Section B Flashcards
What are the 5 reasons to justify government participation in insurance?
27 - CAS: Government Insurer Study Note
- Filling insurance needs unmet by private insurers (e.g. Crop Insurance)
- Compulsory purchase of insurance (e.g. WC)
- Convenience (e.g. Florida Hurricane Catastrophe Fund)
- Greater Efficiency
- Social Purposes
List and describe the 5 reasons used to justify government participation in insurance?
27 - CAS: Government Insurer Study Note
- Filling insurance needs unmet by private insurers
• Can offer insurance where otherwis eunavailable or unaffordable (residual market philosophy)
• Requirements differ from private insurers: Can subsidize with taxes (e.g. TRIA) or charge less than actuarial rates (e.g. crop insurance) - Compulsory purchase of insurance
• Certain types of insurance need to be available to meet social responsibilities (e.g. WC)
• Government can operate as a “take all comers” in competition with private insurers (e.g. subsidizing high risk drivers) - Convenience
• Easier for government to set up a program and may already have services in place
o Flood insurance requires mapping, land control, and disaster relief - Greater Efficiency
• belief that the government can operate at a lower cost than private market
o State auto programs
• some costs exist for both government and private insurers (administration) yet government may include this as a cost saving if done by an existing department - Social Purposes
• Main reason, some goals can only be acieved through government participation
o Workers Comp – Rehabilitation and vocational training of injured workers
o Social Security – Protecting the elderly and disabled
What are the 3 levels of government involvement as insurers?
27 - CAS: Government Insurer Study Note
(1) Exclusive Insurer (e.g. Social Security)
(2) Partner with Private Insurers (e.g. Flood, TRIA, Crop Insurance, Residual Markets, FAIR)
• government offers reinsurance coverage on specific loss exposures
(3) Competitor to Private Insurers (e.g. Workers Compensation)
What 3 questions should be asked to justify government participation in insurance?
27 - CAS: Government Insurer Study Note
• Is government insurance necessary for the given market?
• Is it insurance or social welfare program?
o Social welfare provides benefits based on demonstrable need, funded by tax resources
o Insurance is paid to all who suffer loss, funded by the contributions of insureds
• Is the program efficient? Is it accepted by the public?
Definition of insolvency risk
30 - Dibra and Leadbetter
Assets become insufficient for company to meet contractual and other financial obligations
Definition of liquidity risk
30 - Dibra and Leadbetter
Sufficient assets to cover obligation, but high level of risk that those assets could disappear
Define Insolvency
30 - Dibra and Leadbetter
Involuntary exit from the market precipitated by a winding-up order issued by the appropriate supervisory authority
What are two types of risk that can lead to winding-up and involuntary exists
30 - Dibra and Leadbetter
- Insolvency risk
- Liquidity Risk
Historically, what have been the four leading causes of insolvencies in Canada?
30 - Dibra and Leadbetter
1 & 2. Inadequate pricing or deficient loss reserves
• Related: Deficient reserves, lead to inadequate prices, lead to deficient reserves, etc…
3. Foreign parent
4. Rapid growth
Identify and briefly describe four company characteristics that have been identified in most insolvencies
30 - Dibra and Leadbetter
- Governance and Internal controls
• Solvency risk increases when they break down or are purposefully circumvented - New Entrants
• Likelihood of survival increases with the age of the firm - Growth
• Rapid growth in the last few years of business is a contributing factor to insolvencies - Firm Size
• Insolvent insurers are usually small insurers, writing less than 1% of total industry premium
4 External Factors that Influence Solvency
30 - Dibra and Leadbetter
- Underwriting Cycle & Profitability
• Soft underwriting cycle linked to the three waves of insolvencies - Catastrophe Losses
- Economic & Financial Market Factors
• Key risk is the volatility of financial variables, not their level
• Risk of insolvency heightened when volatility coincides wiht a softening UW cycle - International Exposure
• Mixed conclusions regarding the relationship of foreign ownership and survival
• Increased competition but greater diversification and access to international sources of capital
What are the requirement for a risk to be transferred to a risk sharing pool?
31 - Dutil
- PPA only (Quebec allows motorcycles)
- Not a residual market risk
- Carry at least minimum TPL coverage
- Follow appropriate classification and rating procedures
- Use RSP approved premiums for such risk
What is the goal of Facility?
31 - Dutil
To ensure that auto insurance is available to every owner and licensed driver who needs it
What are the requirements for a risk to be stransfered to FARM?
31 - Dutil
- Must have at least the statutory minimum coverage
- Policy must be a “Residual Market Risk”
• Motor vehicle, non-PPA; or
• PPA which an insurer refused to cover or renew
List and describe the types of risk sharing mechanisms that Facility uses.
31 - Dutil
Residual Market (FARM) • Provides a residual auto insurance market for insureds who may encounter an availability problem • Underwriten according to Facility rates and rules
Risk Sharing Pools
• Allows insuraners to transfer certain auto exposures to an industry wide pool
• Exposures don’t qualify for FARM but represent a higher risk of loss
• Underwriten according to insurers own rates and rules
Uninsured Autmobile Fund (UAF)
• Compensate for damages when unable to have covered because no other insurance is available or its inadequate
What is UAF?
31 - Dutil
The Uninsured Automobile Funds
• Facility administered funds available in the 4 Atlantic provinces
• Compensate for damages when unable to have covered because no other insurance is available or its inadequate
• The respective provincial Insurance Acts govern payments of these claims
Identify the 5 classes of business defined for the purpose of determining participation in Facility Association business
31 - Dutil
- Private passenger non-fleet non-pool automobile business
- All automobile business other than [1] or business transferred to a RSP
- Business transfer to a RSP in AB, NB or NS
- Business transferred to an RSP other than [3] and other than ON catastrophe claim fund
- Uninsured or unidentified motorist claims and amounts expended in connection with a pool or catastrophic claim fund in ON covering statutory benefit claims due from an insolvent insurer
Why do risk-sharing pools operate at a loss?
