The PACICC Strategic Plan for 2004 to 2006

Insolvency protection for home, car and business

insurance consumers

2017-19Plan

and 2017Budget

November 2016

Message from the President

During 2016, Canada’s insurance industry experienced the most costly loss ever recorded in this country from a single event – the wildfire that hit the City of Fort McMurray and surrounding areas. At an estimated $4 billion, total insured losses from the Fort Mac wildfire exceed the most costly single-event catastrophe by a factor of more than two. While the wildfire put significant strain on company earnings, for the most part insurers were able to maintain their capital strength thanks to adequate reinsurance coverage. High and rising catastrophe losses have become the “new normal” and signal the need for insurers to increase their resilience to greater volatility in future underwriting results and earnings.

The focus of PACICCremains on preparedness – specifically, on our ability to protect policyholders in the event a member insurer becomes insolvent. In this respect, we are continuing to partner with the Insurance Bureau of Canada to address the risk of a severe urban earthquake causing financial contagion in our industry. PACICC’s research has clearly demonstrated that there is a threshold – insured losses in excess of $30 billion – beyond which otherwise healthy insurers could fail due to absorbing the insolvency costs of weaker companies. This risk should not be allowed to occur in Canada – thus the need for a government backstop to be available to the industry beyond the “tipping point” of a $30 billion loss event.

PACICC’s priority issue for 2017 is to strengthen solvency supervision by establishing intervention guidelines with several insurance regulators. The timing of completion and implementation will depend in part on the pace at which the supervisory authorities are able to proceed.

In addition to setting out PACICC’s priority issues for the next three years, our strategic plan includes information on our risk profile, and on our initiatives to support member companies in strengthening their risk management practices. In this respect, I draw your attention to the activities of the Risk Officer’s Forum over the past year – and its plans for the year ahead. Also of note, PACICC’s most recent ERM benchmark survey results show a deepening of sound risk-management practices in the industry. To reference one key example, 90 percent of survey respondents had a Board-approved risk-appetite statement in place in 2016 – compared to only half of respondents three years earlier. That is significant progress.

As PACICC continues its work on behalf of insurance consumers, our Board of Directors and management welcomeyour feedback on any aspect of our plan and operations.

Paul Kovacs

President and CEO

PACICC
Priorities for the period 2017 to 2019

Priority for 2017

Developing P&C Intervention Guidelines with Insurance Regulators

In 2016, PACICC put in place two components that will help strengthen provincial solvency supervision over the medium term. The first was to establish a new Pre-Insolvency Regulatory Liaison (PIRL) Committee, consisting of PACICC’s public (non-industry) directors as the vehicle for confidential consultations and information exchanges with regulators concerning potentially troubled member companies. The second component was reaching an agreement with Quebec’s Autorité des Marchés Financiers (AMF) documenting – in the form of intervention guidelines – the steps that both organizations can and will take when solvency concerns arise for a Quebec-supervised PACICC member.

PACICC’s priority issue for 2017 is to develop intervention guidelines with the other insurance regulators in Canada. This effort will focus on OSFI, British Columbia and Alberta. Including Quebec, more than 90 percent of PACICC members are accountable to these regulators.

As PACICC’s work in this area scales up, it will be important for management and for the Board of Directors to monitor the operational resources and budget required to support it effectively.

Priorities for the period 2017 to 2019 (continued)

Priority for 2018

Renewing Federal financial sector legislation

PACICC’sproposed priority for 2018 is to participate actively in the Federal government’s scheduled renewal of financial sector legislation. (The primary focus of the renewal is on banking and insurance legislation). As stated in the most recent Federal Budget:

“The Department of Finance will undertake a financial sector legislative review and begin consulting stakeholders in the coming months. To support the review, Budget 2016 proposes to provide the Department of Finance with $4.2 million over five years, starting in 2016-17, and to extend the current statutory sunset date by two years to March 29, 2019.”

The Federal government’s scheduled review of Canada’s federal financial sector legislative and regulatory framework provides an opportunity for PACICC and IBC to press for a government backstop to minimize the financial risk posed by a severe urban earthquake. This is consistent with the core policy objectives of the financial sector review, including:

Stability – safety, soundness and resiliency;
Efficiency –contributes to economic growth; and
Utility – protection for consumers (businesses, individuals and families).

PACICC’s more specific goal will be to advance the case for modernizing the Federal Winding-Up and Restructuring Act (WURA) – the legislation governing the liquidation of failed banks and insurance companies. This has been a longstanding issue for PACICC. Our position advocating reform is well-developed and has been communicated previously to Federal officials.

While modernizing WURA is outside the scope of strictly reviewing the Federal Bank Act and Insurance Companies Act, a compelling argument can be made to include it in the review because of its role as the resolution mechanism for insolvent banks and insurance companies (and because it is woefully outdated!) Moreover, the Federal government has already opened the door a bit by stating (in Budget 2016) its intent to introduce a recapitalization “bail-in” regime for banks as part of the review.

As PACICC develops its recommendations on this issue, there may be opportunities to partner with other industry stakeholders – including IBC and Assuris – and to strengthen and leverage our position in the process.

Priorities for the period 2017 to 2019 (continued)

Recommended priority for 2019

Reviewing PACICC`s coverage and benefits

PACICC last reviewed its coverage and benefits in 2006. It is appropriate that a review be conducted approximately once every 10 years. The review would examine the full range of PACICC coverage and benefits, including the current limit on unearned premiums. Stakeholder consultations would include insurance consumers, regulators and liquidators. 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.

