Climate change compounds insolvency risks

June 20, 2022 — GEFION Insurance, Denmark, 2021. Anbang Insurance Group, China, 2020. CBL Insurance, New Zealand, 2018. Merced Property & Casualty Co., California, 2018.

The Property and Casualty Insurance Compensation Corp. says in a new report that fatal flaws in the actions and approaches of these companies put each of them on the road to ruin.

It says the recent insolvencies show that despite the continued evolution of best practices in enterprise risk management and the ever-increasing rigour of prudential oversight across the developed world, p&c insurers can and do still fail.

The cases are examined in detail in the latest installment of the Canadian policyholder protection provider’s Why Insurers Fail series.

The authors of the 48-page report, titled ‘Mapping the road to ruin: Lessons learned from four recent insurer failures,’ said their research confirms that the traditional causes of failure — internal operations, organizational structure and adequacy of regulatory oversight — were factors in the insolvencies.

“Perhaps even more important though, is the realization that climate change, fuelling increases in natural
disasters, has become a new and significant source of potential insurance failures,” they said.

The three most common traditional causes of p&c insurer failures were identified in PACICC’s previous research, which examined earlier failures including Canada’s Advocate General Insurance in 1989, Maplex General Insurance in 1995, Canadian Millers’ Mutual Insurance in 2001 and Markham General Insurance in 2002.

The last Canadian insurer failure was Home Insurance Co. — 19 years ago. PACICC said there have been a number of general improvements in the global business environment over the past 20 years that should materially reduce the risk of insurer insolvency.

These improvements include risk-based regulation with risk-based capital requirements, risk management best practices, enhanced statutory financial reporting, more sophisticated actuarial and accounting standards and technological advancements which enable more sophisticated pricing and risk selection and provide both management and regulators with better transparency regarding risks, aggregate exposures and claims development trends.

But PACICC said its latest case studies show that traditional factors and now climate change have continued to present challenges for insurance companies and make it necessary for industry participants to remain vigilant with the financial health of p&c insurers.

(More complete coverage of the PACICC report was presented in Thompson’s June 20 weekly edition. To access that story and more on Canadian p&c industry news and trends, please choose the ‘Subscribe’ tab on our main page or email for more information).