PACICC calls for new funding mechanisms for worst-case insolvency scenarios

The Property and Casualty Insurance Compensation Corporation (PACICC) has approached regulators about two possible funding mechanisms in response to the potential failure of a large insurance company or several small-to medium-sized insurance companies.
PACICC identified these scenarios as part of its enterprise risk management plan.
“While such scenarios are unlikely, the impact on PACICC, should they occur, could be significant,” PACICC board chair George Cooke said in prepared written remarks for the corporation’s annual general meeting in Toronto on Apr. 13. “As a result, the corporation needs to consider in advance how it would respond.
“To this end, PACICC was able to launch discussions with insurance regulators about two potential mitigations: an industry liquidity facility, and a possible counter-cyclical insolvency assessment funding mechanism.”
The discussions will continue in 2010, PACICC says, and PACICC will be consulting with companies as part of the process.
PACICC says vigilance is particularly important now that the industry is currently entering a weak part of the market cycle.
“Over the past 30 years or so, on average, four or five insurance companies have failed during each cycle: most within the first year or two of recovery,” Cooke’s written remarks say. “Fortunately, the industry as a whole continues to be strongly capitalized.”
The interest rate risk is also elevated, PACICC president and CEO Paul Kovacs notes in the corporation’s 2009 annual report.
“The consensus forecast among the bank economists calls for a full percentage point increase in interest rates,” Kovacs writes. “The correlation (73%) between such interest rate volatility and insolvency is high.
“Since 1970, interest rates have moved a full percentage point 19 times and an insurer failed in a majority of those years.”