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.
Past Life and Health Insurance Company Failures in Canada
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.
The past failures are like fallen trees that serve as valuable lessons for the entire life and health insurance ecosystem. Assuris studies the weaknesses that caused the failures, whether it was from shallow root systems (inadequate capital resources), internal decay (poor risk management and governance) or external forces (economic change). All this helps us understand and anticipate company and industry-wide risks that can cause failure.
Rethinking Risk With Lessons From Failed Business Models
It is difficult for a life and health insurer to fail because of the longer-term nature of the business and the benefit of time to manage through tough economic situations. They are inherently resilient due to their long-term focus, making outright failure less common. Failures, when they occur, typically unfold gradually and are the result of complex factors such as insufficient capital, reputation loss, and internal cultural issues.
Failures are not always public, nor does failure always result in insolvency or court liquidation proceedings. There may be solvent alternatives to liquidation, such as restructuring, strategic partnerships, capital injections from a parent company, or a voluntary exit from the market.
In the case of the four life and health insurer insolvencies, the underlying issue was the failure of the business model, which led to increased risk-taking and, eventually, insolvency. Strategic risk issues tend to be more chronic than acute. However, a trigger event can escalate these ongoing risks to a critical level, where access to capital becomes crucial for the company’s survival.
Well-diversified companies have the benefit of more time to manage stress events due to their broader resources. While liquidity risk is not typically a direct cause of failure for life and health insurers, this is an evolving environment and subject to change, especially if they start to undertake risks similar to banks, such as those arising from hedging activities.
How the industry’s business model and risk management have changed over time will affect future failures. There has been a notable shift towards embracing shorter-term, less capital-intensive risks. Large public companies in the industry now operate with diversified business models, while small and medium-sized companies either follow a similar diversification strategy or focus on specific market niches.
Top 6 “Red Flags”
Assuris has compiled its top six lessons learned from the Canadian life and health insurer past insolvencies, which are considered potential “red flags” for failure risk.
1. Structural Business Model Changes
The insolvencies of the 90s all failed due to overexposure to the commercial real estate market, but the companies were overexposed because they needed to earn higher returns to offer more competitive products as they changed their business models. Competition in new business models can result in product mispricing, aggressive asset mixes, lack of scale and poor access to distribution.
2. Over-Leveraged Capital Structures
The past failures had over-leveraged capital structures that held hidden risks, such as requiring a constant stream of profits to support holding company debt payments or adverse actions by senior debt holders as the troubled company attempted to restructure.
3. Corporate Governance Risk
Another common theme was risk management and corporate governance failure. Executives and boards of directors sometimes buy or create unfamiliar businesses in which they have no expertise. A dominant CEO can also result in a conflict of interest and lack of oversight for the organization.
4. Rapid Change in the Macroeconomic Environment
All four insolvencies were triggered by macroeconomic stress events that depleted capital buffers. Insurers may not be able to adapt to the changing macroeconomic environment due to:
- locked-in product pricing on long-term business
- asset portfolios optimized for a macroeconomic environment that no longer exists
- unhedged market exposure leading to losses
- liquidity pressure from collateral calls on derivatives portfolios
5. High-Risk Funding Models
Lack of public confidence in a life and health insurer’s long-term viability can lead to a liquidity risk “death spiral”. Short-term funding programs may not renew, and large institutional businesses will lapse or not renew when the troubled company is facing credit downgrades.
6. Gaps in Capital and Actuarial Standards
Actuarial standards are not prescriptive, and there can be valuation risk when overly optimistic judgment is applied to lesser-understood assumptions. Capital and actuarial standards may also not provide adequate protection to manage through stress events when new business models and risks are introduced, such as high-risk real estate or term-to-100 lapse rates.
Each failure is a fallen tree that enriches the forest floor providing nutrients for new growth and creating opportunities for adaptation. Understanding the lessons learned contributes to the industry’s evolution and resilience and helps Assuris remain vigilant in anticipating risks that could cause failure and being ready for resolution.
This article is part of a series on lessons learned from past failures. You can read the other articles in the series below:
