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Why Insurers Fail: The Dynamics of Property and Casualty Insurance Insolvency in Canada

Author

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  • Darrell Leadbetter

    (Property & Casualty Insurance Compensation Corporation (PACICC), Research, 20 Richmond St. East, Suite 210, Toronto, ON, Canada M5C 2R9.)

  • Suela Dibra

    (Insurance Bureau of Canada, Policy, 777 Bay Street, Suite 2400, PO Box 121, Toronto, ON, Canada M5G 2C8.)

Abstract

We analyze the involuntary exit of 35 property and casualty insurance companies from the Canadian insurance market over the 1960–2005 period, and consistent with other jurisdictions, find evidence that inadequate pricing and deficient loss reserves are the leading cause of insurer insolvency. Overall, we find that the operating environment generally provides the catalyst for insolvency, either through turbulent financial markets or reduced profitability in the industry, but most causes of involuntary exit can however be linked back to three sources within an institution: the quality and experience of governance/management, internal operational processes and risk appetite. Further, other than inadequate pricing, our results, when compared with the few studies in various jurisdictions, indicate there are few universal causes of involuntary exit across jurisdictions, and hence supervisory approaches to insurer insolvency should be flexible and adaptable to the environment. The Geneva Papers (2008) 33, 464–488. doi:10.1057/gpp.2008.14

Suggested Citation

  • Darrell Leadbetter & Suela Dibra, 2008. "Why Insurers Fail: The Dynamics of Property and Casualty Insurance Insolvency in Canada," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 33(3), pages 464-488, July.
    • Handle: RePEc:pal:gpprii:v:33:y:2008:i:3:p:464-488
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    Citations

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    Cited by:

    1. Olivier de Bandt & George Overton, 2020. "Why do insurers fail? A comparison of life and non-life insolvencies using a new international database [Les déterminants des défaillances en assurance : comparaison entre les secteurs de l’assuran," Débats économiques et financiers 36, Banque de France.
    2. Eling, Martin & Jia, Ruo, 2018. "Business failure, efficiency, and volatility: Evidence from the European insurance industry," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 58-76.
    3. A.V. Larionov, 2020. "Assessing the Financial Stability of Insurance Companies by Analyzing the Dynamics of Cash Flows," Journal of Applied Economic Research, Graduate School of Economics and Management, Ural Federal University, vol. 19(2), pages 208-224.
    4. Yuechen Dai & Tonghui Xu, 2021. "A Lifecycle Approach to Insurance Solvency," Working Papers in Economics 21/13, University of Canterbury, Department of Economics and Finance.
    5. Huong Dang, 2014. "A Competing Risks Dynamic Hazard Approach to Investigate the Insolvency Outcomes of Property-Casualty Insurers," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(1), pages 42-76, January.
    6. Anggy Renaldo & Unggul Purwohedi & Gatot Nazir Ahmad, 2021. "Determinants of the Risk-Based Capital of Insurance Companies in Indonesia," Oblik i finansi, Institute of Accounting and Finance, issue 3, pages 72-77, September.

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