Start-ups require extra attention from solvency regulators: PACICC report

Start-up companies deserve special supervisory attention from solvency regulators, the Property and Casualty Insurance Compensation Corporation (PACICC) concluded in its assessment of the failure of Advocate General in the late 1980s.
PACICC was on the hook for $45 million in claims to policyholders when Advocate General wound up in July 1989. The insurance company folded nine years after opening its doors for business.
“Like Advocate General, roughly one-third of the P&C insurance companies that failed in North America over the past 30 years did so in their first 10 years of operation,” PACICC noted in the fourth report of its series, ‘Why Insurers Fail.’
In its fourth report, Lessons learned from the failure of Advocate General Insurance Company, PACICC highlights the importance of getting pricing and reserving right, as well as the wisdom of diversifying lines and territories of business.
By the time OSFI took control of Advocate General in April 1989, the company’s loss reserves were deficient by $13 million, the PACICC report notes.
In addition, the company’s auto insurance rates were 7% below the industry average. This pricing deficiency was exacerbated by Ontario’s decision in 1987 to freeze auto insurance rates.
To make matters worse, the company had very quickly become Ontario auto insurance-heavy after obtaining its license in 1980.
In 1981, the company collected $4.5 million in premium, which was fairly evenly spread between Manitoba, the Maritimes, British Columbia, Alberta and Ontario. About 49% of the company’s business was written in auto lines.
Seven years later, 91% of the company’s $40.5 million in premiums was written in Ontario. By then, 75% of the company’s business was in auto.
“High concentration in a single line of business and in one region presents a different enterprise risk profile than a diversified strategy,” PACICC’s report notes. “Accordingly, it is important for management and boards of directors to evaluate business plans when insurance companies expand into new markets.”