July 11, 2022 — CANADA’s policyholder protection provider is exploring ways to increase its financial capacity, as new research shows its current compensation fund is not adequate to handle larger insurer failures.

Alister Campbell, president and CEO of the Property and Casualty Insurance Compensation Corp., reported in late June that the fund sits at roughly $60m but estimates from consultants Eckler Ltd. show something in the range of  $225m to $250m would be needed to handle a larger insolvency.

He noted in PACICC’s Solvency Matters newsletter that a figure in that same range has been suggested for establishing a fund to mitigate the risk of systemic contagion from an earthquake in B.C. or the Quebec/Ottawa corridor.

“The fact that these two different research work-streams generated similar numbers is, of course, entirely coincidental,” Mr. Campbell said.

“But, as our board contemplates increases to PACICC’s financial capacity as part of a potential upgrade to our firepower, there now appear to be several good reasons why a target in the $200m-$250m range might make sense.”

Last year, in preparation for its review of the compensation fund, PACICC retained Eckler to model the capacity of the fund and discovered that the while it would be adequate to handle some insolvencies, it would not be large enough to handle the first 30-day requirements in the case of a failure of a top-70 member insurer in terms of premiums written.

This year, Eckler examined the amount of financing PACICC would need to fully respond to an insolvency — meaning the refunding of unearned premiums and the paying out of six months worth of claims.

It found the size of the current fund is not adequate to fully respond to the failure of any of PACICC’s largest 90 members.

It also found that the compensation fund as it now stands would also be ineffective in the event of the failure of any of the 15 largest branches.

The policyholder protection provider has three ways to raise funds.

The first is through an special assessment on the industry of up to 1.5% of direct premiums. Between 1998 and 2000, the industry contributed seed capital for the current PACICC compensation fund via a series of capital levies that raised $30m, which has now grown to almost $60m which is invested entirely in fixed income  securities to optimize liquidity in moments of crisis.

Other sources permitted through PACICC’s bylaws are borrowing and reinsurance.

The protection provider is continuing to investigate how the fund can be used to advance its mission. It is exploring whether or not it can use used as collateral to allow PACICC to issue a guarantee, as a potential source of funds for reinsurance purchases or as a source of funds for capitalization of a bridge insurer.

PACICC staff provided a detailed overview of the fundraising options to the corporation’s board at a strategic planning conference earlier this month and formal proposals are expected to be presented in November.

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