PACICC.Comp

Notice: Updated practice problems reflecting the latest limits will be available shortly. Example 1 more to follow, including Excel practice...

Reading: “Guide to Compensation Plan for Property and Casualty Insurers,” May 2010.

• Click for updated coverage and limit.

Authour: Property and Casualty Insurance Compensation Corporation (PACICC)

Forum

BA Quick-Summary: Compensation After Insolvency PACICC stands for Property And Casualty Insurance Compensation Corporation. The purpose of PACICC is to provide compensation AFTER insolvency (whereas the purpose of OSFI is to PREVENT insolvencies.) You need to know how to calculate the compensation a policyholder receives when their insurer goes bankrupt. Variations of that question have appeared on the exam several times on available published exams.

Pop Quiz

List 4 internal causes of insurer insolvency. [Hint: GoNGS.]

Study Tips

This reading is only 7 pages long, and is not difficult. Most of the questions tested on prior exams require you to calculate PACICC compensation, with others testing you on procedures, purpose, and funding of the PACICC. I would suggest reading through quickly to get a brief understanding of the operations and the roles of the PACICC, liquidator, claimants of the insolvent insurer, and solvent member insurance companies.

Focus on memorizing:

• Purpose of the PACICC
• 4 funding mechanisms

→ Note that only 3 are now accepted by the CAS graders. See Funding and Assessment for details.

As mentioned above, calculational questions include:

• Policyholder recovery/compensation in the event of an insolvency
• (Insurer assessment - note that this is a low probability question)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• Calculate compensation to policyholder after insurer goes insolvent
• Calculate assessment on insurer (for funding of PACICC)
• Miscellaneous facts about PACICC: purpose, procedures, trigger for financial responsibility

Calculating PACICC compensation to the policyholder in the event of an insolvency was a popular question up through 2015.Spring, but not so much recently. Did the exam committee decided it wasn't important? Still, it's pretty easy. Don't skip it!

Top Questions ← Questions you absolutely need to know!

Questions held out from Fall 2019 exam: #10. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #10)	CAS.GovtIns	(i) evaluate PACICC (ii) IBC.Flood
E (2019.Spring #12)	calculate compensation 1	calculate compensation	PACICC funding: - methods
E (2018.Fall #13)	Dibra.Fail	calculate compensation
E (2017.Fall #12)	purpose: - of PACICC	procedures: - of PACICC	see Dibra.Fail
E (2016.Fall #1)	purpose: - of OSFI	See McD.Intro
E (2015.Spring #13)	calculate compensation
E (2014.Fall #11)	costs: - involuntary exits	calculate compensation
E (2014.Spring #8)	PACICC assessment: - formula
E (2013.Fall #11)	calculate compensation	calculate compensation	trigger: - PACICC responsibility
E (2012.Fall #17)	SCENARIO: - soundness of PACICC	see Dibra.Fail
E (2012.Fall #20)	calculate compensation	calculate compensation

¹ Parts (a) and (b) of this question are defective. The loss amount was not provided and you could not solve the problem without it. You had to make an assumption regarding the loss amount and the examiner's report accepted any assumption.

In Plain English!

Intro and Basic Facts

PACICC stands for Property and Casualty Insurance Compensation Corporation.

The purpose of PACICC is to provide a reasonable level of policy holder recovery for claims & unearned premium AFTER a P&C insurer becomes insolvent.

This policyholder recovery 'plan' is administered by the non-profit PACICC. Members of PACICC include all participating insurers in a jursidiction, with some exceptions. (Ex: reinsurers.) Note that a participating insurer is simply a licensed insurer selling a class of business covered by PACICC. This is all pretty easy, right! Just a couple of more basic facts before we look at the actual calculations & process:

Question: Identify the types of policies covered by PACICC

• Most P&C policies are covered by PACICC (life insurers have their own similar plan so these are excluded)
• Exclusions:

- Automobile insurance sold by Government-owned insurers in Manitoba & Saskatchewan (auto insurance is provided by Crown Corporations, not private insurers)

- Mandatory auto coverage sold in British Columbia (added Feb 23, 2023) (optional auto coverages are covered by PACICC, such as Collision, Comprehensive, Loss of Use, etc)

- Aircraft, credit, crop

- Directors' and officers', employer's liability, certain errors and omissions (medical malpractice is not excluded)

- Fidelity, financial guarantee, marine, mortgage, surety and title insurance

- Bodily Injury coverage in Quebec when covered by Société d'assurance automobile

This is a long list of exclusions and I don't think you need to memorize it. Virtually all of the old exam problems involve auto or property. If you read this list once or twice and just remember that most of the exclusions are unusual policy types you should be ok. Note that some types of auto policies are excluded however, namely mandatory auto coverage sold in BC, Saskatchewan, and Manitoba.

An exam question may try to trick you by asking you to calculate the compensation for an aircraft policy. You would have to remember that aircraft is an unusual policy that isn't covered by PACICC. The compensation would therefore be 0.

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Calculating Compensation: Example

The following example is modeled on E (2019.Spring #12), but with different inputs.

Here's the problem...

Here's the solution...

Explanation of 2015.Spring #13

There is only 1 other likely exam question on this topic:

• Calculating policy holder recovery

And there is a good forum discussion on this particular question.

2025-Spring Update: Change in coverage limits

• Everything is the same except the coverage limits. Exam problems from 2020.Fall and prior use old limits, which have undergone several inflationary changes. (Technically, these problems are now outdated because of the new limits, but the formulas are the same.) Beginning 2025.Spring, the limits listed below are in effect:

→ new limit for auto: $415,000 (limit was $250,000 at the time of this paper)

→ new limit for HO: $520,000 (limit was $300,000 at the time of this paper)

→ refunding of unearned premium: 70% x $2,500 (limit was 70% x $1,000 at the time of this paper)

As you look at these old exam problems, keep these new limits in mind.

