The Impact of the 2003 Regulatory Reform in the Canadian Property/Casualty Insurance Industry on Insurers’ Surplus Levels

Abstract

In 2003, Canada’s federal prudential regulator modified the capital adequacy test for property/casualty insurers to better align regulatory surplus with firm risk. We explore the impact of this change on the level and determination of insurers’ surplus holdings.

We find that firms have not changed the level of surplus held in response to risk characteristics as delineated in the capital adequacy test. However firms have reduced surplus holdings in jurisdictions in which automobile insurance reform has been successful, and increased surplus holdings in jurisdictions with escalating automobile insurance claims.

Overall, larger firms have increased their surplus holdings since 2003, whereas smaller insurers report surplus-to-net-premium-written ratios that have been declining over time. In addition, insurers are part of a larger financial conglomerate have consistently held more surplus than their counterparts. We conjecture that these higher levels may be related more to the conglomerate’s future strategic opportunities than the insurer’s level of risk. This suggests that Canadian regulators need to work with supervisory authorities in other jurisdictions to study solvency standards related to groups and larger financial conglomerates.

Keywords: Solvency Regulation, Statutory Surplus, Property/Casualty Insurance

JEL Classification: G22, G28