PACICC to meet insolvency threat head-on

In an era of insurer financial instability, the Property & Casualty Insurance Compensation Corp. (PACICC) is ready to step beyond its role as a compensation mechanism for policyholders of defunct insurers, to take a more proactive approach to insolvency.While 2003 saw just one p&c insurer go into liquidation in Canada the Canadian branch of Home Insurance Co. U.S. insolvency trends highlight the need for increased vigilance, says new PACICC CEO Paul Kovacs.Kovacs, who took over the top spot at PACICC in late 2003, says the industry has been left vulnerable after five years of poor results, and despite a profitable 2003, “it will take several years to work out the challenges we [insurers] have experienced”.Kovacs, who is now producing a newsletter for PACICC entitled “Solvency studies”, says, “the number of vulnerable insurers is at the highest level since PACICC was formed 16 years ago. It is encouraging, however, that the number of companies with extreme problems declined over the past year, and should fall further this year.”PACICC has invested in staff and resources to fulfill its key goals of being more proactive, having effective governance and accomplishing relevant research, explains chair Alain Thibault, president & CEO of Security National Insurance Co. As PACICC looks to improve its governance, it is considering, amongst other ideas, allowing for non-insurance industry directors on its board. It will also consider reducing the board’s size.Kovacs says new research is well underway, unfortunately highlighting the difficulty the organization would face if the number and size of insolvencies were to take a sharp upturn. “While the likelihood of this occurring is low, we believe that the risk is rising over time,” he says. Research on PACICC’s financial capacity and the viability of its $35 million compensation fund will be completed in second-quarter 2004 and presented to members. Kovacs will also look at past insolvencies and the lessons these experiences can teach, including the ability to predict insolvency occurring.One area highlighted by both Kovacs and Thibault is the difference between provincial and federal solvency regulation. “It is interesting to note that PACICC’s experience shows that solvency problems have been encountered largely among provincially-licensed and regulated insurers,” Thibault notes. In fact, eight of the 12 insolvencies handled by PACICC have been provincially-regulated companies. Kovacs also notes that while the federal regulator provides information on the number of companies in vulnerable positions, the same information is not generally available at the provincial level, “so the number of troubled provincial companies and the problems they face is unclear”.