November 24, 2008 by Canadian Underwriter
Only reinsurance arrangements that include an appropriate insolvency clause should be recognized by Canada’s solvency regulator as an allowable asset, Canada’s insurance guarantee fund has recommended in a report.
The Property and Casualty Insurance Compensation Corporation (PACICC), which reimburses Canadian policyholders in the event of an insurer bankruptcy, made this and several other recommendations in its recent report, ‘(Re)assurance of Solvency: reinsurance assets in insurance company liquidations.’
The PACICC report looks at, among other things, the thorny issue of whether insolvent insurers should be able to recover from reinsurers (and therefore count those ‘recoverables’ against their assets in the event of an insurer bankruptcy).
Traditionally, insurers have to pay a ‘loss’ first in order to recover funds for that loss from reinsurers.
But in the case of an insolvency, insolvent insurers “allow” claims against the assets of the estate for future distribution to policyholders and creditors in the order of priority established under U.S. law. Noting this, reinsurers have made the case that since insolvent insurers do not technically pay the claims, reinsurers should not have to pay if the insolvent insurer can’t pay its claims obligations.
The U.S. courts have sided with reinsurers, causing U.S. regulators to require an “insolvency clause.”
An insolvency clause, as PACICC notes, “clarify that if the reinsured stops making payments for losses because of insolvency, the reinsurer must continue to make payments to the reinsured or to its liquidator as if the insolvency had not occurred.”
In Canada, while the Reinsurance Research Council of Canada (RRC) developed wording for an insolvency clause in 1991, it is not currently a requirement before reinsurance recoverables can be recognized as an asset for regulator capital purposes, according to PACICC.
PACICC wants the insolvency clause to be required before the federal solvency regulator recognizes reinsurance recoverables as an asset of the insolvent company.