PACICC may lack capacity to handle a major insolvency

The Property and Casualty Insurance Compensation Corporation (PACICC) is closely examining whether the organization has the financial capacity to respond to insolvency risk going forward, says Jim Harries, PACICC’s vice-president, operations. The organization is in the process of consulting with its members, Canada’s P&C companies, to see what can be done about the situation.

PACICC is an industry-funded, non-profit program to protect policyholders and claimants in the event that an insurer in Canada collapses financially. In its 2004 annual report, PACICC’s president, Paul Kovacs sounded the alarm about the financial capacity issue. “With respect to financial capacity, our early research suggests PACICC would have difficulty responding to larger or more frequent insolvencies than we’ve experienced in the past…We are assessing the adequacy of PACICC’s $35 million dollar compensation fund…and the annual member assessments.”

Mr. Harries told The Insurance Journal that since the annual report was released, PACCIC has carried out an in depth study with respect to its financial capacity, the results of which the organization is not yet ready to make public. But, he did say the corporation is conducting broad consultations with its member companies “about possible options to enhance and strengthen PACICC’s financial capacity.” The intention is to wrap up these consultations in the first half of 2005.

Mr. Harries says dealing with the issue of PACICC’s financial capacity is the organization’s “key focus” at present. If a large P&C company failed, or if more insolvencies occur, “our capacity as it stands now would be stretched…That does not mean the industry would not be able to respond, but it might mean that the response might not be as timely or as prompt as insurance regulators or consumers would want it to be.”

PACICC has compensated policyholders of 12 Canadian P&C insolvencies. The last of these was Markham General which was wound up in July 2002. PACICC is concerned over the elevated risk of further insolvencies. In the annual report, Mr. Kovacs states, “After several years of poor financial performance, it isn’t surprising that we found a growing number of companies experiencing a higher risk of insolvency. While conditions are starting to improve…the risk of insolvency will only diminish significantly after a sustained period of improved earnings.”

PACICC’s annual report also points out that Canada’s P&C company insolvency experience has been considerably better than the United States’, where total liquidation assessments averaged $1 billion US annually during the period from 2001-2003. Canada’s worst year so far was $11.5 million for P&C company liquidation assessments. However, comments Mr. Harries, that doesn’t mean that the risks in Canada aren’t “still significant and…might be increasing over time.”

In Canada, of particular concern to PACICC are provincially licensed and regulated insurers, he adds, pointing out that 8 of the 12 insolvencies that PACICC has dealt with involved provincially regulated companies. “It’s not all jurisdictions…but we do have some specific concerns about the soundness of the financial solvency regulations in some jurisdictions, the province of Newfoundland and Labrador is an area of specific concern,” he says, noting that three of the insolvent companies that PACICC has responded to were licensed there. “Hiland, Beothic and Canadian Universal were all Newfoundland based and regulated companies.”

Mr. Harries says there could be multiple weaknesses in Newfoundland’s regulations that have led to this problem. “It may reflect supervisory resources and capital requirements, but there are a number of factors involved.”

He adds that PACICC is planning to get involved in Newfoundland’s current public hearings which are specifically focused on automobile insurance issues. “But there are larger issues in the background and it is certainly an opportunity for PACICC to comment on financial solvency and on what we think is needed to strengthen the system and reduce the risk.”