Actuarial Notes

Why Insurers Fail: Mapping the Road to Ruin: Lessons Learned from Four Recent Insurer Failures

By Zhe (Judy) Peng, Ian Campbell and Grant Kelly · Property and Casualty Insurance Compensation Corporation · 2022

The 2022 instalment of PACICC's Why Insurers Fail research series, a case study of four recent P&C insurer failures outside Canada. It examines Gefion Insurance A/S (Denmark, 2021), CBL Insurance Limited (New Zealand, 2018), Anbang Insurance Group Co., Ltd. (China, 2020) and Merced Property & Casualty Company (California, 2018) against the three common causes of failure the series identified in earlier case studies — internal operations, organizational structure and adequacy of regulatory oversight — and concludes that natural disasters should be added as a fourth.

Executive summary

  • The series' earlier case studies — Advocate General (1989), Maplex General (1995), Canadian Millers' Mutual (2001), HIH (2001), Reliance (2001) and Markham General (2002) — identified three common causes of P&C insurer failure:
    • 1 Internal operations — poor underwriting, insufficient loss reserving, rapid growth, inappropriate diversification, risky acquisitions and joint ventures, corporate governance deficiencies, bad investments, poor capital management, and reinsurance misuse or mismanagement
    • 2 Organizational structure — holding company arrangements and other complex corporate structures
    • 3 Adequacy of regulatory oversight — gaps in regulatory oversight
  • The paper adds a fourth: 4 Natural disasters — failure to understand exposure aggregation, and inadequate stress-testing of capital and reinsurance requirements against such aggregations, can lead directly to sudden insurer failure; many of these perils appear to be accelerating with climate change.

Introduction

  • Table 1 sets the earlier failures against the causes, each marked primary or secondary.
  • The last insurer insolvency in Canada was 19 years before the study (Home Insurance Company), so the four recent cases are drawn from abroad.

Insolvency case studies

  • 1 Internal operations — the case of Gefion Insurance A/S (Denmark, 2021)
    • Causes of the Gefion failure: corporate governance deficiencies (insufficient control of outsourced activities; ineffective compliance, risk management and internal audit) and rapid growth in new markets across Europe in six years.
    • Lessons learned: internal controls; caution entering new markets and lines of business; capital management; reinsurance is not a solution for chronic underwriting losses.
  • 2 Organizational structure — the case of CBL Insurance Limited (New Zealand, 2018)
    • Causes of the CBLI failure: a holding company structure that let CBLI write most of its business outside New Zealand without appropriate local supervisory scrutiny; failure to estimate reserves for long-tailed claims; a cautious regulatory approach; outsourcing of fundamental insurance operations.
    • Lessons learned: holding company supervision on a "whole company" basis; adequate provisions for outstanding claims; regulators acting quickly when in doubt; regulatory capacity in host jurisdictions.
  • 3 Adequacy of regulatory oversight — the case of Anbang Insurance Group Co., Ltd. (China, 2020)
    • Causes of the Anbang failure: inconsistent financial reporting standards, corporate governance deficiencies, rapid growth and fraud through a complex and opaque equity structure.
    • Lessons learned: harmonized financial reporting and regular review by the prudential regulator; internal controls; caution in new markets and lines; sound risk management.
  • 4 Natural disasters — the case of Merced Property and Casualty Company (U.S., 2018)
    • Causes of the Merced failure: catastrophic loss from the 2018 Camp Fire, with poor underwriting — an over-concentration of homeowners business in high-severity fire zones (60 percent of policies and 81 percent of direct written premium).
    • Lessons learned: avoid geographical concentration of risk; climate change is increasing solvency risk, so stress-test property portfolios against changing natural catastrophe models and unmodelled risks; diversify across lines of coverage.

Conclusion

  • 1 Despite improvements in the business environment, P&C insurers can still fail.
  • 2 Common causes of P&C insurer failures have not changed over time.
  • 3 By fueling increases in natural disasters, climate change adds a new source of potential insurance failure.
  • 4 The causes of P&C insurer failure are not unique to one country or a single business model.

Publications in PACICC's Why insurers fail series

  • The dynamics of P&C insurance solvency in Canada – 2007
  • Lessons learned from the failure of Maplex General Insurance Company – 2008
  • Inadequately pricing the promise of insurance – 2009
  • Lessons learned from the failure of Advocate General Insurance Company – 2010
  • Determinants of survivability of new entrants to the P&C industry – 2011
  • Lessons learned from the failure of Markham General Insurance Company – 2012
  • Natural disasters and catastrophes – 2013; updated in 2016
  • Lessons learned from the failure of Canadian Millers' Mutual Insurance Company – 2014
  • The role of capital in weathering crises – 2015
  • Lessons learned from the financial challenges – and the successful recovery – of the Farm Mutual Reinsurance Plan – 2016
  • Exit Strategies for P&C Insurers – 2017
  • Lessons learned from the failure of HIH Insurance Limited – 2018
  • Alternatives to Liquidation? Exploring the case for expanding Canada's P&C resolution toolkit – 2019
  • Lessons learned from the failure of Reliance Insurance Company – 2020
  • How Big is Too Big? The Tipping Point for Systemic Failure – 2021

Sources

  • Why Insurers Fail: Mapping the road to ruin (PACICC, 2022) — the document: title page, authors, table of contents, executive summary, case study causes and lessons, and conclusion. Read from the Internet Archive's copy of that file captured January 24, 2024 (sha256 04f86932…6f9f, 48 pages), as pacicc.ca refused automated requests