Insolvency protection for home, car and business
insurance consumers
2015-17 Plan
and 2015 Budget
November 2014
Contents
Page
Message from the President .................................................................................................1
Recent accomplishments .....................................................................................................2
Key deliverables for 2015 ...................................................................................................3
Mission and principles ........................................................................................................4
PACICC’s planning process ................................................................................................5
Risk Management report ......................................................................................................6
PACICC’s top-five risks ...................................................................................................6
Risk Officer’s Forum ........................................................................................................7
Priorities for the period 2015 to 2017:
Securing an Emergency assessment mechanism (2015) ...................................................8
Reviewing PACICC’s coverage and benefits (2016) .......................................................9
Developing Protocols with Canada’s insurance regulators (2017) .................................10
PACICC’s operations priorities for 2015 to 2017 ..........................................................12
Update on PACICC Fund balances....................................................................................13
Projected 2014 revenue and spending, and proposed 2015 budget ...................................14
Message from the President
Canada’s P&C insurance industry appears on track for a solid, if unspectacular,
performance in 2014. Following the severe weather-related losses incurred last year ($1.7
billion in claims from flood damage in southern Alberta alone), it would not have been
surprising to see underwriting performance bounce back this year. Thus far at least, that
has not happened. Nonetheless, the industry’s capitalization continues to strengthen –
increasing 4.8 percent year-over-year to a total of $45.7 billion. Correspondingly, the
industry’s MCT ratio rose almost nine percentage points from a year earlier – to 246.5
percent. From a solvency perspective, PACICC welcomes the continued improvement in
industry capitalization – which we view as a more sustainable metric, and one that
provides a buffer against changing risks and other uncertainties that affect underwriting
performance.
PACICC’s main focus continues to be on preparedness – on our ability to protect
policyholders in the event a member insurer becomes insolvent. Most recently, we have
advocated that stronger actuarial standards be adopted by Canadian insurance regulators,
consistent with the practices followed by OSFI and recommended by the IAIS. In the
year ahead, we will work toward securing an Emergency funding mechanism to help our
industry deal with potentially large financial demands that could result from a severe
earthquake or other catastrophic event.
One year ago, PACICC launched a new initiative by sponsoring a P&C insurance Risk
Officer’s Forum in Canada. I’m pleased to say that the Risk Officer’s Forum has had a
successful first year, attracting approximately 80 members across the industry, including
some 45 member insurance company CRO’s. Building on this success, we are planning
an ambitious program of in-person Forum meetings and webinars for 2015.
As we continue our work on behalf of insurance consumers, PACICC’s Board of
Directors and its management welcome feedback on any aspect of our plan and
operations.
Paul Kovacs
President and CEO
PACICC
PACICC’s 2015-2017 Plan and 2015 Budget
Page 1
Recent accomplishments
Corporate governance (2004) PACICC took steps to modernize its corporate governance,
including: adopting a corporate mission; downsizing the Board and streamlining Board
Committees; introducing competitive compensation for public directors; and evaluating the
Board’s performance.
Financial preparedness (2005) The Corporation’s financial preparedness was enhanced by
doubling PACICC’s potential maximum annual insolvency assessment; modeling future
insolvency costs; and simulating the impact of shocks on the financial health of member insurers.
Coverage and benefits (2006) We led a comprehensive review of PACICC’s coverage and
benefits, ensuring that Canadians remain well protected in the unlikely event that a member
insurer fails. PACICC harmonized covered lines to accord with CCIR’s classes of insurance, and
raised its maximum benefit for personal property claims to $300,000.
Enterprise risk management (2007) PACICC developed an ERM plan and strategy that is now
embedded in our corporate governance practices. Initial action plans focused on mitigating six of
PACICC’s own highest-rated risks.
Insolvency legislation (2008) PACICC championed the call for a comprehensive review of the
Winding-Up and Restructuring Act (WURA), identifying changes to improve the insolvency
management framework for PACICC, our members, liquidators and regulators. Submissions
outlining key reforms were made to Finance Canada and to the Senate Banking Committee.
Reducing insolvency contagion risk (2009) PACICC undertook several projects in 2009 aimed
at reducing contagion risk, including: participating in the reinsurance market review led by OSFI
and AMF; communicating our research findings on how rate regulation impacts insurer solvency;
and by proposing a liquidity facility to respond to the winding-up of a large insurer.
Strengthening provincial solvency supervision (2010) PACICC updated its model wind-up
order and Insurance Act provisions to address capital adequacy, investments and governance.
Federal financial sector legislative review (2011) PACICC proposed a number of technical
amendments to the WURA designed to improve the liquidation process; submitted a discussion
paper on the resolution of complex failures, such as a financial conglomerate; and proposed new
insolvency wording for use in reinsurance contracts.
Promoting sound risk management (2012) After conducting a benchmark survey on membercompany ERM practices, PACICC worked with an advisory committee of Chief Risk Officers to
deliver member-focused seminars on ERM standards, risk appetite and risk governance.
Managing earthquake risk (2013) PACICC undertook detailed research and analysis to quantify
the maximum catastrophic loss the Corporation could handle without threatening the solvency of
otherwise healthy insurers. Findings were shared with key stakeholders.
Promoting actuarial best practices (2014) PACICC worked with the actuarial profession in
Canada to identify best practices to reduce insolvency risk, including appointed actuary
requirements and mandatory reporting; peer review of estimates; and DCAT requirements.
PACICC’s 2015-2017 Plan and 2015 Budget
Page 2
Key deliverables for the year ahead
PACICC’s priority issue for 2015 is to develop an Emergency assessment mechanism
that would reduce the risk of contagion for PACICC members following an extreme
catastrophic event. (See page 8 for more detail).
PACICC will also continue its sponsorship of the Risk Officer’s Forum in Canada –
consistent with our goal to reduce insurer solvency risk. And we will continue our
successful solvency analysis research in 2015 by completing the ninth paper in
PACICC’s Why insurers fail series – “The Role of Capital in Insurer Insolvencies.”
PACICC’s operations priorities in 2015 include reviewing our:


