What would a Canadian General Earthquake pillar look like?

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A federal government subsidy designed to help private insurers cover high-severity floods could be extended to protect Canadians from earthquake risks as well, Canada’s home, auto and business insurers proposed in a statement released Tuesday.

Meanwhile, in the absence of government support, the Property and Casualty Insurance Compensation Corporation (PACICC) is looking for innovative ways to prevent a chain reaction of insurers that fail in the event of a massive earthquake in Canada. PACICC is an industry organization that pays claims to Canadians in the event of an insurance company’s bankruptcy.

Recently, PACICC worked to create a $250 million Standby Credit Facility issued by major Canadian banks, using PACCIC’s power to charge insurance company members as collateral. The group has also observed in Louisiana innovative ways to bypass membership fees to generate capital in the event of major natural disasters.

Insurance Bureau of Canada (IBC) issued a press release Tuesday announcing its new president and CEO, Celyeste Power, and a list of priorities for the organization in 2023. Among them is continuing work with the federal government on public-private flood support. The funding model has not yet been decided, but the IBC indicated in its release that the new model could be extended to more than just floods.

“Specifically, the IBC will assist the federal government in making its commitment to the National Flood Insurance Program a reality in 2023,” said the IBC. The program aims to offer more affordable insurance to all residents at high risk from wild flooding, including flooding caused by storm surges, through a public-private partnership.

“Once established, the program can be expanded to address earthquake-related insurance gaps and other climate-related protection gaps that emerge in the future.”

On a parallel track, PACICC has been talking with the federal government for several years to create a public-private partnership to cover Canada’s biggest risk – the earthquake.

Previous studies from PACICC indicate that an earthquake generating more than $35 billion in damages may carry the risk of failure for many P&C insurers. (Total private insurance capital for all Canada insurance risks, homes, autos and businesses, was in the order of $50 billion four years ago.)

The PACICC funding model places an annual cap on the total rating that the organization can charge from insurer members. The cap is set at 1.5% of a member’s direct written annuity, which means that the current maximum amount of capital PACICC can receive is approximately $1.07 billion. (PACICC can continue to collect this amount for years in order to continue paying Canadian insureds in the event of an earthquake.)

“We have shown that, above a certain volume of the insured loss event, the claims of eligible policyholders [in an earthquake] PACICC President and CEO Alastair Campbell wrote recently in the January 2023 issue of Solvency Matters. And we’ve also explained why, in a time of crisis, politicians, regulators, and industry leaders are uniting to call on PACICC to fund claims that exceed this limit.

“Hence, our advocacy for federal support — providing important liquidity to taxpayers in times of crisis — to avoid systemic collapse and to ensure adequate protection for Canadian policyholders.”

Those conversations — which include the potential structure for the backstop, and how to avoid the “moral hazard” of governments bailing out private companies — are still ongoing, Campbell reports.

Meanwhile, PACICC is looking elsewhere around the world for innovative solutions.

Campbell’s report in Solvency Matters said, “Two recent developments have identified another potential source of best practice.” “The first development has been the progress that has been made here at PACICC to partner with a panel of Canadian banks in order to establish a Standby Credit Facility as part of our efforts to ‘expand our financial capacity,’ and ensure that we can respond effectively to address resolution or insolvency scenarios.

“It now appears clear that major financial institutions are willing to accept PACICC’s rating authority as sufficient collateral to provide up to $250 million in short-term financing.”

Another interesting example to explore is in Louisiana, where the Louisiana Insurance Guaranty Association (LIGA), the local equivalent of PACICC, has floated a $458 million bond to draw additional capital beyond member fees. Four major hurricanes since 2020 caused nine Louisiana insurance companies to fail during the first three quarters of 2022 alone, Campbell notes.

Also, in Louisiana, the government and private insurance companies have used an innovative tax arrangement to take full advantage.

“Louisiana insurance companies are allowed to deduct future appraisal payments from their premium tax liability—up to 10% of the total taxes payable annually,” Campbell wrote. “In this way, the government and taxpayers support industry efforts to care for adversely affected policyholders without making policyholder protection too onerous for current or future insurers active in the state.”

Main image courtesy of iStock.com/koksikoks

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