This article was produced in partnership with Property and Casualty Insurance Compensation Corporation.
Desmond Devoy of Insurance Business Canada sat down with Alister Campbell, president and chief executive officer of Property and Casualty Insurance Compensation Corporation to discuss the modernization efforts underway at the not-for-profit corporation.
It’s the service the insurance industry hopes it never needs but is happy to have just in case.
While Canada’s last insurance company failure was more than 20 years ago, the country’s property and casualty insurance (P&C) companies have been funding the Property and Casualty Insurance Compensation Corporation (PACICC) to ensure the industry is always ready for the worst-case scenario. The corporation, approved by government regulators, is a non-profit entity that, in the unlikely event of the collapse of a P&C company, will respond to claims of policy holders.
But now the corporation is making some important changes to how it will respond to the next insurance company collapse.
“The board of directors has established a new strategic plan with a few key pillars that will ensure a more modernized organization, to ensure that our institution is ready to respond to the insurance company failures of the future,” said Alister Campbell, the corporation’s president and chief executive officer.
When the next failure occurs in an “increasingly consolidated industry, it’s likely to be much larger,” Campbell says.
But while financial mismanagement is usually behind a business collapse, the cause of the next major Canadian insurance collapse could surprise you.
“It might well be caused by a natural catastrophe, fueled by climate change,” Campbell said. The corporation’s “emergency mechanism is pretty robust, but it has definitely been tested only in circumstances that are very different from the ones we anticipate in the future.”
South of the border, five insurance companies failed in Louisiana last year alone, all driven by underwriting losses from wind events from 2020 to 2022. Multiple companies have also failed in Florida in the past three years.
“The increasing number of unmodeled events could really expose insurers to greater risk,” said Campbell.
The Fort McMurray fire in Alberta in 2016 is a good example, along with the BC village of Lytton being 90 per cent wiped off the map by fires. Hurricane Fiona also wreaked devastation on Atlantic Canada late last summer.
Campbell called Fort McMurray “a wake-up call for regulators in Canada.” regarding the exposure we all face from the increasing severity and cost of natural catastrophes.
That is why the corporation’s board decided to expand its financial capacity.
“We have roughly $60 million in the bank to kickstart the work after a company’s failure,” he said. “Once we work out how bad it is, we send out an invoice to the industry for whatever additional amounts we need.”
But in the event of a major, catastrophic event, the financial damage would not be limited to just one insurance company, and so other companies, while not on the brink of collapse, would also be hurting financially. That’s why the board mandated that management seek additional liquidity capacity. To this end, the corporation has secured a $250 million line of credit, which came into being this past February.
“We don’t draw any of that money unless we need it,” Campbell said. “It’s subscribed to by all six major Canadian banks who all agreed it would be good for the system.”
The corporation would have access to that quarter of a billion dollars within 48 hours of placing a phone call.
“So that’s a substantial increase in our financial capacity and it means we’re now ready to handle the failure of the average insurance company in Canada,” Campbell said. “The ones that have failed before were much smaller. But, we can’t predict who will fail in the future and now we are in a position to handle the first six or maybe 12 months after failure for larger insurers.” In a way, literally buying time.
All one has to do is look to the banking sector south of the border to see regulators having to seize failed financial institutions. But we have also seen companies coming in to scoop up failing properties like First Republic, Silicon Valley Bank and Credit Suisse.
For a Canadian insurance carrier in distress, regulators may be able to find a buyer for at least part of their business, “so we have been thinking about a process called resolution, where you can try and make the exit less painful than pure bankruptcy. You can imagine scenarios where you work with the court and the regulators and sell off the good parts of the company and retain more problematic liabilities in a bridge entity and manage the run-off there” Campbell said.
“It’s another way of buying time,” Campbell said.
That is why the corporation’s board has moved to “expand resolution capacity,” so PACICC has better tools to work with the appropriate authorities in the case of resolution. It is his hope that, within the next 18 months, it can secure an OSFI charter for a new bridge insurer, hoping to “avoid a worst-case scenario where (the ailing company) goes into pure liquidation,” Campbell said. “We think that leads to potentially way better outcomes for the system, for our other insurer members and how much they’re going to have to pay. Most important, it will ensure that policyholders are protected.”
He noted that the Canadian Deposit Insurance Corporation already has legal authority to establish a bridge bank, so Canada’s banking system has that capacity. And, “our life insurance system also has this capacity,” Campbell said. “Our general insurance system does not. It’s a gap that we can fill.”
Between 2018 and 2019, the corporation conducted a review of their benefit limits and coverage based on data analysis of 400,000 industry claims. And in 2022 PACICC moved to increase those limits.
“Regulators were very happy that we made these changes,” Campbell said, “as there had been a nearly 20-year gap since the last review.
“Our board agreed that, from now on, we would review every five years,” he said.
The regulators agreed to that going forward, but asked them to do their next review in three years, “because they wanted to know if our coverage limits are equally fair, province by province.”
So PACICC is now doing a review that incorporates a more granular analysis of whether their $500,000 limit on personal property and $400,000 limit for auto, commercial property and commercial liability is equally fair to consumers in Ontario or Quebec or Prince Edward Island.
“And we honestly had no idea as to the answer to that question going in,” Campbell admitted. That review is already in motion, having started last fall, with a data call to the industry. The corporation has already collected 750,000 data points, with nearly 80% industry participation. Results were shared with the PACICC Board in April and PACICC is now in the process of socializing the results with provincial regulators from coast to coast.
It is too soon to have final findings, “but the initial good news is that our level of protection is excellent and our level of protection is, within the margin of error, consistent province by province.” These are quite interesting and important findings.
“Turns out that it roughly costs the same amount to rebuild a house that’s burned to the ground in BC as it does in PEI, even if the land value that the house is build on is way different,” Campbell said. And the number of total losses as a percentage of insured dwellings is also completely consistent. “Of course, insurance just covers the replacement of the house. It doesn’t cover the cost that you had to pay to buy the house, the property, or what combined to create purchase value.” This means that there will likely not have to be a complex schedule with different benefit limits based on province.
Campbell plans for further industry consultation of the impact of inflation on coverage limits and premiums. There will be a full PACICC Member consultation paper this summer.
“It is always prudent to plan for tougher times especially when the times are good.
The strong financial performance of the industry and the absence of any recent failures makes this a perfect time for the modernization of PACICC.”
