Reporting of Excess Credit Exposures in the Capital Adequacy Returns

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April 28, 2022
Circular Letter to:
Insurance Companies Registered under Insurance Act, 2018 The Institute of Chartered Accountants of Trinidad and Tobago Association of Trinidad & Tobago Insurance Companies Secretariat Caribbean Actuarial Association REF: CB-OIFI-795/2022 REPORTING OF EXCESS CREDIT EXPOSURES IN THE CAPITAL ADEQUACY RETURNS The Central Bank of Trinidad and Tobago ("Central Bank") refers to the Circular Letters issued dated December 22, 2020 and December 28, 2021 regarding the submission of, inter alia, Capital Adequacy Returns (“Capital Adequacy Returns”) and Credit Exposure CB105i Returns under the Insurance Act, 2018 (“IA 2018”) and the Insurance (Capital Adequacy) Regulations, 2020 (“Regulations”). The Central Bank advises that credit exposures in excess of the limits under section 89 and 90 are to be treated in the following manner:
a) Credit exposures under section 89 of the IA 2018:
Pursuant to section 89(5) the credit exposures in excess of the stipulated limits that existed prior to proclamation of the IA 2018 (reported excess) are allowed a transitional period, during which the reported excess will not be included in non￾permissible values. Insurers are reminded that they were required to notify the Inspector of Financial Institutions (Inspector) on measures they shall take during the transition period as follows:

1. reduce within a period of three years the excess credit exposures granted so that
   they are within the limits in sections 89 (1) and (2); and/or
2. provide within a period of two years, additional capital.
   Insurers are advised that during the transition period, if there is any subsequent increase to the reported excess, it must be treated as an excess credit exposure arising after commencement of the IA 2018 and must be included in the non-permissible values. b) Credit exposures under section 90 of the IA 2018:
   Excess Credit Exposures under section 90 that existed prior to the commencement of the IA 2018 are not to be included in the non-permissible value. However, pursuant to sec 90(10) the Inspector may require an insurer to reduce such excess, and the insurer will be consulted on the disposal period during which the excess shall Cen t r al Ban k o f Tri n i d ad an d To bag o Eric Williams Plaza, Independence Square, Port-of-Spain, Trinidad, Trinidad and Tobago Postal Address: P.O. Box 1250 Telephone: (868) 621-CBTT (2288), 235-CBTT (2288); Fax: (868) 612-6396 E-Mail Address: info@central-bank.org.tt Website: www.central-bank.org.tt

Circular Letter to
Insurance Companies Registered under Insurance Act, 2018 The Institute of Chartered Accountants of Trinidad and Tobago Association of Trinidad & Tobago Insurance Companies Secretariat Caribbean Actuarial Association April 28, 2022 2 be reduced. Any excess that continues past the disposal period shall be included in the non-permissible value. For all insurers, any credit exposure in excess of the limits under Sections 89 and 90 of the IA 2018, which arise after the commencement of the IA 2018, is to be included in the non￾permissible value and the treatment of such must be accounted for in the Capital Adequacy Return using the reporting procedure below:

1. STEP 1: Determine the Regulatory Capital Available to be used as the capital base in the
   CB105i - Credit Exposure Returns calculation before adjusting for excess credit exposures. This requires preparation of an initial Capital Adequacy calculation, deducting any other non-permissible values that are not due to excess credit exposures.
2. STEP 2: Determine the Credit Exposure
   Prepare the CB105i - Credit Exposure Returns using the Regulatory Capital Available calculated in STEP 1 as the capital base to calculate any excess credit exposures. The CB105i return does not currently differentiate between exposures originating pre and post proclamation of the IA 2018, however any increase in excess credit exposure over that reported in the Credit Exposure Return CB105i Form B, is a current breach of the IA 2018 credit exposure limits and is immediately non-permissible. As such, a manual calculation is required to determine the non-permissible amount to be reported in the Capital Adequacy calculation. There are to be no subsequent calculations/adjustments to the capital base used in the CB 105i - Credit Exposure Returns.
3. STEP 3: A Final Capital Adequacy calculation is required in which all excesses over the
   prescribed limits arising in STEP 2, in respect of excess credit exposures arising after commencement of the IA 2018, are reported as non-permissible values and must be treated as such in the final Capital Adequacy calculation. In this regard, the following steps are required:
   a. The non-permissible value arising from the total of all excess credit exposures reported in the CB105i - Credit Exposure Returns from STEP 2, in respect of excess credit exposures arising after commencement of the IA 2018, must be reported in the Non￾Permissible Values Tab 40.060 in the Capital Adequacy Returns. b. In the updated Capital Adequacy Returns, the Asset Default Risk Tab 40.020 and/or Investment Volatility Risk Tab 40.021 must reflect the adjusted asset balance, where applicable, net of the excess credit exposure for the non-permissible value.
4. STEP 4: Where the Regulatory Capital Available (as reported in the Capital Adequacy
   Returns) generated by STEP 3 is different from the Regulatory Capital Available (as reported on the CB 105i - Credit Exposure Returns) in STEP 1, there should be a reconciliation that accounts for the difference arising from the non-permissible value due to the excess credit exposures. Therefore, a reconciliation between the Regulatory Capital Available before and after the deduction above must be documented in the Notes page of both the Credit Exposure and the Capital Adequacy Returns.

Circular Letter to
Insurance Companies Registered under Insurance Act, 2018 The Institute of Chartered Accountants of Trinidad and Tobago Association of Trinidad & Tobago Insurance Companies Secretariat Caribbean Actuarial Association April 28, 2022 3 The Capital Adequacy Returns required to be submitted will be the Final Capital Adequacy Returns as per STEP 3 above, i.e. after all non-permissible values have been deducted. Insurers are reminded that the latest version of all forms specified by the Inspector of Financial Institutions for all of the regulatory reports and returns required under the IA 2018 can always be accessed at https://www.central-bank.org.tt/publications/regulatory￾returns/insurance-sector-regulatory-return. Please be guided accordingly. Yours sincerely Patrick Solomon INSPECTOR OF FINANCIAL INSTITUTIONS

Appendix I
Circular Letter Procedure

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