Let's look at: E (2015.Spring #13) (Note that the examiner's report provides 2 acceptable solutions. This is discussed in the forum here.)

Given:

unearned premium:	500
claim:	400,000
deductible:	1,000
distribution from InsR:	350,000

There is more than one accepted solution due to the interpretation of "Distribution from the insurer". This solution treats it as a partial claim payment that was made to the insured before insolvency, whereas solution 2 treats it as a payment from the liquidator to the PACICC. Solution 2 is more in line with how the PACICC process currently functions. Please see the forum discussion or the Distributions section below for solution 2.

The basic formula is easy enough:

Recovery = (Unearned premium component) + (Indemnity component)

Now,

Unearned premium component = 70% x min(1,000, Unearned premium) = 70% x min(1,000, 500) = 350

and,

Indemnity component = min(Loss - Distribution - Deductible, 300,000) = min(400,000 - 350,000 - 1,000, 300,000) = 49,000

Therefore,

recovery = 350 + 49,000 = 49,350

Complications to the Calculation

The value of 300,000 used in the formula for the indemnity component depends on whether the insurance policy is personal property or auto.

auto: use 250,000

personal property: use 300,000

Also, the unearned premium is not always given. You may have to calculate the unearned premium based on the policy inception date and the insurer's insolvency date.

Distributions

The term distribution arises from time to time. This is what it means:

• In the indemnity formula, distribution refers to money the policyholder received from the insurer. In 2015.Spring #13, the policyholder received a distribution of 350,000 from their insurer for their claim of 400,000. Since the policyholder still had money owed to them, they may receive another distribution from the PACICC for 50,000.

• There is also an example in the source text discussing distribution from a liquidator. In this example the policyholder received 250,000 of their 300,000 automobile claim directly from PACICC. Now, PACICC doesn't have its own money and must recover this 250,000 from liquidating the insolvent insurer (or the other insurers that are still solvent, or the compensation fund) before the policyholder gets any more money.

Case 1: If the liquidator makes a distribution of 150,000 (which just means the liquidator gives 150,000 to PACICC) then the insured wouldn't get any additional funds because the 150,000 the PACICC recovered doesn't cover the original 250,000 advanced to the policyholder.

Case 2: If the liquidator makes a distribution of 275,000 to PACICC (gives 275,000 to PACICC) then the original 250,000 is covered and the policyholder would receive the leftover 25,000. The policyholder would still be 25,000 short and whether they get this back depends on whether PACICC gets any more money from its funding sources.

In the context of 2015.Spring #13, this means that the PACICC has already advanced the policyholder the amount for their claim: min(400,000 - 1,000, 300,000) = 300,000 and UEP: 70% x min(1,000, 500) = 350. The PACICC then recovers 350,000 from the liquidator of the insolvent insurer, where they are reimbursed for the 300,350 they already provided to the policyholder. They are also able to provide an additional 49,650. Note that the policyholder is still short 50,000 and whether they get this back depends on whether PACICC gets any more money from its funding sources.

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Funding and Assessment

Here is a question that has appeared on more than 1 exam:

Question: identify funding mechanisms for PACICC [Hint: AC-3]

Liquidation of the insolvent insurer's assets ← The CAS no longer accepts this answer. See this forum post for further details.

Assessment of participating insurers

Compensation Fund – borrow money from this fund to cover short-term cashflow when required (pre-insolvency funding)

-

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

That question appeared as part (c) on the following exam, and the examiner's report listed the first 3 answers above:

E (2019.Spring #12 - part c)

Unfortunately, this is another repeat exam question where the examiner's report from one year provides a different answer from another year. In particular, the examiner's report answer for part (b) of the following very similar exam question was somewhat different:

E (2019.Fall #10 - part b)

You could argue that the 2019.Fall question asked for more details than just sources of funding, but I still don't think it was very clear. If I had been answering that question, I probably would also have quoted the assessment formula (and the assessment limit of 1.5% x DWP of each insurer):

A = B x (C/D)

where

A = Insurer assessment

B = Total amount assessed by PACICC = (amount advanced by PACICC) minus (amount recovered)

C = DWP of insurer

D = Total DWP of all assessed insurers

This calculation must be done separately by jurisdiction. Anyway, take a look at the examiner's report answer. The details are all included in various BattleCards in quizzes 3 & 4 below.

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Regarding the funding mechanism of assessment: The assessment applies only to licensed, participating insurers in the jurisdiction where the insolvency occurred. There are also limits on the amount PACICC can assess and insurer, and limits on how much of the assessment the insurer would actually have to pay.

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BattleCodes

Memorize:

• purpose of PACICC
• 4 funding mechanisms

→ Note that only 3 are now accepted by the CAS graders. See Funding and Assessment for details.

Conceptual:

• difference between OSFI's and PACICC's roles regarding insolvencies

Calculational:

• policyholder recovery/compensation in the event of an insolvency
• (insurer assessment - note that this is a low probability question)

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  Forum

POP QUIZ ANSWERS

4 internal causes of insurer insolvency: [Hint: GoNGS] (See Dibra.Fail)

Governance & internal controls (breakdown of governance)

New entrants (they are inexperienced & subject to established competition)

Growth (rapid growth produces a high proportion of new business, which usually has higher loss ratios)

Size (insurer may be too small to absorb large losses)