PACICC exploring ‘Plan B’ for quake risk

July 14, 2023 — THE PRESIDENT of Canada’s p&c policyholder protection provider has reiterated his frustration with the need to go with a ‘Plan B’ due to the lack of federal government action on the systemic risk posed by earthquakes.

In the Property and Casualty Insurance Compensation Corp.’s latest Solvency Matters newsletter, Alister Campbell noted that while Finance Canada has faced many challenges over the past decade such as the coronavirus pandemic, “it does not feel unreasonable at this point to express some profound impatience” with the lack of action on a federal backstop for earthquake risk.

“We simply cannot wait another decade,” he said in the newsletter released late last month.

It was 10 years ago that PACICC first flagged the systemic risk from earthquake as a major issue that could threaten the capacity of the Canadian p&c industry.

Since then it has repeatedly pleaded for a federal backstop mechanism to help mitigate the risk and respond to a major disaster.

In 2021 PACICC released a report which showed that if a disaster such as an earthquake in B.C. caused $35bn or more in insured losses — which is roughly half the amount of damages caused by Hurricane Ian in the U.S. last year — the industry and consumers would experience serious problems.

Now PACICC is exploring previously discarded options and alternatives to address the systemic risk posed by earthquakes.

Mr. Campbell noted that PACICC’s initial research in 2013 was not greeted with enthusiasm. Other researchers were then asked to evaluate the risk scenario outlined by PACICC.

“The bottom line is that their analyses confirmed that of PACICC, and when we published our own updated version of the systemic risk model in 2016, the industry and third-party analysts were fully aligned around both the size and scope of the problem and the compelling need for a federal backstop mechanism of some form to help mitigate the risk,” Mr. Campbell said.

He noted the government appeared to listen at the time, making a commitment in the 2017 federal budget to address the risk.

Since then, however, although the p&c industry has continued to press the issue there has been no progress.

“In 2021, we updated our systemic risk model — determining an updated tipping point of around $35bn in insured losses — and the dialogue resumed, but with no appreciable difference in the pace of decision-making or evidence that the federal government was moving closer to a decision,” Mr. Campbell said.

He noted that in the most recent federal budget, there was an important affirmation of the government’s awareness of the earthquake risk problem along with a restated commitment to address it.

“But that affirmation is buried deep in the text and it is listed only in the last sentence of a section where Ottawa is making an important multi-year commitment . . . to tackle the challenging public policy issues around increasing flood risk in the face of rapid climate change,” Mr. Campbell said.

Meanwhile, PACICC has also been preparing for a review of its coverage and benefit levels by engaging actuarial and consulting firm Eckler Ltd. to conduct a survey of member insurers’ claims data.

It found that just 1.1% of policyholders would be only partially protected by PACICC in the event of a p&c insurer insolvency in Canada — which is something that has not occurred since 2002 when Markham General Insurance over-extended its boundaries by expanding too much, too soon.

That small percentage of policyholders that would be only partially protected would still receive the full $500,000 compensation amount from PACICC but would be required to wait for the legal system to yield any additional compensation that may become available from the estate of the insolvent insurer over time.

Eckler also measured the level of protection relative to the value of claim reserves.

It found that the 1.1% of policyholders who are only partially protected could have claims that are worth much more than the PACICC limits.

And it said that 1.1% of claims represent 15.2% of all personal property claims reserves.

“What this means is that when a claim is higher than the PACICC limit, it is much larger than $500,000.”

PACICC also warned that inflation has led to an erosion in its coverages in all lines of business.

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