April 20, 2020 by David Gambrill
Canada’s property and casualty insurance companies have upped the benefit amounts they will pay out to policyholders in the wake of an insurance company insolvency. In addition, they have broadened coverage for some commercial specialty lines customers who were previously ineligible for compensation payments.
The Property and Casualty Insurance Compensation Corporation (PACICC) protects eligible Canadian policyholders from undue financial loss in the event that a member insurer becomes insolvent. PACICC recently announced that its changes to coverage and benefits had received unanimous approval from Canada’s provinces and territories.
The move is significant because changing PACICC’s bylaws requires unanimous consent across all provincial and territorial regulatory jurisdictions, PACICC president and CEO Alister Campbell noted in an interview with Canadian Underwriter.
“We’re harder to amend than the Senate,” he said. “For the Senate, you only need seven provinces with 50% of the population [to approve constitutional amendments]. PACICC needed unanimity. You need unanimous buy-in from the provincial and territorial regulators. That’s why it’s a big deal to achieve. That’s pretty rare.”
Immediately after the AGM, the PACICC board formally approved the changes, which take effect immediately. They include:
Personal property limits for benefits paid to policyholders in the wake of an insolvency are now increased to $500,000. The limit was previously $300,000, which last changed in 2006.
Normally, an insolvency would trigger such a review, Campbell noted. But there have not been insurance company failures for a couple of decades, so in this instance the catalyst was a large-scale catastrophe.
“It’s critical that you pay attention and learn lessons from events,” he said. “Fort McMurray was a meaningful event for the industry in a whole bunch of ways. One of the things it showed was that if there had been a failure, there would have been a very large number of retail consumers who would not have been made whole afterwards [if the personal property payment limit remained at $300,000].”
PACICC’s board has agreed to review coverage limits within three years, and at least every five years thereafter.
Unearned Premium Payments
The changes also include an increased unearned premium amount, which bumps up to $2,500. Given a 70% co-pay model, that amounts to a $1,750 maximum payout.
Campbell used the following scenario to explain how the unearned premium amount works. “I just paid my premium in full and my insurer goes bankrupt the next day. I’ve got 45 days to find another insurance policy. I can find the policy, but I don’t have any money to pay, because I just lost all my money. I might get it back when the estate is wound up 10-15 years from now.” The unearned premium payment allows the policyholder to recover funds to pay for moving the insurance to a new carrier.
PACICC covers policyholder losses in certain businesses classes – home, car and business liability and property, for example – but not others (specialty lines, aviation, surety, fidelity, D&O).
Campbell said PACICC has broadened coverage slightly to cover the not-for-profit directors and officers (D&O) class of business, and also non-professional errors and omissions (which would apply to work-from-home consultants, for instance).
PACICC member companies had to strike a balance, as the compensation fund noted in announcing the changes. PACICC member insurers have agreed to offer increased benefits and broadened coverage at the very same time that it is totally on the hook for a catastrophe event that is most likely to trigger insurer insolvencies.
“Canada remains the only developed nation with a quake exposure that does not have some form of a government backstop,” said Campbell. “There is a real, legitimate tension within the industry as to how generous we could afford to be until such time as we get a better answer from government about some form of backstop solution….
“I think this pandemic is creating a reminder to government that if it is better to be prepared for worst-case scenarios, to have an ‘In-Case-of-Emergency-Break-Glass’ plan, and PACICC is part of that. It’s a rare event to have a failure, but when you have one, it’s awful. I think the industry can make a more compelling case to Ottawa [about the need for a government backstop for quake] than we’ve ever been able to make before.”