Canadian Underwriter

What to tell your clients when their insurer goes bust

August 13, 2021   by Canadian Underwriter Staff

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What would happen if a property and casualty insurer were to go bust?

Last week, thousands of Florida home owners were left scrambling for coverage when — during peak hurricane season — Sarasota-based Gulfstream Property & Casualty announced its liquidation to customers.

In 2018, California’s Camp Fire left Merced Property & Casualty in ruins, unable to pay millions of dollars to policyholders and in 2011, the powerful earthquake that killed 185 people in Christchurch, New Zealand, caused two large insurers to declare insolvency.

Prepared for disaster
In Canada, when an insurance company is declared insolvent and can no longer pay claims, the Property and Casualty Insurance Compensation Corporation (PACICC) steps in to protect policyholders and claimants.

According to the PACICC’s 2021 industry modelling report on why insurers fail, Canada’s P&C insurers can currently withstand a large disaster resulting in insurance claims of up to $30 billion without affecting the solvency of well-run carriers.

“This level of preparedness is seven times larger than any catastrophe ever experienced in Canada to date,” wrote Grant Kelly, vice president of financial analysis & regulatory affairs, in the report, which was based on 2019 data.

At this scale of event, if an insurer has underestimated exposure and accumulated too much risk in a particularly damaged region, PACICC could protect policyholders.

The report showed the industry would be likely to survive an event resulting in claims of up to $35 billion — at that scale, however, several insurers would become insolvent and claims settlement for many consumers would be delayed.

Tipping point

An event resulting in $35 billion in claims “would likely overwhelm the capacity of Canada’s insurance industry. This is the tipping point,” Kelly said in the report.

“Multiple insurers would be distressed and could fail, including both smaller regional insurers and large national insurers. These failures would cause contagion in the industry, as PACICC assessments to address losses from failed insurers would trigger the default of other surviving insurers,” Kelly wrote. “Simply put, PACICC was not designed to protect insurance consumers from this magnitude of risk. At this level of catastrophe, the Canadian economy could be permanently damaged without an effective federal government backstop.”

This scenario is highly unlikely. According to the PACICC, regulators have closed only 32 property and casualty insurance companies since 1979, with some of the most recent being the Markham General Insurance Company in 2002 and the Home Insurance Company in 2003.

And no extreme weather-related event has caused an insurer to fail over the past 60 years, Kelly wrote.

What to tell clients if it happens

Nonetheless, if a carrier does go bust, what should you tell your clients?

The PACICC covers auto and home insurance policies, as well as liability, legal expense, accident and sickness, boiler and machinery, and credit protection insurance. Coverage extends to policies representing more than 95% of all P&C premiums paid in Canada.

If one of the corporation’s member insurers fails, PACICC will pay outstanding claims up to $500,00 per home insurance policy and $400,000 per auto and commercial insurance. This excludes mandatory auto insurance sold in B.C., Saskatchewan and Manitoba.

Finding your clients alternative coverage is the first step, and if they’re waiting to receive payment on a claim or need to file a new claim, assist them in getting touch with the liquidator for next steps.


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