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Life and health insurer failures are infrequent in Canada, but Assuris plays a crucial role in protecting policyholders when they occur. This article outlines the collaborative process between Assuris, prudential supervisors, and the liquidator to ensure policyholder protection if a Canadian member life and health insurer fails. Because failures are so rare, it is crucial to keep Assuris’ stakeholders informed of the established approach to resolving life and health insurers, ensuring that everyone is better prepared. Some differences exist between the framework for federally regulated and provincially regulated life and health insurers, such as entry into resolution and certain resolution powers, but that will not be covered here.
The Road to Insolvency
1. Leading Up to Failure – Supervisory Intervention and Monitoring
Assuris works closely with the lead prudential supervisor, following the established guide to intervention1. This partnership involves:
- Supervisory updates on recovery efforts
- Continuous information sharing during staging
- Assuris updates on contingency plans for a potential failure
If recovery activities are unsuccessful, the supervisor will trigger a failure by taking control of the company and initiating court proceedings for winding-up.
2. Leading up to Failure – Assuris Activities
While the prudential supervisor focuses on recovery efforts, Assuris focuses on resolution planning and other resolution preparedness activities. During this time, we are evaluating strategies for the life and health insurer and the options and tools we have available.
Other resolution preparedness activities across Assuris include:
- Reviewing all crisis preparedness playbooks (i.e., risk and resolution analysis, communication, legal, finance)
- Evaluating funding strategies (i.e., how will Assuris raise funds from the industry to pay for policyholder protection)
- Evaluating how plausible resolution strategies may be executed
The Traditional Liquidation Process
3. Liquidator
The liquidator is an insolvency professional that is appointed by the court and is an officer of the court. Their responsibility is to take over the operations of the failed insurer and wind it up under the Winding-up and Restructuring Act (WURA). WURA is a legal statute applicable to the failure of banks and life and health insurers in Canada. The liquidator evaluates all assets and liabilities of the failed life and health insurer and will determine the best strategies to effectively realize the assets of the failed estate to pay creditors according to the priorities under WURA. Policyholders are considered a creditor of the estate and have priority before bondholders, unsecured creditors, and shareholders.
Given that life and health insurer failures are rare in Canada, the liquidator may rely on other experts to provide advice during the proceedings. In the past four life and health insurer insolvencies in Canada, Assuris has been designated as a court inspector to advise the liquidator and oversee the insolvency proceedings as an expert in life and health insurer failures as well as a priority creditor of the estate (see Policyholder Protection below). Assuris’ experience from past failures, combined with our current focus on resolution preparedness, enables us to understand the risks in resolution for our member companies. This knowledge and expertise allows us to effectively assist the liquidator.
The liquidator works with Assuris to develop the resolution strategies and administer the estate.
4. Policyholder Protection
In addition to being a court inspector, Assuris also enters into a loan agreement with the liquidator to provide funds needed to protect life and health insurance policyholders:
- To ensure that policyholders with claims during the insolvency proceedings are paid up to Assuris’ protection limits.
- To ensure that policyholders retain their policy benefits up to Assuris’ protection limits when their policies are transferred to another life and health insurer.
By providing funds, Assuris becomes a creditor of the estate. The liquidator is motivated to accept the terms of the loan agreement since it provides additional funds to the estate, and results in a more favourable outcome for policyholders. After the policyholders are transferred to a solvent company, any remaining assets in the estate will be repaid to Assuris before other creditors.
5. Evaluate Resolution Options and Tools
When evaluating the resolution options and tools available, Assuris considers three main options. It is important to note that a key resolution objective for Assuris is to support the continuation of policyholder benefits. Life and health insurer failures tend to be inherently slower than banking failures due to the fundamental differences in their business models and the long-term nature of the liabilities.
Option 1 – Recapitalize to facilitate restructuring
Assuris can provide financial support to recapitalize and restructure the business and avoid the WURA liquidation process. Specific criteria are needed for Assuris to support this, the most important being:
- it must be the most cost-effective solution and;
- there must be a change in control of the failed company
Option 2 – Transfer of the business to a solvent company
Transferring the business to a solvent company is the best approach that realizes the value of the business and, most importantly, ensures the continuation of policyholder benefits. The smooth transition of policies also helps to maintain confidence among regulators, policyholders and the broader financial market. This was the strategy used for all four past life and health insurer failures.
Option 3 – Run-off unsaleable business
Assuris can use our bridge institution, CompCorp Life, to run off the business if it is unsaleable in the market. Run-off means that no new policies are sold, and the existing policies are managed and settled until they naturally expire.
6. Balance Resolution Objectives
Assuris has three resolution objectives in the failure of a life and health insurer:
- Protect policyholders by supporting the continuation of benefits
- Minimize the cost of failure to the industry
- Contribute to public confidence and financial stability
We balance these objectives throughout the insolvency proceedings to ensure an orderly resolution and have the flexibility to choose the best resolution option to meet the needs of different stakeholders.
7. Execute Resolution Strategy
The liquidator executes the agreed upon resolution strategy, with the prudential supervisor approving the sale of the business. Policyholders are transferred to a solvent company, and their benefits continue at a level that meets or exceeds Assuris’ guaranteed protection levels. The liquidator pays remaining creditors from the remaining assets and closes the estate.
The collaborative efforts of Assuris, prudential supervisors, and the liquidator play a vital role in safeguarding Canadian life and health insurance policyholders during challenging times. By focusing on proactive resolution preparedness, prioritizing policyholder protection, and leveraging past experiences, Assuris ensures that the interests of policyholders remain protected.
