a margin for other types of risks not included in the test; provides for an early intervention approach
- internal target capital ratio: consider own risk appetite and risk profile; should be above supervisory target to provide adequate time for management to resolve problems
- MCT/BAAT uses 100% for minimum, 150% for supervisory target
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Establishing an internal target capital ratio
- take into account current and forecasted business environments
- adjusted when appropriate to ensure capital adequacy under stress scenarios
- consider results of DCAT
- BoD has ultimate responsibility for overall risk management program
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Establishing capital management policy includes
- an internal target
- documented policies and procedures to identify, measure and report material risks
- clearly defined roles and responsibilities for design and execution of relevant policies
- process to measure capital needs relative to current and anticipated future levels of risk
- policy stating capital adequacy goals relative to risk
- set of internal controls, reviews and audits to ensure integrity of overall risk
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