PACICC.Comp

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 at least 4 times since 2012.   Forum

Pop Quiz

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

BattlePlan

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!

reference	part (a)	part (b)	part (c)	part (d)
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

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 an 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. PACICC involvement is triggered by the issuance of a formal winding up order. This is all pretty easy, right!

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Explanation of 2015.Spring #13

This reading used to be tested in detail, but it seems to have fallen off the radar over the past couple of years. My intuition tells me there is only 1 other likely exam question: calculating policy holder recovery. 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

The basic formula is easy enough:

recovery = (unearned premium component) + (indemnity component)

Now,

unearned premium component = 70% x min(1000, unearned premium) = 70% x min(1000, 500) = 350

and,

indemnity component = min( loss - distribution - deductible, 300000 ) = min( 400000 - 350000 - 1000, 300000) = 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.

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Funding and Assessment

For completeness, I've included this final section, but my prediction is that these items are not likely to be asked. (I could be wrong, but you can probably skip this if you're pressed for time in the days leading up to the exam.)

There are 4 funding mechanisms for PACICC: LAC-3

Liquidation of insurer's assets

Assessment of participating insurers

Compensation fund

-

3rd party recovery

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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 function mechanisms

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)