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Although Canadian life and health insurers rarely fail, Assuris’ role is to always be ready for the resolution of any member company. Part of being always ready is to make sure we understand our past failures to help us be more prepared for the next one.
Since Assuris was created, the organization has actively managed four life and health insurer insolvencies in Canada, pioneering efforts to ensure policyholders were protected in unprecedented situations.
Each of these insolvencies has provided learning opportunities for Assuris as the industry-funded policyholder protection organization. Because Assuris focuses on the early identification of solvency risks and being prepared to resolve a failed member company, our past experience provides valuable insights into why and how life and health insurers fail as well as resolution options and tools to minimize losses to policyholders and costs to the industry.
Union of Canada
On February 2, 2012, Union of Canada Life Insurance, headquartered in Ottawa, sought court protection under the Winding-up and Restructuring Act (WURA).
Union of Canada Life Insurance had 22,000 policyholders. Assuris fully protected 99% of them. The remaining 1% retained at least 95% of their benefits. Assuris worked closely with the liquidator to ensure policyholders were transferred to another life insurance company, where their benefits continue to be honoured.
Union of Canada was a small test case that illustrated the effectiveness of our resolution processes well over twenty years after the experience in the 1990s.
Outcome:
- 99% of the 22,000 policies were fully covered by Assuris.
- The remaining 1% of policyholders who incurred some losses retained at least 95% of their benefits.
Confederation Life
On August 11, 1994, the liquidation of Confederation Life began.
Confederation Life had 260,000 individual Canadian policyholders and 1.5 million policyholders under group insurance plans. Confederation Life was an internationally complex liquidation with operations in Canada, the United States and the United Kingdom.
Assuris provided immediate protection to Canadian policyholders under our protection rules. As the liquidation progressed, Assuris partnered with the regulator and the liquidator, and leveraged lessons learned in previous insolvencies. The result was full recovery for Canadian policyholders.
The failure of Confederation Life demonstrated the challenges of cross-border insolvency and the benefit of cooperation across jurisdictions.
Outcome:
- Full recovery for 260,000 individual policyholders and another 1.5 million people who participated in group insurance plans.
Sovereign Life
On January 18, 1993, a Winding-up order was granted against Sovereign Life, headquartered in Calgary.
Sovereign Life had 249,000 policyholders. Assuris fully protected 96% of them. The remaining 4% of policyholders retained at least 90% of their benefits. Assuris successfully transferred all policies to a solvent life insurance company.
This was the first time that Assuris used its fully-licensed life and health insurance company, CompCorp Life Insurance as a tool to maximize policyholder protection and minimize cost to the industry.
Outcome:
- 96% of the 249,000 policyholders were 100% protected by Assuris coverage.
- The remaining 4% who incurred some loss all retained at least 90% of their benefits.
Les Coopérants
On January 3, 1992, Les Coopérants, headquartered in Montreal, was ordered into liquidation under the Winding-up Act.
Les Coopérants had 222,000 individual policyholder insurance contracts and 600,000 policyholders under group insurance plans. All policyholders were fully protected by Assuris.
This was the first life insurance company failure in Canada and Assuris successfully established the precedent that policyholders should receive priority in the liquidation of a life insurance company.
Outcome:
- All 220,000 policyholders and 600,000 group insurance certificate holders were fully protected.
1990
Assuris
Assuris is founded by the Canadian life and health insurance industry.
In each case, the policyholders were transferred to a solvent company where their benefits continued to be honoured. Resolving a failed life and health insurance company is like ensuring customers continue to receive uninterrupted access to the service they have signed up for. The goal is to keep the service running seamlessly, as it is something they rely on and may not be able to replace for a reasonable price.
How Life and Health Insurers Are Resolved
Resolving a life and health insurance company is different from resolving any other type of company. However, there are many similarities: the appointment of an insolvency professional to take control of the business, the valuation and sale of the entire business or its assets, and the oversight by the insolvency courts.
The big difference is that the largest group of creditors in a life and health insurance company are the policyholders. Their claims are difficult to value and cannot be suitably satisfied by cash compensation but only by the continuation of their policies. The value of the business is also only partially in the assets. The policyholder liabilities and their administration are usually the highest value item to be realized in the resolution.
The process to transfer the policyholder liabilities to another company is very similar to selling the assets, but it takes everyone involved a little while to understand the concept of selling the liabilities as well as the assets!
Top 5 Lessons Learned
Leaning on our experience from the past insolvencies, Assuris has compiled its top 5 lessons learned on how life and health insurer failures are resolved:
1. Life and Health Insurers Are Different Than Banks and P&C Insurers
The approach to resolving life and health insurers is different from the resolution strategies for banks and property and casualty (P&C) insurance firms, which often deal with shorter-term business. The focus for life and health insurers is on maintaining the continuity of benefits for policyholders, rather than offering cash compensation. This is crucial because, as policyholders age, obtaining replacement policies becomes more expensive, and some may become uninsurable due to deteriorating health conditions.
