INSOLVENCY risk in Canada’s p&c industry has been rising over the past four years and is now at its highest level since 1990, the nation’s policyholder protection provider says.
The Property and Casualty Insurance Compensation Corp. notes in the latest edition of its quarterly Insolvency Matters newsletter that in the first quarter of 2015, 83.4% of the p&c marketplace reported profits.
The figure was 63.2% for the same period this year.
“In a competitive industry, there are always winners and losers,” PACICC chief economist Grant Kelly said. “Some insurers try new distribution strategies. Others employ different tools to underwrite. Ideas that work are rewarded.”
He noted that profitable insurers use their earnings to strengthen their financial health and support growth.
“Trends in earnings are the primary indicator of future capital adequacy,” Mr. Kelly said.
“When firms employ unsuccessful strategies and are not profitable, some have to alter their decisions if their owners wish to continue to put their capital at risk by remaining in the market.”
PACICC said the next release in its Why Insurers Fail research paper series will set the stage for the development of an early intervention framework for companies in danger of insolvency.
It said the yet-to-be-released paper explores three default scenarios and their potential impact on the p&c industry, including the scope and scale of any required PACICC assessment on member insurers.
The paper concludes that in the case of a default of a small insurer, the current PACICC model works well.
But it says Canada’s traditional insolvency and liquidation model may not be optimal in the case of a default of a mid-size carrier, “and is simply not the right option in the case of a large carrier default.”
In the latter two scenarios, a traditional default could potentially expose the industry to significant public and regulatory backlash should it occur, PACICC said in the newsletter.
PACICC said it will be examining other Canadian and international best practice schemes for preventing insolvencies and will then work with the federal regulator and Quebec’s regulator and the Insurance Bureau of Canada on alternatives to liquidation or insolvency. It will also be looking at the criteria which might be used to determine if or when early intervention tools would be appropriate.
In a separate article in the latest PACICC newsletter, president and CEO Alister Campbell notes that the p&c industry has changed in the 30 years since the corporation was founded, with far fewer small players and many more mid-sized and large insurers.
“If a natural catastrophe were to mortally wound one of these, the current PACICC model would be strained,” he said.
“The reality is that insolvency and liquidation is an extremely costly and inefficient way to manage larger insurer insolvencies.”
Mr. Campbell said that when PACICC was founded, it was granted broad powers as a full “resolution authority.”
“These powers have never been used,” he said. “It is time to explore whether or not we should develop a deeper toolkit and establish clear parameters with the industry about if, how and when we might employ new early intervention tools. This topic will be the key priority issue in our 2020 plan.”
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