Banking service arrangements; and
Information-technology service arrangements (the current contract with Insite
Computer Group was put in place in 2006).
PACICC’s 2015-2017 Plan and 2015 Budget
Page 3
Mission and principles
Mission Statement
The mission of the Property and Casualty Insurance Compensation Corporation is to
protect eligible policyholders from undue financial loss in the event that a member
insurer becomes insolvent. We work to minimize the costs of insurer insolvencies and
seek to maintain a high level of consumer and business confidence in Canada’s property
and casualty insurance industry through the financial protection we provide to
policyholders.
Principles

In the unlikely event that an insurance company becomes insolvent,
policyholders should be protected from undue financial loss through prompt
payment of covered claims.

Financial preparedness is fundamental to PACICC’s successful management
support of insurance company liquidations, requiring both adequate financial
capacity and prudently managed compensation funds.

Good corporate governance, well-informed stakeholders and cost-effective
delivery of member services are foundations for success.

Frequent and open consultations with members, regulators, liquidators and other
stakeholders will strengthen PACICC’s performance.

In-depth P&C insurance industry knowledge – based on applied research and
analysis – is essential for effective monitoring of insolvency risk.
PACICC’s 2015-2017 Plan and 2015 Budget
Page 4
PACICC’s planning process
PACICC’s Board of Directors has established a formal planning cycle focused on two
regular meetings during the calendar year:

Spring – PACICC staff present their evaluation to the Board summarizing the
business environment for the Corporation, industry capitalization and measures of
solvency risk. Staff analysis of individual company results remains confidential,
so discussion with the Board focuses on trends in the number of insurers with
weak regulatory capital scores, rapid premium growth, significant adjustments in
loss reserves, and identification of member insurers unwilling to share financial
results or other signs of vulnerability. Enterprise risk management (ERM) priority
risks, ratings and action plans are reviewed by the Audit Committee and by the
Board.

