What’s Canada’s insurer failure tipping point?

A cluster of insurer failures assessed at more than $3 billion would trigger systemic issues for Canada’s P&C insurance industry, according to a new report from the Property and Casualty Insurance Compensation Corporation (PACICC).

The paper found PACICC’s current funding mechanism is adequate to handle a cluster of failures assessed at up to $1.3 billion per year. Clusters are defined as three or more failures within three years.

In short, PACICC charges assessments to other “surviving” companies if a PACICC member insurer fails in Canada. PACICC’s board of directors estimates an amount (the ‘total assessment’) that reflects the best estimate of the cost with respect to the insolvency of a particular year.

The board then allocates the total assessment among participating jurisdictions (provinces and territories) in which the insolvent insurer was writing policies. Finally, the corporation levies assessments on each member which is licensed in a contributing participating jurisdiction.

PACICC assessments are limited to 1.5% of covered direct premiums written by an insurer in the prior year. In 2024, the maximum assessment capacity was about $1.3 billion — the assessment amount PACICC said is adequate to handle a cluster of failures.

In fact, PACICC’s paper found the corporation would be able to handle a cluster of failures with a combined total required assessment of as much as $2.25 billion in a single year.

Multi-year considerations

“However, this level of assessment would need to be collected over at least two years, given limits to our assessment mechanism, with the risk that not all policyholder obligations could be met in a timely fashion,” says the report, When it Rains…it Pours: Analyzing failure clusters and Canada’s capacity to respond. “It is also important to note that PACICC’s ability to handle further failures in Year 2 would also be inhibited.

“It would not be in a position to manage a cluster of failures of this size in successive years.”

PACICC’s research also found it wouldn’t be able to provide the liquidity necessary to cover Year 1 cash flow obligations for a cluster of failures with a total assessment of between $2.25 billion and $3 billion. In this scenario, there would be a cash shortfall requiring PACICC to borrow funds to meet these obligations.

Anything above $3 billion would cause systemic solvency issues for PACICC’s membership.

Last year, PACICC introduced the Global Failed Insurer Catalogue, listing 547 P&C and life insurers that failed between 2000 and 2022 across 55 different jurisdictions.

“A key finding from this research on insurer failures around the world was that, when insolvencies occur, they often do so in ‘clusters’…,” the report says. “This international pattern matches Canada’s own experience with insurance company failures (although our own cluster time periods were slightly longer).

“Some 35 property and casualty (P&C) and life insurance companies failed in Canada in three identifiable clusters between 1981 and 2003.”

PACICC also conducted a ‘deep dive’ into the specific experience of three countries that recently witnessed significant failure clusters — Denmark, the U.S. and Thailand. “The evidence in Demark, the United States (two distinct clusters in Florida and Louisiana) and Thailand clearly demonstrates that a large cluster of insurance company failures can be so substantial as to test the financial resources of an insurance guarantee fund.”

Feature image by iStock.com/Natalia Misintseva