Canadian Underwriter

What a Canadian public earthquake backstop might look like

January 31, 2023   by David Gambrill

Earthquake seismograph pattern

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A federal government backstop designed to help private insurers cover high-risk flooding could be extended to protect Canadians from earthquake risk as well, Canada’s home, car and business insurers suggested in a release Tuesday.

Meanwhile, in the absence of a government backstop, the Property and Casualty Insurance Compensation Corporation (PACICC) is looking at innovative ways to prevent a chain reaction of insurers failing in the event of a massive earthquake in Canada. PACICC is an industry organization that pays claims to Canadians in the event of an insurer bankruptcy.

Most recently, PACICC has worked to establish a $250-million standby line of credit facility issued by major Canadian banks, using PACCIC’s power to levy its insurance company members as collateral. The group has also observed in Louisiana innovative ways to go beyond membership levies to generate capital in the event of major natural catastrophes.

Insurance Bureau of Canada (IBC) issued a press release Tuesday announcing their new president and CEO, Celyeste Power, and a list of the organization’s priorities in 2023. Among them is continued work with the federal government on a public-private flood backstop. The funding model is yet to be decided, but IBC noted in its release the new model could be extended to apply to more than just flooding.

“Specifically, IBC will help the federal government make its commitment for a national flood insurance program a reality in 2023,” IBC said. “The program will aim to offer more affordable insurance to all residents at high risk of overland flooding, including flooding caused by storm surge, through a public-private partnership.

“Once established, the program could be extended to address earthquake-related insurance gaps and other climate-related protection gaps that emerge in future.”

On a parallel track, PACICC has been talking to the federal government for several years to create a public-private partnership to cover Canada’s most extreme peril — earthquake.

Previous studies from PACICC suggest an earthquake generating more than $35 billion in damage would carry the risk of multiple P&C insurance companies failing. (The entire private insurance pool of capital for all insurance risks in Canada, home, auto and business, was in the neighbourhood of $50 billion four years ago.)

PACICC’s funding model places an annual cap on the total assessment the organization can levy from its insurance company members. The cap is set at 1.5% of a member’s direct written premium, which means PACICC’s current upper limit of capital obtained an annual levy is roughly $1.07 billion. (PACICC can keep levying this amount for years in order to keep paying out to Canadian insureds in the event of an earthquake.)

“We have shown that, above a certain size of insured loss event, claims of eligible policyholders [in an earthquake] would far exceed that limit,” as PACICC president and CEO Alister Campbell recently wrote in the January 2023 edition of Solvency Matters. “And we have also illustrated why, in that time of crisis, politicians, regulators and industry leaders would unite to call upon PACICC to fund claims in excess of that limit.

“And thus, our advocacy for a federal backstop – with taxpayers providing critical liquidity in time of crisis – to avert systemic collapse and to ensure proper protection for Canadian policyholders.”

Those conversations – which include the potential structure of the backstop, and how to avoid the “moral hazard” of governments bailing out private companies – are ongoing, Campbell reports.

In the meantime, PACICC is looking elsewhere around the globe for innovative solutions.

“Two recent developments have flagged another possible source for best practice,” Campbell reports in Solvency Matters. “The first development has been the progress made here at PACICC to partner with a panel of the Canadian banks in order to establish a standby line of credit facility as part of our efforts to ‘expand our financial capacity,’ and ensure that we can respond effectively to address resolution or insolvency scenarios.

“It now appears clear that major financial institutions are ready to accept PACICC’s assessment power as sufficient security to advance as much as $250 million in short-term funding.”

Another interesting example to explore is in Louisiana, where the local equivalent of PACICC, the Louisiana Insurance Guaranty Association (LIGA), floated a $458-million bond to draw additional capital beyond member levies. Four major hurricanes since 2020 have caused nine Louisiana insurers to fail during the first three quarters of 2022 alone, as Campbell observes.

Also, in Louisiana, the government and private insurers have used an innovative tax arrangement to full advantage.

“Insurers in Louisiana are allowed to deduct future assessment payments from their premium tax obligations – up to 10% of total tax payable a year,” Campbell writes. “In this way, government and taxpayers support the industry’s effort to look after adversely impacted policyholders without making such policyholder protection too onerous for current or future insurers active in the state.”


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