OSFI wants P&C ‘resolution authority.’ What PACICC needs for the job

Canada’s solvency regulator is looking for a stable, reliable ‘resolution authority’ that would allow the country’s property and casualty insurance industry to wind up an insolvent insurer efficiently without relying on taxpayer subsidization.

At first blush, the ideal candidate is the Property and Casualty Insurance Compensation Corporation (PACCIC), whose role is to do just that. But the rules for winding up Canadian companies were first passed in the late 1800s, and so PACICC is making several moves to bolster its ability to resolve a P&C insurance company bankruptcy during the modern era.

“Just to remind you, that when a company fails, it is a messy, utterly long, and slow process that is all done through the Winding Up and Restructuring Act of Canada, which was first drafted in Sir John A. MacDonald’s second term and not materially amended since,” PACICC president and CEO Alister Campbell told the late-September National Insurance Conference in Canada (NICC) in Montreal. He added the average time to wind up an insolvent company is typically 15-to-20 years.

In addition to securing a $250-million line of credit facility, Campbell said PACICC recently applied to the Office of the Superintendent of Financial Institutions (OSFI) for the authority to establish a ‘bridge’ insurer to help wind up insolvent companies.

He explained a bridge insurer essentially mimics some of the powers OSFI granted to Assuris, which plays an analogous role to PACICC in the event of a life insurance company failure.

How would such a PACICC-operated bridge insurer be capitalized?

Campbell said PACICC hopes for a similar deal offered to the resolution authority for the life and health industry. Founded in 1990, Assuris is an independent non-profit that protects Canadian policyholders if their life and health insurance company fails. Its bridge insurer essentially starts with no capital, but ramps up very quickly to a full-blown insurance operation in the event of a failure.

“Assuris has a deal where they don’t have to put any capital in their shell [i.e. bridge] insurer,” Campbell said. “We think that’s a super deal. Informally, OSFI has indicated they can’t find anybody still at OSFI who can remember why Assuris got that sweet deal.”

Campbell said PACICC has identified five ‘use cases’ in which a P&C bridge insurer would benefit the industry, governments and policyholders.

“They all start out with the same root theme,” he said of the scenarios. “There is an insurer in severe financial distress, and there is no buyer on the immediate horizon that will take all of it. That is a very specific scenario by itself; then we have [other scenarios] branching out from that.

“Having a bridge insurer would allow us to transfer the dodgy assets and the toxic liabilities and put them safely into our bridge insurer and allow the successful sale, hopefully, of the good parts of the insurer to buyers, so that we can start looking after the obligations of the company with regard to claims of policyholders.”

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Campbell gave the hypothetical example of an insurer that sold policies without updating its pandemic exclusions after SARS, and wound up on the hook for COVID losses, causing it to fail. A bridge insurer would give PACICC the ability to park the toxic commercial liability for the COVID policies with the bridge insurer. At the same time, PACICC could arrange a sale of the company’s healthy books of business — its auto portfolio, for example — to interested buyers.

If OSFI approves PACICC’s submission, Campbell expects the compensation fund to have the power to create a bridge insurer sometime in 2025, albeit more likely at the end of that year.

OSFI superintendent Peter Routledge has questioned whether the P&C industry is adequately prepared to handle a possible insurer insolvency — or multiple insurer insolvencies — during a major claims event such as an earthquake without taxpayer support.

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“PACICC and the IBC [Insurance Bureau of Canada] have talked a lot about earthquake risk,” Routledge said at the NICC in September. “At some point — it might be in my lifetime, it might be in my grandchildren’s lifetime — it will happen in Canada. It might be in the Ottawa/Charlevoix region, it might be on the West Coast, but it’s going to happen. All geology and science tells us this. So when it happens, it would be good to have in place a mechanism that could stabilize the insurance industry after a huge event, financially, so that recovery can begin and so that other critical insurance services are available to Canadians the day after that awful event.”

Routledge said his experience with a resolution authority is with Canada Deposit Insurance Corporation (CDIC). In 2023, CDIC reported total assets, including investments, to be just under $8.2 billion Cdn. Its liabilities include provision for insurance losses related to handling a bank insolvency, which are $2.1 billion.

“I don’t want to set this as a fixed notion that there’s some CDIC-type model for the insurance industry,” Routledge said at NICC. “That is not what I mean to communicate or suggest. What I’m suggesting is that if there is either a loss contagion event triggered by the failure of an insurance company, or there is a sizeable event – an earthquake, for example, that produces an extraordinary loss – there should be some pre-planned mechanisms in place to deal with that….

“That pre-planned mechanism should be constructed in such a way that, although the sovereign [i.e. the federal government] may provide support during a finite period of financial strain, the taxpayer in the long run doesn’t subsidize that loss.”