2019 Fall Q10b

jt1097

Just wanted to confirm that the liquidation of insolvent insurer's assets would no longer qualify as a source of funding from the Sample Responses in F2019

Staff-T1

yup that should be right

adipelino

so only the compensation fund and assessments count?

Staff-T1

It would seem so @graham

jt1097

Thanks for confirming!

graham

Oh my gosh, the CAS changed the answer to that question AFTER the examiner's report was initially released. They added that whole paragraph that @jt1097 quoted. This is what was in the original examiner's report:

But I just downloaded the 2019-Fall again and this is what is given for the answer to part (b):

The publication date on the CAS website is still listed at Oct 2019 however but they obviously made the above change then re-published it AFTER Oct 2019 so nobody would realize a change may have been made. Ugh!!!!!

cornedov

What’s the difference between liquidation of an insolvent insurer and third party recoveries?

My understanding is that PACICC maximum aggregate assessment is:

Max Assessment = Advances to Policyholders - Third Party Recoveries & Liquiditation

The gap between these is the “funding” that is needed. The reason the CAS no longer accepts liquidation from insolvent insurer is that that funding or value would be there regardless of PACICCs involvement. The compensation fund and assessment capabilities are the sources of funding that are unique to PACICC. Therefore if the CAS no longer accepts liquidation would they accept third party recoveries? I’m struggling to see how they are different from liquidation in this regard.

graham

It's all a bit confusing, but here is what I understand from the source text:

• Liquidation refers to the process of winding up an insolvent insurer, selling off its assets, and using the proceeds to settle claims, debts, and obligations. This process is managed by a court-appointed liquidator.
• Third-party recoveries refer to funds obtained from sources other than the liquidated assets of the insolvent insurer. This can include subrogation, recoveries from reinsurers, or other legal claims against third parties responsible for the loss.

Why the graders no longer accept liquidation but do accept 3rd-party recoveries:

• Liquidation: The reasoning seems to be that liquidation recoveries are assets of the insurer itself, not external sources. These funds would be present regardless of PACICC's involvement, meaning they do not represent additional or unique funding.
• Third-Party Recoveries: In contrast, third-party recoveries are external to the insurer's assets and may involve legal actions or claims against entities other than the insolvent insurer. As such, they can provide a supplementary source of compensation that is distinct from what is obtained through liquidation.

cornedov

I see this helps clarify things. To add on, I see one particular sentence from the source which makes somewhat of a distinction is:

"PACICC is also entitled to first priority against amounts received by the insured from
third parties with respect to the loss for which PACICC provided payment."

So I guess if an insured gets advanced money from PACICC for an Auto accident where they are not at fault, PACICC would have the right to subrogate against a liable third party. Any recoveries of this type would reduce the aggregate assessment PACICC can make and therefore is considered a source of funding seperate from liquidation.

Is my interpretation here correct?

Staff-T1

Yes, your interpretation here is correct and what you are referring to is a third party recovery. However, the same logic would apply here in that these assets should still be available for use regardless of PACICC. I guess you could make the argument that without PACICC, there would be no entity to go after those assets.

@graham did you mention that 3rd part recoveries should be an accepted answer? Doesn't the examiner report list that as an incorrect answer in the first bullet point? Maybe I am misunderstanding the examiner's report.