Fall – The Board considers PACICC’s strategic plan, identifying the priority
issues that the Corporation plans to address over the next three years, as well as
the budget for the coming year. The main focus of the Plan is on the strategic
priorities that PACICC will address and deliver on in the year ahead. ERM
priority risks, ratings and action plans are reviewed by the Audit Committee.
PACICC’s 2015-2017 Plan and 2015 Budget
Page 5
Risk management report
PACICC’s top-five risks
Risk description
Mitigation undertaken by
PACICC

Risk F1 – Insolvency costs
could exceed PACICC’s
available financial resources.
Risk F1 – PACICC’s Board of
Directors approved the option of
establishing an industry liquidity
facility to respond to potential
extraordinary insolvency events.

Risk F2 – Seismologists
consider it inevitable that a
major earthquake will
someday strike Canada.
Risk F2 – Management of this
risk is PACICC’s strategic
priority for 2013. Mitigation will
be consistent with OSFI’s
revised Earthquake Exposure
Sound Practices Guideline.

Risk R1 – Regulation of
insurance rates may contribute
to insurer solvency problems.
Risk R1 – PACICC is
conducting research to clarify
best actuarial practices used in
establishing insurance rates.

Risk R2 – Provincial
insurance supervisory
frameworks may not meet the
standards recommended by the
International Association of
Insurance Supervisors (IAIS).
Risk R2 – PACICC has
organized seminars on
insolvency practices and
procedures for several provincial
insurance supervisors, including
B.C., Alberta, Ontario and
Newfoundland.

Risk R3 – Insurance company
winding-up and restructuring
practices in Canada are
outdated.
Risk R3 – PACICC has made
submissions to Federal Finance
and Industry Canada advocating
specific WURA reforms in
connection with the review of
financial sector legislation.
Risk rating changes
since last report
No rating changes
recommended
(Note: Revisions in
earthquake guidelines
will reduce PACICC’s
exposure over the next
decade)
No rating changes
recommended
(Note: PACICC will
work with the new
Solvency Committee of
the Canadian Council
of Insurance Regulators
toward implementing
IAIS standards)
Notes:


All of PACICC’s identified risks consider related reputation issues where applicable; we do not
treat reputation risk as a separate risk category
PACICC’s top-five risks represent the Corporation’s risk profile. This is part of the complete ERM
Framework, a copy of which is posted on the Corporation’s website at www.pacicc.ca
PACICC’s 2015-2017 Plan and 2015 Budget
Page 6
Risk Officer’s Forum
PACICC launched a P&C insurance Risk Officer’s Forum in December 2013 – in
response to needs expressed by member companies for better sharing of information on
effective ERM practices. Over the past year, the Risk Officer’s Forum has attracted a
solid membership base of approximately 80 risk professionals across the industry,
including some 45 member insurance company CRO’s. Three in-person Forum meetings
have been held, supported by expert panel discussions and guest speakers, and covering
relevant topics like ORSA, key metrics and emerging risks. Several webinars led by
subject-matter experts have also been organized by the Risk Officer’s Forum. Holding a
Forum meeting following OSFI’s annual Risk Management Seminar has become an
established practice, allowing the Forum to reach more out-of-town members attending
the OSFI event.
The Forum is guided by an Advisory Committee of member-company CRO’s and is
Chaired by Susan Meltzer of Aviva Canada. The Risk Officer’s Forum has developed a
mandate statement, which is to:





discuss and share ERM best practices and benchmarks for the industry
review and communicate topical ERM information with members and
stakeholders
serve as a consultative ERM resource for insurance regulators and PACICC
discuss major existing and emerging risks impacting the industry
provide members references and information to facilitate research of risks, ERM
and related regulatory and governance topics.
Looking ahead, the Risk Officer’s Forum is planning the following program for 2015:*
Forum meetings
Webinars
April – ERM Best Practices
March – Social Media
September – Embedding ERM
June – Product Risk
December – OSFI Risk Management Seminar debrief
October – Use of Models
& Stress Testing
____________________________________________________________________
* Specific dates for these events will be announced before year-end 2014.
PACICC’s 2015-2017 Plan and 2015 Budget
Page 7
Priorities for the period 2015 to 2017
Priority for 2015
Securing an Emergency assessment mechanism
PACICC’s existing funding model has worked as intended for more than 25 years to
protect insurance consumers from financial hardship should their property and casualty
insurance company become insolvent. However, our recent research shows that
PACICC’s current funding model could fail to protect consumers if the Corporation was
faced with an extreme catastrophe loss, or if multiple insurers were to become insolvent
in the same year. In such a scenario, PACICC could be confronted with serious liquidity
problems and be unable to pay eligible policyholder claims on a timely basis. Moreover,
PACICC’s assessments on insurers could inadvertently create liabilities so large that
otherwise healthy insurers could fail regulatory solvency tests.
PACICC’s proposed priority for 2015 is thus to:

