Life and Health Insurance Resolution Process
Runway Phase
Well before a life and health insurer reaches the point of insolvency, the Canadian regulator that is the prudential supervisor (e.g. OSFI, AMF) of the troubled insurer will have been working closely with its Board of Directors and senior management to find solutions to the problems the insurer is encountering. Prudential supervisors such as OSFI and the AMF use a “staging” approach to guide the level of intervention, which are codified in published Guides to Intervention. During each stage of intervention, the prudential supervisor and Assuris collaborate to keep each other informed of developments and share relevant information about the troubled insurer.
In the early stages of intervention, the prudential supervisor and the troubled insurer are focused on recovery. During this period, the prudential supervisor:
- will require enhanced monitoring and reporting
- will conduct additional reviews
- may impose restrictions on the insurer’s business
- may provide specific direction to the insurer
- may conduct special audits or retain specialized consultants
- will develop contingency plans to take control
During this phase, Assuris begins to prepare for the insurer’s insolvency in case the recovery actions prove ineffective. Assuris:
- will develop a resolution strategy
- may hire specialized insolvency consultants
- will assess progress with recovery plans
- will begin to estimate the cost of protection
- will develop plans for managing liquidation and funding resolution
- will activate the crisis communication plan
Resolution Phase
If, despite the prudential supervisor’s and the insurer’s best efforts to recover, the insurer becomes non-viable, then the prudential supervisor will usually assume temporary control of the insurer and immediately petition the court for a winding-up order under WURA. Close collaboration between Assuris and the prudential supervisor continues in this phase, particularly on public announcements and communications. In addition, both Assuris and the prudential supervisor will begin to collaborate with the court-appointed liquidator of the failed insurer.
Assuris maintains a model winding-up order that has been developed over time with the benefit of our past experience with failure. Assuris will often prepare a first draft of the winding-up order that the prudential supervisor will use to petition the court. Assuris and the prudential supervisor will also often collaborate to make a recommendation to the court on who should be appointed as the liquidator.
In some circumstances, the prudential supervisor might take control of the failed insurer and implement a restructuring of the insurer without placing it into a WURA wind-up. In these circumstances, which we call an “out-of-court resolution”, Assuris can financially support a restructuring and recapitalization of the failed insurer, provided that certain conditions are met, including a change of control of the failed insurer.
Communicating with Policyholders and the Public
The fact that a life and health insurer is in financial distress will generally not become publicly known unless and until the prudential supervisor has taken control of the failed insurer. Assuris maintains a comprehensive Crisis Communication Plan that goes into effect at this point to help ensure that policyholders of the failed insurer and their financial advisors, as well as the broader public, are kept informed about what is happening. Our plan includes mechanisms to coordinate announcements and ongoing communications among Assuris, the prudential supervisor, the liquidator, and other stakeholders and regulators.
The main source of information for these groups will be a microsite that provides detailed information on Assuris protection and the resolution process. The microsite content will be customized to provide protection information specific to the products offered by the failed company and launched on the Assuris website within minutes of the announcement of a member company failure. Messaging will also be pushed through social media channels, which will be used to direct stakeholders to the microsite. All communications will be provided in English and French.
A call centre may also be utilized to address policyholder questions and concerns that may not be met through the microsite. This may take the form of utilizing the call centre of the failed member company or securing the services of a third-party company. Assuris will develop and provide a training program as well as a comprehensive Q&A to ensure this resource is fully prepared to answer questions from policyholders and financial advisors.
Assuris Funding of Resolution
Member
Designation
Assuris’ funding obligation begins when the Assuris Board of Directors determines that a member life and health insurer is insolvent or about to become insolvent. The Board will declare that the member is a Troubled Member. This designation allows the Board to make a Financial Commitment to resolve the Troubled Member and allows Assuris to access its Liquidity Fund of approximately $200 million.
The amount of the Financial Commitment is determined by analyzing the cost of the financial guarantees made by the failed life and health insurer to its Canadian policyholders, the value of the assets owned by the insurer and that are available to policyholders, and the level of coverage for the various guaranteed benefits provided by Assuris. The Financial Commitment is the amount that Assuris will then collect from its other members (i.e. the rest of the Canadian life and health insurance industry) to pay for the cost of the failure.
