Should PACICC purchase reinsurance?

Canadian P&C insurers have expressed mixed views about whether the Property and Casualty Insurance Compensation Corporation (PACICC) should purchase reinsurance to mitigate the impact of a natural catastrophe-triggered default of a member insurer.

However, a PACICC industry consultation paper found a “clear bias” towards an increase in the compensation fund rather than a reinsurance purchase, PACICC said in its latest quarterly Solvency Matters report released Wednesday.

In July 2021, PACICC sought member insurer feedback on the merits of purchasing reinsurance to ensure a more efficient and cost-effective response to future industry solvencies. (The industry-funded, non-profit PACICC exists to respond to claims of policyholders under most policies in the unlikely event of the collapse of a P&C insurer in Canada.)

Specifically, the paper asked for feedback on:

• Whether the industry was open to the idea of PACICC acquiring reinsurance on the behalf of the industry for a NatCat-triggered default of a member insurer;
• The specific reinsurance option (coverage/price) successfully marketed by Guy Carpenter
• Appropriate methods of payment for such a reinsurance purchase
• The trade-off between the annual purchase of reinsurance versus payment of capital levies to achieve an increased target level for the PACICC compensation fund.

“PACICC received strong survey response, with more than 100 PACICC member insurers representing 88 per cent of industry direct written premiums,” says the Solvency Matters report.

While views were mixed, there was a clear bias towards an increase in the compensation fund rather than a reinsurance purchase (particularly among larger companies), if a higher target was set by PACICC’s board.

iStock.com/magical_light

“If a higher target were to be set by the PACICC board, the industry would prefer capital levies to the purchase of reinsurance,” the report says. “Some appetite was expressed for a combination (i.e. reinsurance purchase and/or standby line of credit) to cover the gap between the fund and target, until such time as a series of capital levies would enable the fund to get to a new, higher target.”

The consultation also found industry did not support purchasing the specific reinsurance program detailed in the paper, for a variety of reasons, such as price, and quantum and stability of coverage. “The industry is ready to fund a reinsurance purchase if required, and would prefer to do so via increased assessment… Members are not supportive of drawing down income or capital from the current compensation fund.”

PACICC’s board of directors asked staff to review feedback with Guy Carpenter and explore alternative reinsurance to flesh out scenarios for an increased compensation fund target. Staff will also explore costing for a standby line of credit as an alternative to reinsurance and/or capital levy. The board will review results of this research at its strategic planning conference scheduled for June 9.

Reinsurance has been a hot-button issue in the Canadian P&C industry since the federal solvency regulator released its reinsurance discussion paper in 2018. At the time, Insurance Bureau of Canada said it would need to post an additional $21-30 billion in capital to insure risks if the proposed rules went through.

But in November 2020, a new draft guideline was released and industry was “pleased to see that it was significantly different than the original proposals,” Jill Lankin, senior vice president and general counsel with Zurich Canada, said in November 2021 during IBC’s annual Regulatory Affairs Symposium.

For example, the original paper has a stress scenario requiring insurers to “capitalize for three of our largest policies incurring total losses all at the same time, and getting zero recoverability from any unregistered reinsurance,” Lankin said at the time.

“We all know that created quite a stir in the industry,” she says. “And as a result, we formed coalitions, we met individually with OSFI to talk about our concerns, most notably the capital impact being [$21-30 billion] projected on the industry.”

The new draft focuses on a capitalization requirement for a maximum loss on insurers’ single largest insurance exposure. “Obviously, we’re very happy with the shift.” 

New updated reinsurance guidelines are expected in February. 

Feature image by iStock.com/Marc Bruxelle