PACICC

Study guide: Exam 6C

The Property and Casualty Insurance Compensation Corporation (PACICC) is Canada's guaranty fund for property and casualty insurers. Membership is compulsory for insurers licensed in participating jurisdictions, and when a member fails PACICC pays covered policyholder claims up to defined limits, funded by assessments on surviving members after the failure.

• Mandate: to respond to the claims of policyholders of an insolvent member insurer, and — the second half, often overlooked — to minimise the cost of insurer failures by contributing to a well-regulated industry. PACICC publishes research on solvency, capital and insurer failure that appears directly on the syllabus.
• Coverage: claims of individuals and small businesses up to a per-claim maximum, plus a refund of a portion of unearned premium, subject to a cap. Excluded or limited: reinsurance recoverables, claims above the cap, and certain commercial exposures.
• Funding. Assessments are levied after a failure, allocated by market share in the affected jurisdiction and line, and subject to an annual cap on how much a member can be assessed — which spreads a large failure over several years rather than removing the constraint.
• Why insurers fail, from PACICC's own research: inadequate pricing and deficient reserves dominate, with rapid growth into unfamiliar lines, reinsurance failure, catastrophe exposure and fraud following. Notably, investment losses are a less common primary cause than candidates expect.
• PACICC's own solvency work — capital adequacy research, the "cost of failure" analysis, and studies on the MCT framework — argues that early intervention by OSFI is far cheaper than resolution, because an insurer's asset value deteriorates fast once failure is public.
• The recurring exam question is the framework's limits: post-assessment funding creates a pro-cyclical burden, market-share assessment creates Moral Hazard, and capacity is insufficient for the failure of a very large member. PACICC is the last line of defence, not the primary one.

Why Insurers Fail, and What It Implies An insurer grows written premium 45\% in two years by entering commercial trucking, a line it has not written before, at rates 15\% below the market. Its reserves are set by applying its personal auto development factors. Two years later it reports a \$60 million reserve strengthening and its MCT ratio falls to 118\%.

Diagnose the failure pattern and say what should have caught it.

Answer This is the textbook Canadian insolvency profile, and every element of PACICC's research on failure causes is present:

1. Rapid growth into an unfamiliar line. Growth of 45\% means the book is dominated by business written without relevant experience.
2. Underpricing as the growth mechanism. Winning share at 15\% below market on a long-tail line means the business was bought, not selected.
3. Deficient reserves, and worse, deficient method. Commercial trucking develops far more slowly and severely than personal auto. Using personal auto factors does not merely understate the reserve — it conceals the underpricing, because reported loss ratios look fine while the claims are still immature.
4. Delayed recognition. The strengthening arrives two years in, by which time two full years of underpriced business is on the books and cannot be repriced retroactively.

What should have caught it:

• The Appointed Actuary, at the first valuation after entering the line: development assumptions for a new line cannot be borrowed from an unrelated one, and where no own experience exists, industry benchmarks or an exposure method are required.
• FCT, whose scenarios must include reserve deterioration in a new line — precisely the risk a growth strategy creates.
• ORSA, which should have identified entry into an unfamiliar long-tail line as a material risk requiring capital above the ordinary target.
• OSFI supervision, for which rapid growth in a new line is a standard escalation trigger.

If all four fail, PACICC pays — and its assessment falls on the competitors who declined to write the business at 15\% below market. That is the moral hazard argument in one paragraph.