31 - Dutil
The Facility Association designed the risk sharing pools to promote stability in the marketplace by making it possible for companies to accept risks for which they believe their prices are inadequate
How much can an insurer transfer to RSPs?
31 - Dutil
- There are limits on the proportion of each risk that can be transfered and the transfer of certain coverages (e.g. higher or lower limits)
- Total allowable transfer from each company is a % of all non-fleet TPL direct written exposures (car years) for province in previous calendar year
- Also, expenses such as acquisitions, operating and LAE will be reimbursed to member company as percentage of premium (does not include premium tax and professional fees)
What is the mandate of the PACICC?
62 - PACICC
- PACICC manages a compensation plan designed to provide a reasonable level of recovery for unpaid claims of P&C policyholders in the event that an insurer becomes insolvent and cannot meet its financial obligations
- PACICC compensation plan pays 70% of unearned portion up to max payment of $700 (UEP weren’t covered priot to 1996)
Describe the two conditions that must be met before PACICC has financial responsibility in connection with an insurer’s insolvency.
62 - PACICC
- Formal winding-up order
- Insurer must be a member of PACICC
What are the recovery limits for unpaid claims and unearned premium under PACICC?
62 - PACICC
- Maximum claim recovery is currently $250,000 in respect to all claims from a single occurrence ($300,000 limit for personal property
- Pays 70% of unearned portion up to max payment of $700 (UEP weren’t covered priot to 1996)
Give three exceptions to the PACICC compensation plan.
62 - PACICC
- Life Insurance
- Distinctive classes of general insurance: aircraft, credit, crop, employer’s liability, directors and officers, certain errors and omissions (except to malpractice which is included in PACICC), fidelity, financial guarantee, marine, mortgage, surety, and title insurance
- Where other compensation plans apply: Auto in MB & SK, BI in Quebec
Who is a member of PACICC?
62 - PACICC
All insurance companies licensed in a participating jurisdiction to sell any of the classes of insurance for which PACICC provides protection are members of PACICC
What are the funding mechanisms for PACICC?
62 - PACICC
- Assessments of participating insurers
- Compensation Fund
- Liquidated assets of the insolvent insurer
- Recoveries from third parties
How is PACICC Funded?
62 - PACICC
• Participating insurers (those that remain solvent) are assessed in the jurisdiction they were licensed where the insolvent insurer wrote business
• Assessment formula:
o A = B X C/D
o A is assessment to be borne by particular insurer
o B is total amount being assessed to all participating insurers
o C is total direct WPs for particular insurer for that jurisdiction
o D is total direct WPs for ALL participating insurers for that jurisdiction
• Max annual levy that an insurer may have to pay is 1.5% of direct WP in that jurisdiction
• Admin expenses are also levied against insurers
• PACICC may borrow from its Compensation Fund and members are assessed to repay borrowed amount with interest
How does the claim process work for recovery by PACICC of amounts paid?
62 - PACICC
- Before a payment is made to policyholder, they must certify that they have exhausted any available claim against any solvent insurer with whom policy covers same loss
- PACICC is entitled to first priority in money received by insured from 3rd parties with respect to loss that they provided payment for
- The policyholder is required to assign to PACICC all of their rights against the insolvent insurer that arise under the particular policy
List and describe the six conditions that must be in place to make a peril insurable
64 - Swiss Re
- Mutuality
• A large number of people must combine to form a risk community - Need
• There must be a need for insurance cover when the anticipated even occurs - Assessability
• Peril must be assessable in terms of possible losses - Randomness
• Independent of the will of insured, timing must not be predictable - Economic Viability
• Risk community must be able to cover flood-loss financial needs - Similarity of Threat
• Community exposed to the same threat and same need for funds
Discuss the Canada Water Conservation Act
64 - Swiss Re
Canada Water Conservation Act (1953-1970)
• Historical reliance on structural flood measures (dams, dykes, levees, etc)
• First federal legislation directly concerned with water management
• Funding provided only for structural adjustments
• Provided cost sharing between federal and provincial government for flood control measures
Discuss the Canada Water Act
64 - Swiss Re
Canada Water Act (1970 to present)
• Replaced the Canada Water Conservation Act
• Allowed for funding of non-structural measures
o E.g. Government disaster relief, emergency preparedness, flood plain mapping, etc…
What was the purpose of the Flood Damage Reduction Program?
64 - Swiss Re
- (Primary) Reduce flood damage and prevent loss of life by discouraging development in flood-prone areas
• Identifying those areas through extensive mapping
• Using these maps to guide land development - Increase coordination of federal and provincial flood strategies
- Promote long term flood damage reduction
- Increase stakeholder awareness
• Held public meetings - Increase knowledge of high risk areas
• Maps and technical reports were made available to the public
What were the drivers of the Flood Damage Reduction Program?
64 - Swiss Re
- Increasing population in urban areas (flood-prone areas not yet identified)
- Large federal disaster payouts
- Pressures to manage flooding on limited budgets
- Environmental considerations
- – Desire to preserve green spaces and agricultural land
- – Environmental impacts of flood control structures - Income transfer from general public to those living in flood-prone areas
- Evidence of structural works encouraged development in floodplains
- Evidence that government relief encouraged development in floodplains