CANADA’s p&c policyholder protection provider is working with Finance Canada as it considers how to limit system-wide risks that a catastrophic earthquake could pose to the industry.

The Property and Casualty Insurance Compensation Corp. lists this as its top priority for 2018 in the first edition of its new quarterly report on solvency issues — called Solvency Matters — released ahead of its annual meeting in Toronto.

PACICC said it is working in close partnership with the Insurance Bureau of Canada on the issue and together they have made two recommendations to Finance Canada.

The first is to allow PACICC to borrow from the federal government’s Consolidated Revenue Fund to finance insurer liquidations following a catastrophic earthquake.

The CRF is an account into which taxes and revenues are deposited and from which funds are withdrawn to defray the costs of public services.

PACICC and IBC have requested that the federal government enable PACICC to access a credit facility drawn on the fund to provide emergency lending assistance — such as liquidity provision — for policyholder compensation in response to institutional failures.

“Under this proposal, insurance companies that mismanaged earth-quake risk would still fail,” PACICC notes in its quarterly report.

“Companies that prudently capitalized and appropriately managed this risk would not be subject to the secondary shock of having to finance the liquidation of their failed competitors.

“The unintended chain of second-round failures that would otherwise occur due to PACICC’s assessments on surviving insurers — that is, systemic financial contagion risk — could be avoided.”

PACICC proposes to repay the CRF loan by introducing an extraordinary assessment mechanism that would allow it to place an assessment on future insurance underwritten by its members.

The second recommendation involves changes to the Insurance Companies Act that would ensure all p&c insurers belong to a compensation association and enable better access to the CRF.

The quarterly report said that for 2019, a top priority for PACICC will be an examination of its coverage and benefits.

PACICC said it has conducted research to help benchmark best practices of insurance guarantee funds in other jurisdictions.

“The results of this research will inform the corporation’s planned review of coverage and benefits.”

It said consultations will be held with member insurers, insurance consumers, regulators and liquidators.

The last review in 2006 resulted in one significant change — the limit on personal property coverage was increased to a maximum of $300,000 per claim.

“Insurance regulators have requested that PACICC review current limits for personal property claims owing to the significant increase in house prices since the last review and new knowledge about the potential for multiple total loss claims as a result of a wildfire or earthquake.”

Looking further ahead, a priority for 2020 will be the development of a framework for early intervention to address troubled insurers.

“Changing circumstances, including the joint development of intervention guidelines between PACICC, the Office of the Superintendent of Financial Institutions and several provincial solvency supervisors, have increased the likelihood of PACICC being asked to intervene to protect policyholders prior to a winding-up order.

“PACICC will seek to clarify, in advance, the criteria the board of directors would use to decide whether early, pre-insolvency intervention serves the interests of policyholders and members.”

The first edition of Solvency Matters also includes articles on emerging issues, industry solvency analysis, PACICC’s Risk Officers Forum and future challenges. The full report is available at PACICC’s website.

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