Actuarial Notes

Guide to Compensation Plan for Property and Casualty Insurers

By Alex Kennedy · Property and Casualty Insurance Compensation Corporation · 2010

Study guide: Exam 6C

A guide to the compensation plan, funded by P&C insurers, that protects policyholders when a property and casualty insurer becomes insolvent. The Plan came out of five years of negotiation with the provincial and federal Superintendents of Insurance; the Property and Casualty Insurance Compensation Corporation, which administers it, was incorporated as a federal non-profit corporation in 1988, and the Plan has been in effect country-wide since 1989. Dated May 2010, the guide is signed by Alex Kennedy, PACICC's President and CEO from 1998 to 2003, as written in December 2003 and updated as of June 2009.

On the syllabus

  • Exam 6C — objectives B1–B3; the whole guide, with the outline referring to PACICC's website for the updated coverage and limit.

1 The Plan

  • The Plan provides a reasonable level of recovery for policyholders' claims under most policies issued by P&C insurers; life insurers have a similar plan of their own and are excluded.
  • Excluded for their distinctive characteristics: aircraft, credit, crop, directors' and officers', employer's liability, certain errors and omissions (medical malpractice is not excluded), fidelity, financial guarantee, marine, mortgage, surety and title insurance.
  • Also excluded are automobile insurance in Manitoba and Saskatchewan and bodily injury from Quebec auto accidents compensated by the SAAQ; government-owned insurers otherwise participate, and accident and sickness insurance is protected where the insurer also writes general insurance.
  • For insolvencies after 1996 the Plan responds to unearned premium claims, limited to 70% of a maximum unearned premium of $1,000 — at most $700; on a $960 annual premium with 7 months unearned, the claim is $560 and PACICC pays $392.

2 Initiation of the Plan

  • PACICC is a non-profit corporation incorporated under Part II of the Canada Corporations Act, and every company licensed in a participating jurisdiction to sell a protected class of insurance is a member — deemed a member by legislation in some jurisdictions, bound by a membership contract as a condition of licensing in others.
  • Jurisdictions have exempted, for example, reinsurers, farm mutuals and reciprocals; all provinces and territories have the necessary legislation in place.
  • A licensed company may not withdraw, and PACICC may not terminate its membership; membership ends six months after the company ceases to be licensed for a protected class in any participating jurisdiction.
  • Each Superintendent had to agree "prudential criteria" — the solvency standards imposed on all P&C insurers in the jurisdiction — with PACICC, and must consult PACICC before amending them.

3 Operation of PACICC

  • A Board of Directors elected by the participating insurers administers PACICC, in close liaison with the Federal Superintendent of Financial Institutions and the provincial Superintendents, who may designate non-voting representatives to Board discussions and to any insolvency advisory committee.
  • PACICC's obligations come into operation only upon a formal winding-up order under the federal Winding-Up and Restructuring Act; until then it has no financial responsibility for the insurer.

4 Procedure in an Insolvency

  • After the winding-up order, PACICC consults the court-appointed liquidator to arrive at a working relationship, following informal consultations before the appointment.
  • The insolvent insurer's auditor is excluded from the tender to pre-select the liquidator, and liquidators use the model wind-up order PACICC developed with them.
  • PACICC may pay a policyholder once the claim is settled with the liquidator, but is not obliged to and may review the settlement.

5 Payment of Claims

  • The maximum recovery is $250,000 for all covered policies ($300,000 for personal property policies) for all claims arising from a single occurrence under policies issued to a single named insured; the insured receives the lesser of the policy entitlement, after deductibles and co-insurance, and that limit.
  • A $300,000 claim with a $250 deductible yields $250,000; a $175,000 claim with a $500 deductible yields $174,500. The Plan provides basic compensation, not full protection in all cases.
  • Because claims from one occurrence are aggregated, PACICC may have to set priorities for how a payment is applied among claimants.

6 Other Arrangements as to Plan Payments

  • The Board may exclude claims by persons with a special relationship with the insolvent insurer, and a major insolvency that triggers the annual assessment limit may require it to stretch out the time over which claims are met.
  • The Plan covers claims arising before the winding-up order or within a period after it that the Board determines, to give time for other insurance to be arranged.

7 Recovery by PACICC of Amounts Paid

  • PACICC recovers what it paid before the policyholder receives any additional payment on that claim, so its payments are interim to the extent the estate or third parties can pay.
  • Before payment the policyholder certifies that any claim against a solvent insurer covering the same loss is exhausted and assigns to PACICC all rights against the insolvent insurer under the policy, normally through the wind-up order.
  • On a $300,000 claim where PACICC pays $250,000, the insured receives nothing from a $150,000 liquidator's distribution and $25,000 from a $275,000 one; PACICC also has first priority against the insured's recoveries from third parties.

8 Assessment Process

  • PACICC recovers what it advanced by assessing participating insurers separately for each participating jurisdiction in which the insolvent insurer wrote business, limited to the shortfall after recoveries from the insolvent insurer and third parties.
  • An insurer's assessment for a jurisdiction, A, is the total assessed there, B, in proportion to its direct written premiums for protected policies there, C, over those of all participating insurers there, D:

A = B \times \frac{C}{D}

  • The maximum annual levy an insurer may be asked to pay in a jurisdiction is 1.5% of its direct written premium there.
  • Special levies in 1998, 1999 and 2000 built a Compensation Fund of about $30 million (about $43 million as of June 2009); the Board may borrow from it and delay an assessment, repaying it with interest.
  • The Board also levies administrative assessments for PACICC's expenses, and must discuss modifying or deferring compensation with the regulators if payments would cause financial difficulty to the industry or to PACICC.

9 Conclusion

  • The Plan protects policyholders against the more serious results of a P&C insolvency without exposing the general insurance industry to unlimited liability for the insolvent insurer's claims.

Sources