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

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