Dibra and Leadbetter Flashcards
List Effects of insurer insolvency in Dibra
- Unexpected financial loss to claimants and PHs
* Reduced confidence in financial institutions
List Causes of winding-up and involuntary exit
- Insolvency risk: When assets become insufficient to meet its contractual and other financial obligations
- Liquidity risk: When an insurer has sufficient assets to cover its obligations, but there is a high level of risk that these assets could disappear
List Main causes of involuntary exit
- Inadequate pricing or deficient loss reserves
- Rapid growth
- Foreign parent
- Alleged fraud
List 4 external factors influencing insolvency
External envs is unlikely to be primary cause of insolvency; rather it usually exacerbates vulnerabilities and reduces earnings • UW cycle and profitability • CAT losses • Economic and financial market factors • International exposure
List 4 internal factors influencing insolvency
- Firm size
- Governance and internal controls
- Rapid growth
- Age
What are the Conclusions of Dibra and Leadbetter?
- Insolvency incidence was higher in the 1990s than in the 1980s, which was higher than previous periods
- Leading causes of insolvency are inadequate pricing and deficient loss reserve
- Insolvency incidence varies with profitability and UW cycle
- New entrants are more likely to fail, but survival rate tend to stabilize after a decade
List Observations that can be made from the Canadian experience with insolvency
- Greater xp of SM reduces the incidence of insolvency
- Strong internal controls and financial reporting reduce insolvency risk, as 35% of involuntary exits demonstrated clear breakdowns in internal controls
- Up to 2 years prior to the wind-up, management in many cases undertook strategies that could be described as “gambling for survival”
List Observations relevant to solvency supervision
- Financial risk ratios generally begin to fluctuate up to 2 years prior to involuntary exit and winding-up
- No single indicator is a reliable predictor of insolvency
- Supervisors need to have a good understanding of Re arrangements
- Start-up cies are at greater risk of insolvency
- Cies writing in new LOB, outside of their area of expertise, are at greater risk
- Public data availability increases market discipline and helps identify areas of potential concern, placing pressure on cies to address problems earlier
Define insolvency according to dibra
Involuntary exit from the market precipitated by a winding-up order issued by the appropriate supervisory authority
Why is it important to distinguish between Canadian and branch companies?
- Canadian insurers fail as a result of their operation and exposure to the Canadian economic/UW envs
- Branch cies may fail because the home office cie in a foreign jurisdiction has failed due to the economic/UW envs in a foreign jurisdiction
What is the goal of the PACICC?
To protect eligible PHs from undue financial loss in the event that a member insurer become insolvent
Is the PACICC effective?
PACICC has successfully funded the involuntary exit of 12 PC insurance cies doing business in Canada, paying or setting aside resources for the payment of $150 million in respect of claims by PHs and claimants of the insolvent insurers
Explain external factor: UW cycle and profitability
- High correlation between UW cycle and insolvency in US (correlation of 60%)
- In Canada, correlation not as strong as in US partly as more foreign cies involvement (about half of US)
- Periods of poor profitability increase risk of insolvency as limited capital may be further eroded by claims development
Explain external factor: CAT losses
- Historically had only a small impact on health of Canadian insurers
- Exposure to large severe events is modest in Canada, and CAT losses remain low compared to overall industry claim cost
- Canada, only 1 cie failed because of this, however it contributed to a small number of voluntary exits
Explain external factor: Economic and financial market factors
- Key risk is not the level of the financial variables (ex. interest rate), but their volatility
- Solvency risk is heightened when more volatility coincides with a softening in the UW cycle
- Greater the reliance on investment income for financial health (to compensate for UW loss), the greater the exposure to economic and financial market risks
- AM Best found that the rate of financial impairment and changes in capital exhibited strong relationships with equity markets. The weaker relationship in Canada is due to the limited exposure that Canadian insurance cies have historically had to equity markets, as their portfolios have largely consisted of fixed income securities