Contagion
Although Assuris has the power to assess its members for the cost of failure, Assuris is also required to analyze whether the assessment could cause another solvent member to become distressed and potentially insolvent. In these circumstances, the Assuris Board, in conjunction with the industry, will determine the best approach to protect policyholders while preventing contagion.
A key step early in the court process is that Assuris and the court-appointed liquidator, on behalf of the insolvent insurer, will enter into a Loan Agreement. The Loan Agreement establishes the conditions under which Assuris will provide funds to the insolvent insurer to ensure that payments to policyholders of their guaranteed benefits (up to Assuris’ protection levels) continue to be made during the resolution process. This allows the liquidator to carry on the business of the failed company and preserves the value of the business as well as ensuring that policyholders continue to receive their benefits in this period. The Loan Agreement will also establish some specific rights for Assuris in exchange for the loan, such as the right to access information about the insolvent insurer and the right to be involved in and approve any material transactions, such as the sale of the business, undertaken by the liquidator during the insolvency.
Resolution Strategy and Tools
Well in advance of failure, Assuris will have been developing a resolution strategy for the troubled insurer. Assuris and the liquidator will begin to collaborate on implementing that strategy almost immediately.
The guaranteed benefits that life and health insurers provide to policyholders are generally a promise of payment that will be made upon the occurrence of a future or contingent event. For example, a critical illness insurance policy promises payment if and when the policyholder contracts a covered illness. These types of future or contingent guaranteed benefits are difficult to fairly value at a point in time before they have crystallized, and they are often very difficult for a policyholder to economically replace because their health or other relevant circumstances may have significantly changed since the time they purchased the policy. For these reasons, simply repaying the premiums that a policyholder has paid to that point or otherwise “cashing out” the policy upon insolvency is not an appropriate remedy.
Accordingly, the best way to protect policyholders if their life and health insurer fails is usually to find a way to continue their benefits with a solvent company.
There are two principal strategies for continuing the policyholder guaranteed benefits of a failed life and health insurance company: sale and transfer to another solvent insurer or run-off.
Sale and Transfer
Sale and transfer to a solvent insurer is the traditional approach for resolving a failed insurer. With this strategy, the liquidator will conduct an auction process whereby other solvent insurers will be invited to examine a data room containing relevant information about the failed insurer and submit bids to acquire the business. Bidders are assessed on their financial strength and ability to carry on the acquired business, as well as the financial terms being offered. In some cases, different blocks of the failed insurer’s business may be sold to different purchasers.
The bidders’ financial terms will usually include a level of Assuris funding based on Assuris’ protection levels. Assuris can support a sale and transfer in a wide range of ways, including:
- straight cash transfer to acquiring insurer
- substitute assets on the failed insurer’s balance sheet
- provide financial guarantees or limit losses on problematic blocks of guaranteed benefits
- assume and run-off an unsaleable block of guaranteed liabilities
Run-off is a backup mechanism for resolving a failed insurer and would generally be used to resolve an unsaleable business. Run-off means that the failed insurer is no longer allowed to sell new policies and is prevented from actively conducting any new business but continues to administer and pay claims of existing policyholders for as long as their policies are in force. Run-off may be a permanent solution or may be used as a temporary strategy to allow time for market conditions or the economic environment to improve sufficiently so that the insolvent business becomes attractive to buyers.
Run-off
Assuris maintains a dormant but fully licensed life insurance company subsidiary called CompCorp Life. This is often referred to as a “bridge institution”. CompCorp Life is a powerful tool that can be used in a variety of ways to support resolution strategies. For example, it can be used as a financing vehicle for asset substitution or loss limitation guarantees, or as a means to assume and run-off unsaleable business.
These resolution strategies and tools have proven effective in the past and most policyholder guaranteed benefits are fully covered by Assuris protection, so policyholders of a failed insurer will often have the full amount of their guaranteed benefits continued post-failure with no reduction in value. At a minimum, their guaranteed benefits will be continued at no less than the level of Assuris protection.
Explore What Happens in a Failure
See how Canada’s resolution framework protects policyholders if a life and health insurer fails. These pages explain the coordinated approach between regulators, Assuris, and other stakeholders to preserve financial stability, how the resolution process works, and our experience with past failures.