Two questions the Board will want to consider as part of the coverage and benefits review:

How should PACICC consider changing its limits in response to the risk of a policyholder experiencing a total property loss? (This risk was recently brought to our attention by the magnitude and scope of individual policyholder loss claims from the Fort McMurray wildfire).

Will PACICC re-examine whether coverage should continue to be extended to large commercial insureds?

PACICC’s operations priorities for 2017 to 2019

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.

2017

Review PACICC’s physical office space requirements in advance of the Corporation’s current lease expiry (December 31, 2017).

2018

Review PACICC’s investment management services, guided by the Audit & Risk Committee. The last such review was conducted in 2007-08.

2019

Conduct a review of outsourced Information Technology services to ensure PACICC is utilizing up-to-date, productive and cost-effective technology.

Recent accomplishments

Corporate governance (2004)PACICCtook 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 insolvencycosts; 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’sclasses 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 inour 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 reviewled by OSFI and AMF;communicating our research findings on how rate regulation impacts insurer solvency; andby 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 member-company 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 withkey 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.

Developing an Extraordinary Assessment Mechanism (2015) PACICC developed a mechanism to reduce the risk of contagion for PACICC members following the failure of a large insurer, a proposal that may be considered once the current discussion is completed concerning the industry request for a government backstop.

Achievements in 2016

Priority for 2016

Reducing systemic risk to solvency

PACICC’s priority for 2016 has been to reduce systemic risk to insurer solvency – specifically by supporting the Insurance Bureau of Canada (IBC) in its work to secure a government backstop to minimize the financial risk posed by a severe urban earthquake.

PACICC has put the implementation of the proposed Extraordinary Assessment Mechanism “on hold” in response to a request from IBC and its Board of Directors – pending the outcome of discussions with the Federal government on an earthquake backstop. The proposed Mechanism was approved by insurance regulators. In addition, it was subjected to independent, external analysis (conducted by Deloitte) that validated its contagion-reducing accounting and capital impacts – compared to the status quo of sole reliance on PACICC’s current general assessment mechanism.

IBC’s Board of Directors has based its plan to seek a government backstop on PACICC’s research and analysis identifying the threshold beyond which insured earthquake losses would trigger industry contagion ($30 to $35 billion). Moreover, the backstop lobby will focus on a proposal that would flow public funds to insurers through PACICC, like the backstop presently in place for the banking industry. In this respect, PACICC’s work contributed materially to shaping the P&C insurance industry’s lobbying strategy on this important issue.

PACICC will continue to partner with IBC as the industry works to secure a government backstop to address earthquake risk. But our expectation is that the proposal design and research resources required of PACICC in this effort will diminish beyond 2016.
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 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. 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 & Risk 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 & Risk Committee.

PACICC’s risk profile

PACICC’s Risk Profile remains stable – no significant change for any of the individual risks.

Very High / Assessment Risk 1-1 Insolvency costs exceed risk limit-risk appetite
High / Regulatory Risks
1-5 New laws
1-6 Benefits enhanced
Medium / Operational Risks
1-7Resource demands
1-8Unexpected insolvency costs / Operational Risks
1-9 Lack of liquidator expertise
Low / Regulatory Risks
1-2 Solvency supervision
1-3Rate regulation
1-4Outdated winding-up legislation
Very Low / Low / Medium / High

PACICC’s priority risks (risk profile)

1-1An earthquake or other hazard causes a very large insurer to fail, or leads to multiple, smaller insolvencies; resulting insolvency costs exceed PACICC’s risk limit-risk appetite (2x our annual general assessment capacity)

1-2 Supervisory practices below minimum IAIS standards

1-3 Rate regulation causes insolvency

1-4 Outdated winding-up legislation

1-5 Adverse changes in new legislation

1-6 PACICC could be forced to increase coverage and benefits

1-7 Risk 1-1 places extraordinary demands on human resources

1-8 Lack of member financial data results in unexpected insolvency costs

1-9 Much of Canada’s accumulated P&C liquidation expertise has “retired”
Risk Officer’s Forum

PACICC launched a P&C insurance Risk Officer’s Forum in December 2013in response to needs expressed by member companies for better information sharing on effective ERM practices. This initiative also reinforces PACICC’s goal of promoting better enterprise risk management in Canada’s P&C insurance industry.Over the past year, the Risk Officer’s Forum liaised with principal contactsin all 199member companiesregarding a full schedule of Forum activities and events. There are more than 350 risk professionals in PACICC’s Forum member database, including:Presidents and Chief Executive Officers, Chief Risk Officers, senior Finance department staff from larger member companies andChief Agents.

Two in-person Forum meetings have already been held in 2016, with another scheduled for late November to coincide with OSFI`s annual Risk Management Seminar. Forum meetings feature a topical guest speaker and are supported by a rotating panel of industry experts who guide group discussion. Recent agenda items have included: emerging risk issues; operational risk, cascading risk appetite and autonomous vehicles (automobiles and drones).

Two Emerging Risks Webinars have been held so far this year (“Self-Driving Vehicles” and “Cyber Security”), led by subject-matter experts. A third is scheduled for late November (“Business Continuity: Implications for P&C Insurers”).

The PACICC Strategic Plan for 2004 to 2006

2017-19Plan

and 2017Budget

Contents

Page

Message from the President...... 1

Recent accomplishments...... 6

Message from the President

Priorities for the period 2017 to 2019 (continued)

Priorities for the period 2017 to 2019 (continued)

PACICC’s operations priorities for 2017 to 2019

PACICC’s Board of Directors has established a formal planning cycle focused on two regular meetings during the calendar year: