Study Note on the Minimum Asset Test

This note describes the calculation of the solvency margin for Canadian insurance companies. The solvency margin is designed to keep assets sufficiently higher than required so unfavorable underwriting results in the following year can be absorbed and there is a minimal risk that the insurer will become insolvent. The excess margin, equal to the assets available minus the assets required for test purposes, should be at least 10% of the assets required for test purposes. The assets available are the company’s adjusted assets. The assets required for test purposes are the total liabilities plus some additional margins. The calculations of the assets available and the assets required for test purposes are detailed in the note. KEY WORDS: Canadian Issues, Exam Part 7/7C, Reinsurance, Risk Margin, Solvency.