In the service example above, if life and health insurer policyholders continue to receive their benefits, the objective of a bank or P&C insurer is primarily financial compensation for loss, like giving customers a refund for a product or service they did not receive. It is a one-time compensation for what was lost, rather than ensuring the continuation of something they need over time. Transferring the business also generally requires less up front funding compared to paying cash compensation to consumers.
2. Time Is (Still) of the Essence
While insurance resolution may not require the speed of execution that may be required to deal with a bank failure, time to resolution is nonetheless a critical factor. Conventional wisdom is that banks must be resolved within days, but insurers can be resolved over months and years. It is not clear whether this remains true in this era of lightning-fast transmission of confidence-draining misinformation via social media. Today, consumers will expect to be told the solution as well as the problem on the day their insurance company fails.
The urgency in resolving insurance companies is more related to the problem of anti-selection, where the good risks—for example, healthier policyholders, who can easily find alternative coverage, will leave. This departure of lower-risk individuals leaves behind a pool of higher-risk policyholders, eroding the value of the business. In past failures, it was important to communicate the benefits of Assuris protection to mitigate the risks of anti-selection and discourage panic-driven decisions.
Beyond this risk, the longer it takes to resolve, and the greater uncertainty of outcome it generates, the higher the risks to policyholders and other creditors, the industry and the broader financial system.
3. Need Options and Tools to Tailor Resolution Strategy to Specific Crisis Needs
Past insolvencies were dealt with by finding creative solutions to the problems at hand. An effective approach with Confederation Life involved leveraging the gradual sale of businesses to manage illiquid assets and their recovery, thereby avoiding the pitfalls of undervalued fire sales during liquidation. In such cases, Assuris collaborates with the liquidator to carefully assess the cost of ‘working out’ assets relative to the likelihood of market conditions improving.
Our subsidiary CompCorp Life Insurance Company (CompCorp Life), serves as a critical resolution tool, functioning either as a bridge institution or a vehicle to run off unsaleable business. Unsaleable blocks, such as very small policies or long-term guaranteed life insurance in a low-interest rate environment pose unique challenges due to the limited market appetite for these products.
Additionally, Assuris can also provide guarantees and indemnities to support resolution strategies. As a licensed life insurance company, CompCorp Life is well-positioned to offer alternative financial tools, including stop-loss reinsurance, cash flow swaps, and product guarantees, enhancing the flexibility and effectiveness of our resolution framework. In the case of Sovereign Life’s insolvency, CompCorp Life was used as a reinsurer to work out commercial mortgage and real estate assets that were unwanted by the insurer that assumed the failed company’s business.
4. Resolution Information Is Critical to Make Decisions
Resolution often necessitates decision-making under conditions of incomplete information. A key lesson learned from early insolvencies is the critical importance of effective information sharing between the prudential supervisor, and Assuris, the policyholder protection organization. This insight contributed to the establishment of Assuris’ independent role in serving the public interest and the creation of the independent Board of Directors.
The type of information available also plays a crucial role in resolution preparedness. A ‘gone concern’ perspective is essential but may not be readily available while a company remains a ‘going concern’. Financial statements prepared in liquidation often present a markedly different financial position than the company’s last regulatory filings. High-quality financial information at the outset is vital for the liquidator to identify assets and liabilities, craft a liquidation strategy, monitor performance, and provide transparent explanations of losses to creditors.
Adequate resolution information is likely already captured in regulatory filings for most companies. However, for larger and more complex life and health insurers, specific resolution-focused information should be available proactively, even if the probability of failure remains low.
5. Cooperation and Collaboration Among Stakeholders Are Vital
The Canadian insurance resolution process is based on cooperation and collaboration across key stakeholders – the prudential supervisor, the policyholder protection organization and the liquidator through the court process. Effective cooperation and collaboration among these stakeholders are essential to ensuring an orderly failure, minimizing disruption for policyholders and maintaining confidence in the financial system.
Cross-border cooperation is essential for addressing cross-border insolvencies, often requiring intercompany agreements to facilitate services across jurisdictions. In past cases, sustained cooperation and negotiation successfully avoided litigation. Notably, a complex agreement with the United States in the Confederation Life failure to ‘true up the estates’ and make sure the amounts owed were treated fairly was reached after several years of deliberation, demonstrating the value of collaborative problem-solving in resolving intricate cross-border challenges.
Cooperation issues are not just cross-border but also between entities within the same country. Issues within a country can be just as difficult as those between them. The consumer protection organizations are part of the process and need access to information not only about their jurisdiction but also the rest of the conglomerate, at least to the extent it might impact them.
Assuris maintains the resolution expertise to develop tailored solutions to life and health insurance industry-specific issues. By combining the knowledge gained from past failures with current work with restructuring professionals and awareness of the current industry environment, Assuris can adapt resolution strategies to contain and mitigate the impact of the next life and health insurance failure, no matter how different it may be.
This article is part of a series on lessons learned from past failures. You can read the other articles in the series below:
