Dibra - Why Insurers Fail

  1. Defn of insolvency, insolvency risk, liquidity risk
    • Insolvency: exit from market following winding-up order (when insurer becomes insolvency risk or a liquidity risk).
    • Insolvency risk: when assets become insufficient for insurer to meet its contractual and other financial obligations.
    • Liquidity risk: when it has sufficient assets to cover obligations but high level of risk that those assets could disappear.
    • Liquidity risk more common in Canada: due to larger importance of foreign companies (all liquidity risks have been branch)
  2. Foreign owner - Advantages, disadvantages
    • Advantages:
      • More competition which leads to more affordability
      • Diversification (international opportunity to diversify portfolio -> less likely to be insolvent)
      • Allows access to international sources of capital
    • Disadvantages:
      • Foreign parent failure is a main cause of Canadian insolvency
      • Profit transferred to parent
      • Counters goal to promote Canadian ownership
  3. Cost of exits
    • Insolvent insurers' claim costs and UEP which are borne by surviving ins companies in the industry
    • Costs incurred by regulatory authorities, agents, accountants and reinsurers
    • Lost wages, commissions, taxes
    National guarantee fund, established to protect p.h. from financial loss in the event of an exit
  5. PACICC assessment
    Assesses member companies for the resources required to pay loss claims and UEP, up to its limits, on eligible policies
  6. External factors influencing insolvency
    • UW cycle/profitability: exits increase during soft markets or periods of poor profitability
    • CAT: severe weather events
    • eco and financial market volatility: not level of financial variables but their volatility
    • International exposures: multinationals more likely to exit
    • Reinsurance Risk: failure of a reinsurer
  7. Company characteristics that play a role in most insolvencies
    1. Governance and Internal Controls: mgt and governance issues lead to decisions or failed processes that cause companies to fail
    2. New Entrants: face strong competion from experienced firms
    3. Growth:
      • usually accompanied by deteriorating loss reserves
      • during periods of diminishing capital strength, more incentive to embark on aggressive expansion
      • may also enter new areas of business where they lack expertise
      • If high interest rates, may hope to offset UW losses
    4. Firm Size: small more sensitive to financial distress due to
      • less diversified more diversified
      • limited access to capital
  8. Leading causes of insolvency in Canada
    1. Inadequate pricing / deficient loss reserves
    2. Firms with foreign parent
      • sometimes need to provide capital to parent to offset their losses
      • Capital strain from being responsible for a parent ’s profitability could lead to insolvency
    3. Rapid growth
      • risk increases when UW cycle hits a soft market and profitability deteriorates
  9. Problems with reinsurance assets (3)
    • Can deteriorate quickly
    • Cannot be readily sold
    • Must be actively managed
  10. Why PACICC is in good financial position to handle insolvency in the future
    • can make special assessment
    • Small reserve already exists
    • Canada less prone to CAT
    • Access to subrogation (TP payer)
    • PACICC recover insurers' assets when sold (liquidity risk)
  11. Why PACICC is NOT in good financial position to handle insolvency in the future
    • assessment rates not high enough
    • designed to deal with median insurer but size has increased
    • reserve too small
    • top 10 insurers too big
  12. OSFI vs. PACICC
    • OSFI role: to minimize insolvency risk
    • PACICC: to provide p.h.'s with reasonable recovery for unpaid claims and UEP in event of insurer's insolvency
Card Set
Dibra - Why Insurers Fail
Dibra - Why Insurers Fail: Dynamics of P&C ins insolvency in Canada