Canadian Underwriter

The catastrophe that would overwhelm Canada’s P&C industry

May 12, 2021   by David Gambrill

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A major catastrophe event resulting in insurance claims exceeding $35 billion would likely overwhelm the capacity of Canada’s insurance industry, according to a recent report by the Property and Casualty Insurance Compensation Corporation (PACICC), How Big is Too Big?

At that point, multiple insurers would be distressed and could fail, including both smaller regional insurers and large national insurers. Such failures might trigger the default of other surviving insurers.

PACICC compensates Canadian policyholders for claims in the event of an insurer insolvency. In a modelled scenario of a $35-billion loss, in which 13 P&C insurers are projected to fail, PACICC would be collecting a projected levy of $6.7 billion from surviving insurers to pay Canadian policyholders for the defaulted claims losses.

To put this into perspective, a $35-billion catastrophe event would be almost 10 times larger than Canada’s record-breaking catastrophe loss. In 2016, wildfires in Fort McMurray, Alta., caused a record $3.6 billion in insured losses for Canada’s property and casualty insurance industry.

“How scary is this scenario?” PACICC president and CEO Alister Campbell said of the potential for a $35-billion loss in a video presentation Wednesday, in which he summarized the report’s findings. “Well, scarier than we would like.

“There are multiple events that gloomy underwriters can imagine that would lead to insured losses in excess of $35 billion. And that includes earthquakes in British Columbia and in the Montreal-Ottawa corridor that we absolutely know will happen someday.

“It also includes other events such as solar storms, asteroids, and an evolving scenario or two around cyber that I think has the attention of all of us these days. At $35 billion, we need a better option than what we have now. We strongly believe Canada can and must become prepared for such an event. We need a backstop. We need it in partnership between the industry and the government.”

At the level of a $35-billion disaster, about 1.9 million Canadians might be expected to hold policies with a failed insurer, said the report’s author, Grant Kelly, PACICC’s chief economist and vice president of financial analysis and regulatory affairs. Following a $45-billion disaster, that number would climb to more than 10 million Canadian policyholders affected by insurer liquidations.

PACICC has been modelling “the tipping point” for the industry since 2013, in part to a response by a PACICC board member about what kind of event would trigger a systemic failure of Canada’s private insurance system for protecting policyholders. Under the PACICC model, if a Canadian P&C insurance company were to fail, as last happened in 2003, PACICC levies its members to provide the funds to compensate policyholders for claims in the event that their insurer goes bankrupt.

PACICC members would be able to sustain any major catastrophe of up to $30 billion without any undue financial stress, the PACICC report found. This threshold is $10 billion higher than in 2013, in large part because PACICC member insurers have made substantial investments in reinsurance over that time. In his presentation Wednesday, Kelly observed that PACICC member insurers have purchased almost $30-billion worth of reinsurance capacity in 2019, a 71% increase over the $17.6 billion worth of reinsurance capacity in 2013.

But in the ‘Orange Zone,’ representing a disaster that causes insured losses of between $30 billion and $35 billion, PACICC would start to experience liquidity issues and multiple insurers would be predicted to fail.

In a B.C. quake scenario, for example, the number of failed insurers arising from such an event would jump from one (in a $30-billion scenario) to six in a $35-billion scenario. In addition, seven secondary insurer group failures might occur at the $35-billion level, whereas no secondary group failures would be projected for a $30-billion event.

PACICC was asked to model different scenarios in which the financial burden on PACICC may be reduced. For example, maybe PACICC could establish a pre-disaster fund, borrow money to help restore a severely financially distressed insurer back up to a minimum MCT capital level of 150%. Or perhaps the regulator could “look the other way” [called the regulatory forbearance option], basically allowing failed insurers to use current premiums to pay for past losses.

“The blunt reality is that there is an important distinction that some of you may recall from The Princess Bride between ‘dead’ and ‘really dead,’” Campbell said. “The tragedy of this model is that at $35 billion, too many of the insurers aren’t just distressed — they are fatally out of the game, with liabilities far in excess of their compliant capital and reinsurance, and there is no real scenario for either [PACICC restoring their financial health] or regulatory forbearance options.

“A catastrophic event at $35 billion would simply create a national crisis for the industry.”


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