Develop an Emergency assessment mechanism that would reduce the risk of
contagion for PACICC members following an extreme catastrophic event;

Consult with members and other stakeholders to obtain input on the design and
operation of the Emergency assessment mechanism; and

Obtain regulatory and member approval for the mechanism.
PACICC’s 2015-2017 Plan and 2015 Budget
Page 8
Priorities for the period 2015 to 2017 (continued)
Priority for 2016
Reviewing PACICC’s coverage and benefits







PACICC last reviewed its coverage and benefits in 2006.
We believe it is appropriate to review coverage and benefits approximately once
every 10 years – thus the proposal to do so in 2016.
The last review in 2006 resulted in one significant change being made – the limit
on personal property coverage was increased to a maximum of $300,000 per
claim. (All other PACICC claims limits remained at a maximum of $250,000).
PACICC has conducted research to help benchmark best practices of insurance
guarantee funds in other jurisdictions. The results of this research will inform our
planned review of coverage and benefits.
Our review will examine the full range of PACICC coverage and benefits,
including the current limit on refunds of unearned premiums.
Depending on Board direction and our research findings, PACICC may choose to
re-examine whether coverage should continue to be extended to large commercial
insureds.
Consultations with key stakeholders – including insurance consumers, regulators
and liquidators – will be part of the coverage and benefits review process.
PACICC’s 2015-2017 Plan and 2015 Budget
Page 9
Priorities for the period 2015 to 2017 (continued)
Recommended priority for 2017
Developing Protocols with Canada’s insurance regulators
Maintaining clear and effective working relationships with insurance regulators is key to
PACICC being able to fulfill its mission to protect insurance policyholders – especially in
the event of a member insolvency. While PACICC maintains regular, proactive contact
with OSFI and provincial and territorial insurance supervisors, there is additional benefit
in documenting roles and responsibilities in the form of protocols. PACICC has
completed one such protocol with Ontario (FSCO), and another draft protocol is under
discussion with Quebec (AMF). To ensure consistency of approach and to minimize
potential gaps, PACICC proposes to develop protocols with all insurance supervisory
authorities in Canada.
In addition to supporting the rationale set out above, the protocols could be expected to
address the following:

The conditions required by regulators to exchange confidential information with
PACICC concerning potentially troubled member insurers. One mechanism being
discussed is for PACICC to create a Committee of its Board of Directors (likely
composed entirely of its public directors) for purposes of liaising with regulators
regarding confidential member company information.

