Feds pledge to address systemic risk relief

Jan. 18, 2021 — THE FEDERAL department of finance has pledged to work with the p&c industry this year to address serious protection gaps for major catastrophes such as earthquakes.

The Property and Casualty Insurance Compensation Corp., Canada’s policyholder protection provider, said the finance department is aiming to present multiple policy options to the federal government by the end of 2021.

“They’ll evaluate these policy options based on their contribution to the stability of the financial sector, the degree to which they impact the protection gap and the potential fiscal impact on government,” PACICC said in the latest edition of its Insolvency Matters newsletter.

PACICC’s strategic plan recognizes the systemic risk posed by earthquakes as a “permanent priority issue” until a mitigation mechanism is adopted. It has warned that systemic contagion driven by a large earthquake is the largest single risk facing the Canadian p&c industry — despite sustained efforts by insurers to find a solution.

PACICC and the Insurance Bureau of Canada have proposed a federal backstop mechanism, the development of an alternative assessment mechanism and a compensation fund adequacy review.

The policyholder protection provider said that when the finance department pledged recently to address the situation, it explicitly recognized the concern that PACICC may not be able to respond in a scenario above its defined risk appetite limit. 

“In 2021, we will be working closely with the IBC and the department of finance to see if we can move this critical file forward toward final resolution,” PACICC CEO Alister Campbell said in the newsletter.

He said there is no doubt that the Canadian p&c industry is well-capitalized and reinsured to a high level against severe adverse events.

“But there is a level of quake above which some form of government backstop is simply the only option — as every other major developed nation with significant quake exposure has already determined.

“Just as in the case of a pandemic, the scenario is remote,” Mr. Campbell said.

“But it can happen.”

Meanwhile, PACICC’s board of directors has approved a new resolution protocol to tap the full potential of its existing powers for  intervening prior to a possible liquidation.

The new three-step protocol is the result of 18 months of consultation with stakeholders.

PACICC noted that its memorandum of operation permits its board to take “reasonable steps” prior to a member being ordered into wind-up.

The steps include — but are not limited to — issuing guarantees, providing financial support or assisting in the sale, transfer or reinsurance of a book of business of a distressed member insurer. 

“Such broad and flexible powers appropriately reflect the reality that each distress scenario will be unique and that the insurance industry wanted to ensure that the PACICC board had clear authority to act in alignment with the organization’s three-part mandate,” it said in the newsletter.

“But, given the potential for steps of this type to be subject to substantial risk and to come at significant cost to the industry, the board concluded that some form of protocol and/or decision-making criteria would be beneficial.”

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