Interim Capital Requirements for Mortgage Insurance Companies

Advisory
Subject:
Interim Capital Requirements for Mortgage Insurance Companies
Category: Capital
Date:
I.
January 1, 2015
Introduction
This Advisory sets out the regulatory capital adequacy requirements for federally regulated
mortgage insurance companies and complements OSFI’s Guideline A, Minimum Capital Test for
Federally Regulated Property and Casualty Insurance Companies.
The requirements included in this Advisory are effective January 1, 2015 and apply on an interim
basis until the new regulatory capital framework for mortgage insurance companies is
implemented.
Any capital impact as a result of moving from the regulatory capital requirements in place prior
to January 1, 2015 to these interim capital requirements will be fully recognized in the first
reporting period of 2015, i.e., there will be no phase-in of the impact.
II.
Application of the Minimum Capital Test
Unless specified otherwise in this Advisory, mortgage insurance companies are subject to the
capital adequacy requirements set out in the Minimum Capital Test (MCT) Guideline for federally
regulated property and casualty insurance companies. The required adjustments to the MCT
Guideline for the interim capital framework for mortgage insurance companies are outlined in the
sections below. Similar to the capital requirements set out in the MCT Guideline, the capital
requirements determined in sections IV and V below are at the target level. These capital
requirements are subsequently divided by 1.5 to derive the minimum capital requirements.
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III.
Definition of Capital Available
A mortgage insurance company’s capital resources are determined based on the principles and
requirements set out in Chapter 2: Definition of Capital Available of the MCT Guideline, with
the following modification:
Mortgage insurance companies are required to exclude a portion of accumulated unrealized gains
and losses on available-for-sale debt securities from capital available for the purposes of
determining the MCT ratio. The portion of unrealized gains or losses to be excluded is equal to
the amount of accumulated unrealized gains and losses on available-for-sale debt securities, as
set out in accumulated other comprehensive income, multiplied by the ratio of total capital
surplus (capital available – minimum capital required) to total regulatory assets.
IV.
Insurance Risk
Mortgage insurance companies are required to determine capital requirements for insurance risk
using Appendix A of this Advisory as well as the guidance provided in this section.
For the purpose of determining the MCT ratio, the mortgage insurance margin and the additional
policy provisions determined in Appendix A must be multiplied by 1.25.
Unpaid claims and premium deficiencies are subject to risk factors of 20% and 10%, respectively.
V.
Operational Risk
Mortgage insurance companies are required to hold an explicit capital margin for operational
risk. This margin will be determined by applying a 20% risk factor to total capital required,
before the operational risk margin, rather than using the method described in Chapter 7:
Operational Risk of the MCT Guideline.
VI.
Diversification Credit
Chapter 8: Diversification Credit of the MCT Guideline does not apply to mortgage insurance
companies. Unlike the insurance risk faced by other property and casualty insurers, a mortgage
insurer’s insurance risk is directly dependent on credit risk. Therefore, the rationale for allowing
a diversification credit between asset risk (which includes credit risk) and insurance risk does not
hold for mortgage insurers.
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January 2015
Interim Capital Requirements
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Appendix A: Capital Required: Mortgage Insurance
This appendix currently applies only to federal insurers. It replaces all existing federal
memoranda on the subject of capital requirements for mortgage insurance policies on classes of
loans defined in Section 2 of this appendix.
1. Definitions
The following definitions apply to this appendix.
Commercial loan
Conventional loan
High-ratio loan
Home-ownership
loan
Industrial loan
Initial mortgage
amount
Multiple residential
loan
Variable payment
mortgage
a loan on a property used primarily for commercial purposes
a loan where the ratio of the initial mortgage amount to the lower of the
appraised value or sale price, as at the date of the loan, does not exceed 80%
a loan that is not a conventional loan
a loan on a residential property with 1 to 4 units (inclusive), without regard to
owner occupation
a loan on a property used primarily for industrial purposes
in respect of a mortgage that is not a first mortgage, means the total amount of
the outstanding balance of the first mortgage, and the amount of the other
mortgage at the date of commencement of risk under the policy
a loan on a property with more than 4 units used primarily for residential
purposes
a mortgage on which the payments to be made by the borrower increase in some
pre-determined manner and which OSFI has agreed may be included under this
definition
2. Classes of loans
The following classes of loans are hereby defined:
Type of Property
Home-ownership
Multiple residential
Commercial
Industrial
1st Mortgages
Conventional / High Ratio
HCI
MC1
CCl
IC1
HH1
MH1
CH1
IH1
2nd Mortgages
Conventional / High Ratio
HC2
MC2
CC2
IC2
HH2
Variable
Payment
Mortgage
HV1
Note that the first letter denotes the type of property. The second letter denotes the type of
mortgage. The suffix denotes the ranking of the mortgage.
