PACICC.Comp

Question 1

What is the purpose of PACICC? (Property and Casualty Insurance Compensation Corporation)

Answer 1

Provide for reasonable level of policyholder recovery for claims & unearned premium AFTER an insurer becomes insolvent / in the case of an involuntary market exit by insurer

Question 2

Who administers this policyholder recovery “plan”?

Answer 2

It is administered by the non-profit PACICC

Question 3

Who are the members of PACICC?

Answer 3

• All licensed, participating insurers in a jurisdicion, with some exceptions (ex: reinsurers)

Exclude:
- Auto in MB & SK
- Auto BI in QC
- Certain D&O, E&O, employer’s liability
- Fidelity, financial guarantee, marine, mortgage, surety, title insurance
- Mandatory auto coverage sold in BC, SK and MB
- Aircraft, credit, crop

Essentially, exclude unusual policy types. PACICC mostly covers only auto and homeowners (EB and Cyber are covered)

Question 4

What triggers PACICC involvement? (2)

Answer 4

• A formal winding up order must have been issued to the insurer under the Federal Winding Up and Restructuring Act
• Insurer must be a member of PACICC

Question 5

Compare OSFI vs PACICC on their roles regarding insolvency

Answer 5

OSFI: seeks to minimize probability of insolvency (goal is to monitor & promote solvency of insurer)

PACICC: provides reasonable recovery to policyholders AFTER insolvency

Question 6

Provide the PACICC coverage limits for Auto, Homeowners and Unearned Premium

Answer 6

Auto: limit of 415K
Homeowners: limit of 520K
(All limits except for HO are 400K & Optional Automobile Ins in BC is 60K)
Claims = min(loss - deductible, limit)

Unearned premium: payment = Min (Unearned premium, 2500)*70%

Question 7

PACICC funding methods (3)

Answer 7

1. Assessment of participating solvent insurers
   - % is based on the % of WP compared to market in the jurisdiction the insolvent insurer was operating (capped at 1.5% of DWP)
2. Compensation Fund (pre-insolvency funding through a special levy) - borrow money from this fund
3. 3rd party recovery received by insureds with respect to losses where PACICC provided payment

Question 8

Funding: which mechanisms increase capacity?

Answer 8

(A,C):
- Assessment
- Compensation Fund (compensation fund is funded by assessments)

Question 9

Funding: which mechanisms smooth costs?

Answer 9

C:
- Compensation fund can be drawn upon to smoothe annual assessments

Question 10

Funding: which mechanisms reduce insurer levies

Answer 10

3:
- 3rd party recovery reduce insurer levies/assessments

Question 11

Who does PACICC assess?

Answer 11

Participating solvent insurers in jurisdiction where the insolvent insurer was writing business

Question 12

Limit on what PACICC may assess in aggregate

Answer 12

Shortfall between:
- Amounts advanced by PACICC to policyholders
- Amounts PACICC received from insolvent insurer & 3rd parties

Question 13

Assessment: formula for individual insurer

Answer 13

A = B x (C/D)
where
- A = insurer assessment
- B = Total amount assessed by PACICC
- C = DWP of insurer
- D = total DWP of all assessed insurers

Question 14

Assessment: Limit on individual insurer

Answer 14

1.5% of DWP (in jurisdiction)

Question 15

Insurers that have failed in the past were relatively small. Considering the consolidation and growth of the P&C insurance market, evaluate whether PACICC is well positioned financially to handle insurer insolvencies in the future

Answer 15

Yes, because:
- OSFI, MCT regulations minimize insolvencies
- PACICC can assess solvent insurers
- A compensation fund already exists
- Doesn’t have to provide full compensation

Question 16

Evaluate the performance of PACICC according to the criteria for evaluating government programs

Answer 16

Is it insurance or welfare?
- It is insurance (sort of) because members pay assessment fees

Is it necessary or does it achieve a social purpose that cannot be provided by private insurance?
- Yes, otherwise policyholders may be unprotected if their insurer goes insolvent

Is it efficient, or otherwise accepted by the public?.
- Yes, process already in place, self-sustainable OSFI requires insurers to have MCT greater than 150%.

Question 17

What happens to policyholder claims (that haven’t been fully compensated) when PACICC receives distribution from a liquidator

Answer 17

Case 1: if the liquidator makes a distribution that is below the amount owed to PACICC (essentially the amount that PACICC paid to the non-compensated policyholders), then policyholders don’t get anything

Case 2: if the liquidator makes a distribution that is greater than the amount owed to PACICC (essentially the amount that PACICC paid to the non-compensated policyholders), then the policyholders will get an increase in their compensation

Question 18

Identify the 3 main causes of P&C insurer insolvency in Canada

Answer 18

1. Foreign Parent Failure
2. Rapid Growth (due to overly aggressive UW or Pricing)
3. Deficient Loss Reserves & Inadequate pricing