Review of compensation fund planned

July 19, 2021 — CANADA’s p&c policyholder protection provider is planning to take a hard look at the adequacy of an industry-run compensation fund that was established more than 20 years ago.

The Property and Casualty Insurance Compensation Corp. said discussions over the past year with government and the Insurance Bureau of Canada included the possibility of expanding the fund as a possible element of a joint public-private solution to systemic risk issues posed by a major earthquake.

In its latest Solvency Matters quarterly newsletter, released in June, PACICC identified the issue as a priority for 2022.

The PACICC Compensation Fund was established through a capital levy of member insurers between 1998 and 2000. Insurers were jointly assessed $10m a year for three years, based on their market share and lines covered.

The primary purpose of the fund was to ensure that PACICC is prepared to quickly refund unearned premiums to policyholders affected by an insolvency.

“A key driver for PACICC is materially reducing the number of adversely impacted policyholders in the days/weeks immediately following an insolvency,” the organization said.

“While the fund has almost doubled in size over the past 20 years, recent actuarial analysis indicates that it would be insufficient to handle the timely refund of unearned premiums after the failure of any of Canada’s 70 largest insurers.”

PACICC is planning to review several aspects of the fund, including:

■ The scale of possible future defaults;

■ The required size of the fund to potentially mitigate the risks associated with systemic contagion, post-earthquake, based on 2021 modelling;

■ The source of funds required to ensure capacity for possible resolution actions;

■ The source of funds for PACICC reinsurance purchases on behalf of the industry;

■ The source of funds for capitalization of PACICC Corp. as a bridge insurer, and

■ PACICC’s tax status as not-for-profit entity.

Meanwhile, the organization has been working this year to modernize its insolvency contingency plan to guide management — step-by-step — through the resolution process.

This includes the development of an accom-panying communications plan, with prepared materials and support infrastructure to enhance PACICC’s insolvency preparedness.

“This is important groundwork that will help to ensure that we can respond efficiently and effectively in the event of a larger industry insolvency,” it said in the newsletter.

“Proper emergency preparedness calls for the road-testing of response procedures to ensure their relevance and readiness when the call for help arrives.”

PACICC said it will test the contingency plans through a series of desktop-simulation exercises in the coming months with staff from Quebec’s regulator, the Autorite des marches financiers, and the federal regulator, the Office of the Superintendent of Financial Institutions.

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