If PACICC is successful in creating an Emergency funding mechanism, the
operational features of that mechanism could be embedded in the protocols.
Three alternative issues for the Board of Directors to consider
Insurer insolvency risk within a financial conglomerate
Building on what the G-20 endorsed in 2011 as a new international standard (Key
Attributes of Effective Resolution Regimes for Financial Institutions):
 Examine the specific risks that PACICC could face in Canada if a conglomerate
that included a member P&C insurer failed
 Does PACICC have the necessary tools and mechanisms in place to fulfill its
mission in this scenario?
 If not, what gaps exist and what do we need to do to address them?
Price adequacy and insurer insolvency
 Extend and update PACICC’s research on this issue from the 2009 Why insurers
fail study (focusing on Canada and selected other jurisdictions)
 Has anything changed? Are our fundamental conclusions still the same?
 Proactively target senior government officials and regulators and challenge the
basis and rationale for regulating insurance rates.
PACICC’s 2015-2017 Plan and 2015 Budget
Page 10
Key stakeholder review
 During its 25-year history, PACICC’s consultations with stakeholders have been
conducted as needed and in response to specific issues
 A different and more proactive approach could see PACICC – as a mature
organization with a successful track record of protecting insurance consumers –
consult broadly and more formally with its key stakeholders to ensure we are
meeting their expectations
 Findings from the recent OECD international study of guarantee fund practices
would be considered as part of a broad stakeholder review
 Key stakeholders would include member insurance companies, insurance
consumers, insurance regulators, and insurance brokers.
PACICC’s 2015-2017 Plan and 2015 Budget
Page 11
PACICC’s operations priorities for 2015 to 2017
Because preparedness is a constant requirement, PACICC also identifies its operational
priorities separately from the strategic policy priorities approved each year by the Board
of Directors.
2015
 Review PACICC’s banking service arrangements.
 Review PACICC’s information-technology service arrangements (current contract
with Insite Computer Group was put in place in 2006).
2016
 Review PACICC’s investment management services, guided by the Audit & Risk
Committee (the last such review was done in 2007-08).
 Review PACICC’s external audit services, guided by the Audit & Risk
Committee.
2017
 Review PACICC’s physical office space requirements in advance of the
Corporation’s current lease expiry (December 31, 2017).
PACICC’s 2015-2017 Plan and 2015 Budget
Page 12
Update on PACICC Fund balances
PACICC Liquidation Funds
Beothic General
Canadian Universal
Ontario General
Hiland
Gisco
Canadian Millers’
Markham General
Total
Balances on
September 30, 2014
$269,969
$817,793
$612,674
$565,203
$2,702,511
$675,140
$10,941,305
$16,584,595
Balances projected to
December 31, 2014
$270,645
$819,830
$614,200
$566,600
$2,709,260
$676,825
$10,968,650
$16,626,010
PACICC Compensation Fund Balance
Total market value
on September 30, 2014
$50,945,040
Total market value
projected to December 31, 2014
$51,350,500
PACICC Operating Fund Balance
Total
on September 30, 2014
$2,037,400
Total
projected to December 31, 2014
$1,683,500
PACICC’s 2015-2017 Plan and 2015 Budget
Page 13
Projected 2014 revenue and spending, and proposed 2015 budget
Budget
2014
Projected
2014
Proposed
2015
Revenues
Administrative assessment
Investment income
Funding from liquidation funds
Funding from ICLR
$1,346,000
$18,000
$85,000
$100,000
$1,346,000
$18,000
$85,000
$100,000
$1,380,000
$15,000
$75,000
$100,000
Total Revenue
$1,549,000
$1,549,000
$1,570,000
Spending
Salaries
Benefits
Sub-total: salaries and benefits
$647,000
$143,000
$790,000
$645,000
$95,000
$740,000
$661,000
$98,000
$759,000
Research and other consulting
Legal fees
Premises
Corp. secretary, finance & admin.
Travel
Directors’ fees and expenses
Furniture and equipment
Telephone and postage
Insurance
Annual report and other printing
Investment mgt and banking fees
Audit and other expenses
Expense contingencies
$165,000
$55,000
$140,000
$45,000
$35,000
$75,000
$20,000
$25,000
$16,000
$20,000
$81,000
$77,000
$5,000
$165,000
$50,000
$140,000
$45,000
$43,000
$75,000
$20,000
$25,000
$16,000
$18,000
$81,000
$77,000
$5,000
$195,000
$40,000
$145,000
$45,000
$40,000
$80,000
$20,000
$30,000
$16,000
$17,000
$84,000
$79,000
20,000
$759,000
$760,000
$811,000
$1,549,000
$1,500,000
$1,570,000
Sub-total: non-salary expenses
Total Spending
Notes



The projected surplus of $49,000 in revenue compared to expenditures in 2014 was due primarily
to a staff vacancy during the year. (The position will be filled in 2015).
Administrative assessments for 2015 are projected to increase on average by 2.5 percent.
Budgeting for 2015 assumes that salary and benefits costs will increase by 2.5 percent on average.
PACICC’s 2015-2017 Plan and 2015 Budget
Page 14