PACICC closer to issuing Cat bond for quake risk

In the absence of any incoming federal government backstop for earthquake risk, Canada’s industry-financed public compensation fund has taken the first step towards implementing a novel Plan B for financing earthquake losses — issuing a Cat bond.

“We’ve been actively exploring the potential for PACICC to secure access to capital markets for debt financing purposes in circumstances where additional liquidity may be required beyond what is available via our general assessment mechanism,” Alister Campbell, president of the Property and Casualty Insurance Compensation Corporation (PACICC), reported at the non-profit organization’s annual general meeting on Apr. 29.

“Over the course of 2024, we liaised with major rating agencies regarding a potential credit rating for PACICC,” Campbell said during the AGM. “ I am pleased to report we have now secured investment-grade ratings, private-monitored ratings from two major rating agencies.

“Maintaining these ratings, which are subject to annual review, is relatively inexpensive and also entirely consistent with our low-cost optionality strategy.”

PACICC is a guarantee fund that compensates policyholders for claims losses in the rare event that a Canadian insurance company goes bankrupt. (Markham General was the last Canadian insurer to become insolvent, in 2002.)

Past research by PACICC shows an earthquake causing more than $35 billion in losses in Canada could trigger one or more Canadian P&C insurer insolvencies and cause systemic financial stress on the industry as a whole.

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In this scenario, PACICC would require its insurer members to pay a levy, called an “assessment,’ to pay the bankrupt insurer’s claims losses to policyholders. But that in itself may not be enough to fund the immediate need for capital in case of an emergency like an earthquake.

Waiting game over

Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), last year called for the federal government to create an earthquake backstop so that insurers would not be carrying the full freight of paying out earthquake losses to policyholders.

But PACICC is not holding its breath. The board has given the green light to explore other potential financing mechanisms in place of a government earthquake backstop.

In 2024, PACICC published a report, When it rains…it Pours, showing two U.S.-based insurer compensation funds have successfully pursued Cat bonds as an alternative approach to assessing members’ full costs of financing the claims obligations of insolvent insurers.

“This alternative approach to expand our financial capacity has been successfully employed in at least two jurisdictions in the United States,” Campbell told the AGM. “Both Louisiana’s and Florida’s insurance guarantee associations successfully issued bonds to secure loans to address a large number of unexpected claims resulting from clusters of insurance failures caused by a series of large-scale hurricane events.”

The Louisiana Insurance Guaranty Association (LIGA) issued a $458-million bond with an A1 rating from Moody’s in July 2022, the PACICC report notes. That bond was expected to pay out between $121.6 million and $284.6 million in interest over a 12-year period, placing the value of the bond issue at between $721.6 million and $884.6 million.

In Florida, the Florida Insurance Guaranty Association (FIGA) issued tax-exempt, fixed-rate bonds worth almost $580 million in 2023 to help fund insolvent insurer claims totalling close to $1.6 billion. FIGA’s bonds received A-grade credit ratings from S&P Global Ratings and Moody’s Investors Service.

David Gambrill

David has twice served as Canadian Underwriter’s senior editor, both from 2005 to 2012, and again from 2017 to the present.