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.]

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 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! Just a couple of more basic facts before look at the actual calculations:

Question: identify the types of policies covered by PACICC

• most P&C policies are covered by PACICC (life insurance have their own similar plan so these are excluded)
• exclusions:

- mandatory auto coverage sold in BC, Saskatchewan, and Manitoba (added Feb 23, 2023)   ← shout-out to JennyL!

- 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

- auto insurance in MB & SK (auto insurance is provided by Crown Corporations, not private insurers)

- BI 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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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.

2021.Spring Update: Change in coverage limits

• Everything is the same except the coverage limits. Exam problems from 2020.Fall and prior use the old limits. (Technically, these problems are now outdated because of the new lmits, but the formulas are the same.) Beginning 2021.Spring, the limits listed below are in effect:

→ new limit for auto: $400,000 (old limit was $250,000)

→ new limit for HO: $500,000 (old limit was $300,000)

→ refunding of unearned premium: 70% x $2,500 (old limit was 70% x $1,000)

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

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.

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 (possibly from the liquidator of their insolvent insurer after the company is liquidated.)

• There is also an example in the source text discussing distribution from a liquidator. Here the policyholder received 250,000 of their 300,000 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 of it because that 150,000 doesn't cover the original 250,000.

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 depend 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 (pre-insolvency funding)

-

3rd party recovery

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) ← shout-out to CR!):

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. (shout-out to CR!)

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)