Compensation fund reforms considered 

Feb. 14, 2022 — CANADA’s p&c policyholder protection provider is reviewing the scope, scale and mandate of the industry’s compensation fund.  

The facility was set up in 1997 to enable the Property and Casualty Insurance Compensation Corp. to respond immediately to the needs of policyholders affected by an insolvency instead of waiting for required funds to be collected via levies from member insurers. 

The fund has never been used and now sits at almost $60m.  

PACICC said in the latest edition of its Solvency Matters quarterly newsletter that it will provide recommendations for possible reforms for the fund to the organization’s board of directors in June with a goal of introducing formal proposals in the fall. 

The target for the backstop was originally set at $30m and funds were collected through a series of insurer capital levies — $10m a year over a period of three years from 1998-2000. 

Each PACICC member’s assessment was equal to 0.15% of their net written premiums for 1997. The fund is managed for the corporation by CIBC Asset Management and is overseen by PACICC’s audit and risk committee and governed by a strict investment policy focused exclusively on fixed income securities with a high priority placed on security and liquidity.

The current plan requires any compensation funds that are used to be reimbursed via a levy on member insurers. PACICC said that with its review of the fund, it is aiming to answer three questions: 

  • What is the appropriate size for the fund? 
  • What sources of financing are available to PACICC to collect that amount? 
  • How can PACICC make the best use of the capital in the compensation fund to achieve its mission? 

Work on the first point is well underway, with PACICC having started preliminary work on the issue in 2020.  It hired actuarial consulting firm Eckler Ltd. to assess whether the current fund was large enough to adequately achieve its original objective — a rapid refund of policyholders’ unearned premiums — in the case of a failure of a PACICC member insurer. 

The answer was . . . yes and no. 

Eckler’s report found that the current fund would be adequate to provide unearned premium rebates in the case of the insolvency of 108 of the smallest PACICC member insurers. 

But the consultant found the fund is not large enough to rebate the unearned premiums for policyholders of PACICC’s 70 largest member insurers, should any of them default. 

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