How well the industry protects policyholders against insolvency

Canada’s P&C insurance industry compensation fund will almost entirely protect both personal and commercial lines policyholders in the event of an insurer insolvency, a comprehensive review of coverage and benefits has found.

Should an insurer member of the Property and Casualty Insurance Compensation Corporation (PACICC) fail, roughly 98% of all personal lines policyholders in Canada would be protected to the full value of their claim, PACICC president and CEO Alister Campbell wrote in the latest quarterly Solvency Matters report, released Thursday. The remaining 2% would be partially protected up to the current policy limits.

Even for commercial lines, protection levels are quite high — 96% for commercial property and 94% for commercial liability.

But even with these high compensation levels, there is room for improvement, Campbell wrote in the article Is Great Good Enough? “One finding which was clear in reviewing the new data, however, is that in a world of higher inflation, PACICC benefit limits have eroded, even in the brief period between 2020 and 2023.”

When PACICC last reviewed its benefit limits in 2020, it was “confidently able to affirm that PACICC would provide comprehensive coverage to 98%+ of Canadian personal lines policyholders,” Campbell wrote. But PACICC didn’t have the data to answer a question from members of the Canadian Council of Insurance Regulators regarding the degree to which the coverage was comparably high in every province in Canada.

As part of this year’s review, PACICC initiated a data call to industry and received 750,000 data points of open claims from roughly 80% of the industry. It found PACICC’s limits were equally robust across all provinces.

Still, higher inflation between 2020 and 2023 is a concern. So, PACICC added questions to its industry consultation paper regarding the possible inclusion of “inflators,” at least for personal lines, as an embedded component of the go-forward PACICC operating model.

PACICC didn’t provide examples of inflators or outline benefit limits. However, in 2020, personal property benefit limits paid to policyholders were increased to $500,000 from $300,000, Campbell told Canadian Underwriter at the time. Among other changes, coverage definitions were also broadened slightly to cover not-for-profit D&O and non-professional E&O.

“The PACICC consultation paper also asks members to give us their considered views on broader questions regarding our philosophical approach to benefit limits, as well as several more practical questions regarding management of ‘hardship’ claims,” Campbell wrote in the latest Solvency Matters report.

Campbell noted PACICC was never designed to provide unlimited coverage to Canadian policyholders of an insolvent insurer. Complex specialty lines were excluded from coverage entirely, and limits for commercial property and liability claims were set for most small business claims, but certainly not adequate for larger claims.

Overall, PACICC’s 98% coverage for personal lines policyholders matches up well with what’s provided by the Canadian Deposit Insurance Corporation for bank depositors (96%), Assuris for life insurance (historically targeting 90%) and the Canadian Investor Protection Fund for investors.

Founded in 1989, PACICC’s model hasn’t been tested in 20 years, when the last insurer failed. “While we have not been tested recently, it is critical that we ensure that the current operating model be just as effective in response to the insolvencies that will occur in the future,” Campbell wrote.