3. Mortgage insurance margin
a) An insurer shall, in respect of its mortgage insurance business covered by this Appendix,
maintain a mortgage insurance margin as stipulated below, adjusted for:
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January 2015
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i) various classes of mortgages by factors prescribed in paragraph (b);
ii) various settlement options by factors prescribed in section 8; and
iii) the margin for commitments likely to result into policies in the following 60 days.
Completed Policy Duration
in Years
0
1
2
3
4
5
6
7
8
9
10
Mortgage Insurance Margin per $100
of Initial Mortgage Amount
Homeownership
Others
$0.616
$0.711
$0.694
$0.644
$0.496
$0.346
$0.194
$0.106
$0.051
$0.030
Nil
$1.10
$1.10
$1.07
$0.98
$0.87
$0.73
$0.54
$0.33
$0.10
Nil
Nil
The “Others” category consists of multiple residential, commercial and industrial loans.
b) The following adjustment factors will apply to the mortgage insurance margin for various
classes of mortgages:
Class
HC1
HH1
Factors
Homeownership conventional 1st mortgages
Maximum loan to value ratio up to 50%
Maximum loan to value ratio over 50% to 65%
Maximum loan to value ratio over 65% to 75%
Homeownership high ratio 1st mortgages
Maximum loan to value ratio over 75% to 80%
Maximum loan to value ratio over 80% to 85%
Maximum loan to value ratio over 85% to 90%
Maximum loan to value ratio over 90% to 95%
.04
.08
.10
.30
.60
.90
1.20
Maximum loan to value ratio over 95% to 100%, and
Average credit score greater than or equal to 700
Average credit score between 680 and 699
Average credit score between 660 and 679
Average credit score less than 660
Mortgage Insurance Companies
January 2015
1.35
1.40
1.45
1.75
Interim Capital Requirements
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MCI
MH1
MC2
CCI
CHI
CC2
ICI
IH1
IC2
Multiple residential conventional 1st mortgages
Multiple residential high ratio 1st mortgages
Multiple residential conventional 2nd mortgages
Commercial conventional 1st mortgages
Commercial high ratio 1st mortgages
Commercial conventional 2nd mortgages
Industrial conventional 1st mortgages
Industrial high ratio 1st mortgages
Industrial conventional 2nd mortgages
1.00
1.50
1.00
1.00
1.50
1.50
1.00
1.50
1.50
For homeownership second mortgages, the factor used should be 90% of the first
mortgage factor.
For homeownership variable payment mortgage, the factor used should be 110% of the
non-variable payment factor.
c) An insurer shall also maintain, a margin on the basis prescribed herein in respect of
commitments likely to result into policies in the following 60 days. As regards the
balance of commitments, the insurer will have to satisfy OSFI that capital would be
available at the time when policies are likely to be issued. Companies will be required to
justify the factors used in the calculations.
d) Notwithstanding anything to the contrary stated herein, the mortgage insurance margin
required pursuant to this section shall not be less than 0.15% of the initial mortgage
amount on the total business of the insurer.
4. Unearned premiums
a) An insurer shall maintain unearned premiums on the scales prescribed below, unless
OSFI is satisfied that there is sufficient historical loss emergence data to reliably identify
the loss emergence pattern. For business insured prior to January 1, 2009, the difference
between the two amounts, on an after-tax basis, is to be deducted from capital available.
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January 2015
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Unearned Premium Reserve as Per cent of Single Premium Policy Reserve in Years
Completed Policy
Duration in Years
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
5 or less
100.00%
75.00%
50.00%
25.00%
12.50%
0.00%
over 5 and
less than 10
100.00%
80.00%
60.00%
40.00%
20.00%
10.00%
5.00%
3.00%
2.00%
1.00%
0.00%
Mortgage Insurance Companies
January 2015
over 10 and
less than 15
100.00%
85.00%
65.00%
45.00%
30.00%
18.00%
10.00%
6.00%
4.00%
2.00%
1.50%
1.00%
0.50%
0.25%
0.125%
0.000%
over 15
up to 25
100.00%
88.00%
70.00%
52.00%
35.00%
23.00%
14.00%
8.00%
6.00%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.40%
0.35%
0.30%
0.25%
0.20%
0.15%
0.12%
0.09%
0.06%
0.03%
0.00%
over 25
up to 30
100.00%
88.50%
70.50%
52.50%
35.50%
23.50%
16.00%
12.00%
8.00%
5.00%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.45%
0.40%
0.35%
0.30%
0.25%
0.22%
0.19%
0.16%
0.13%
0.10%
0.08%
0.06%
0.04%
0.02%
0.00%
over 30
up to 40
100.00%
89.00%
71.00%
53.00%
36.00%
24.00%
16.50%
12.25%
8.25%
5.50%
3.50%
2.75%
2.10%
1.70%
1.30%
0.90%
0.70%
0.65%
0.50%
0.40%
0.35%
0.32%
0.29%
0.26%
0.23%
0.20%
0.18%
0.16%
0.14%
0.12%
0.10%
0.09%
0.08%
0.07%
0.06%
0.05%
0.04%
0.03%
0.02%
0.01%
0.00%
Interim Capital Requirements
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b) Renewable policies, other than for homeownership, subject to the first premium not less
than 1.25% (1% for conventional loans) of the initial sum insured and a renewal premium
of not less than 0.25% of the sum insured issued for an initial term (or a renewal term)
not exceeding 5 years:
i) The unearned premiums shall be maintained in accordance with the scale for
policies over 5 and less than 10 years in (a) above; and
ii) The unearned premiums in respect of any renewal premium shall be calculated
pro-rata over the greater of the following periods:
a.
the renewal period; and
b.
three years.
5. Additional policy provisions
An insurer shall maintain additional policy provisions as follows:
Completed Policy
Duration in Years
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Additional Policy Reserve as Per Cent of Single Premium
Original Term of the Policy
Over 5 to
Over 10 to
Over 15 to
Up to 5 yrs
10 yrs
15 yrs
40 yrs
2.0
3.0
4.0
4.0
1.0
2.0
4.0
4.0
0.5
1.0
3.5
4.0
1.0
3.0
5.5
0.5
3.0
6.0
0.5
2.0
5.0
0.0
1.0
3.5
1.0
2.0
1.0
1.5
1.0
1.5
0.0
1.0
1.0
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.0
0.0
0.0
0.0
0.0
0.0
Note: For the purposes of this paragraph, the term of a policy for term 10 to 15 years described
in paragraph 4(b) shall be treated as 10 years.
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January 2015
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These factors are derived based on the assumption that the premium rates charged are adequate.
Should these rates change over time, additional policy provisions factors will have to be
readjusted. OSFI should be advised whenever an insurer is making a material change to its rates
charged.
6. Other policy durations
Factors for Calculating Requirements of:
a) mortgage insurance margin;
b) Unearned Premiums; and
c) Additional Policy Provisions
at policy durations other than those specified in this Appendix shall be obtained by simple
interpolation.
7. Premium deficiency
An insurer shall maintain a premium deficiency calculated as set out below for the different
grouping of policies.
The premium deficiency in respect of a grouping of policies shall be the excess, if any, of:
a) the sum of the future claims and adjustment expenses, future servicing expenses and
reinsurance costs;
over
b) the unearned premiums.
8. Optional settlement clause
a) The mortgage insurance margin required (as specified in section 3) will be adjusted for
the settlement option specified in the mortgage insurance policy by the following
proportion.
Mortgage Loan to
Original Value
0 to 80%
0 to 85%
0 to 90%
0 to 95%
0 to 50%
1
Settlement
Option 1
10%
15%
20%
25%
100%
Factor Applicable to the Mortgage
Insurance Margin
73%
80%
84%
100%
100%
Settlement option - the percentage refers to the maximum claim measured as a percentage of the original loan
amount. For example, a 25% settlement option on a $200,000 mortgage means that the insurer is liable for up to
the first $50,000 of the lender’s loss.
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January 2015
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Mortgage Loan to
Original Value
Over 50% to 65%
Over 65% to 75%
Over 75% to 80%
Over 80% to 85%
Over 85% to 90%
Over 90% to 95%
Over 95% to 100%
Settlement
Option 1
100%
100%
100%
100%
100%
100%
100%
Factor Applicable to the Mortgage
Insurance Margin
100%
100%
105%
110%
115%
140%
150%
b) An insurer may in respect of homeownership loans issue policies with 100% coverage,
subject to the following conditions:
i) The insurer shall include in all such policies a clause giving the insurer the option to
pay claims on a deficiency basis without being required to settle the claim on the
basis of the insurer taking over title to the mortgaged property; and
ii) At any time when the real estate holdings of an insurer exceed 25% of its total
invested assets, the insurer shall settle claims on such policies only on a deficiency
basis, unless the insurer has received written permission from OSFI permitting it to
settle such claims on the basis of taking over title to the mortgaged property.
c) For the purpose of this section invested assets will include those that are required to be
reported in the Annual Return, plus any other items that may be approved by OSFI.
d) For proportional coverage 2, the factor used to adjust the mortgage insurance margin is
obtained by multiplying the proportional coverage percentage by the applicable factor
from the above table for a 100% settlement option. For example, a factor of 55% (50%
times 110%) would apply for proportional coverage on a mortgage with an original loan
to value ratio of 85%.
9. Date of recognition of claim
Provision for losses in respect of mortgages in default will be made on the earlier of:
a) the date of the first missed payment by the mortgagee; and
b) the date when the claim is submitted to the insurer.
10. Policies under which premium credits for existing policies are given
For the purposes of this appendix, the unearned premiums and additional policy provisions shall
be maintained based on the premium ignoring credits, if any, allowed for an existing policy.
2
Proportional coverage option - refers to the percentage of a lender’s loss that is payable by the insurer. For
example, with a 50% proportional coverage option, the insurer is liable for 50% of the lender’s loss.
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