what's compensation fund

oxalisoxalis
in PACICC.Comp

Hi,

I'd like to understand a bit better about the compensation fund, who makes contribution to the fund? is it all participating insurers that have to contribute regularly to the fund in case there's insolvencies in the jurisdiction? or it's funded by some general tax revenue?

when does the individual assessment from each participating solvent insurer happen? do we collect these assessment only in a case by case scenario? i.e we only ask solvent insurers to contribute when insolvency happens and there's a shortfall between the money PACICC advanced to policyholders and the recoveries from 3rd parties + liquidating the insolvent insurers? or they make regular contributions instead?

Thank you

Comments

  • Staff-T1Staff-T1

    Hi,

    In each of the years 1998, 1999 and 2000 a special levy was made on companies to establish a Compensation Fund of approximately $30 million. This fund has never been used and it sits at around 60M right now. The purpose is to provide initial liquidity to settle policyholder liabilities rather than waiting for assessments from solvent insurers. Should this fund be used, it needs to be replenished through assessments again from solvent insurers.

    Insurers only contributed during 1998-2000 and have not contributed since. It was a one-off contribution. An assessment only happens when there is an insolvent insurer and there is not enough assets to settle all policyholder claims after liquidation :smile:

  • sdeibertsdeibert
    edited March 22

    Looking at F2019 #10b, I am trying to decipher all the possible answers to the question. On BA, 3 reasons are listed and then in this examiners report, the points are broken out further. Just want to confirm my understanding is correct...

    • Is "pre insolvency fund (special levy)" the same as what is discussed above here? Since 1998-2000 nothing has happened with that in terms of direct contributions, but it has accumulated investment income (first answer of sample 2).

    • I see they broke out "assessment of solvent members" AND

      • contribute proportionally as a % of their total direct WP in the jurisdiction AND
      • annual max being 1.5% of direct WP in the jurisdiction
        These are all under the "Assessment" point on BA but more details are provided on the examiners report.

    • 3rd party recovery – PACICC is entitled to first priority against amounts received by the insured from third parties with respect to the loss for which PACICC provided payment (insured cannot double recover) - related to the last point of sample 2.

    • "PACICC can borrow money from its fund and delay compensation, to be repaid with
      interest" - could you provide more details on this point please? I'm having trouble figuring out where it fits in. Thanks!

  • Staff-TSStaff-TS

    To your first point, yes, the special levy is in reference to the contributions made in 1998 - 2000 to the compensation fund.

    To your second point: they broke it out, but it is referring to the same thing. Members are assessed proportionally based on their % of total direct WP in the jurisdiction, to a maximum of 1.5% WP. These assessments only occur if an insolvency occurs.

    To your third point: You got it. The PACICC has first priority to recovered amounts, since they advance amounts to the policyholder first.

    And your final point: In the event of an insolvency, The Board may also choose to have PACICC borrow money from its Compensation Fund and delay implementing an assessment until it is better able to estimate PACICC's exposure. The money borrowed from the Fund must be fully repaid with interest, with the relevant insurers being assessed for the appropriate amount. The Compensation Fund essentially acts as gap financing.

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