The Financial Services Commission, New Kingston. - File

The Financial Services Commission (FSC) is in the process of switching the methodology used to measure solvency levels of general insurance companies - from the minimum asset test (MAT) to a more risk-based approach, the minimum capital test (MCT).

"The minimum capital test is a superior measure of solvency as it is risk-based; each company is assessed based on the risks it has undertaken and its mitigation strategies," said Leon Anderson, senior director of insurance at the FSC.

Illustrating, he said where two companies may have undertaken similar risks, the one with superior assets and a better reinsurance programme would achieve a higher MCT standard.

Based on Canadian system

The other would be deemed to have the greater risk exposure.

The MCT approach being developed by the FSC is based on the system used by Canadian insurance regulators, and assesses the riskiness of assets and policy liabilities by applying various factors and margins.

"It is an 'excess of capital' mea-sure, which compares capital available to capital required," stated the consultative document posted on the Jamaican regulator's website.

While companies are now being asked to file earnings reports, and are being assessed under both the MAT and MCT methods, formal implementation of the MCT is not expected before the year 2011.

"We hope to make the change in respect of the year 2010 for which filings will be made in 2011," said Anderson.

Among the advantages noted in the document are that the MCT relates the capital required to the risks assumed by an insurance company.

"Under the MAT, investment risk is not addressed so an insurer with a relatively risky investment portfolio could have the same capital requirement as an insurer with a conservative portfolio," Anderson said.

Introduced in 2001

It further stated that the MAT does not distinguish between the risks of short-term property claims and longer term liability claims.

The MAT was introduced by the FSC in 2001 with the new Insurance Regulations that took effect that year. The minimum value was set at 100 per cent for the years 2001 to 2003.

Since then the ratio has increased incrementally to 135 per cent and is slated to be increased to approximately 150 per cent come 2010.

These standards according to Anderson are set by law.

But general insurance companies have been struggling to achieve the required MAT level.

At the end of December 2008, several failed to meet the 135 per cent asset test ratio prescribed.

The FSC was unable to say definitively whether any were able to make adjustments to achieve the standards subsequently.

The life insurance companies are assessed based on a similar capital base test, the minimum continuing capital solvency requirement or MCCSR.

sabrina.gordon@gleanerjm.com