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TITLE
"The Impact of the 2003 Regulatory Reform in the Canadian Property/Casualty Insurance Industry on Insurers’ Surplus Levels", Peter Carayannopoulos, Mary Kelly, and Si Li, Spring 2010, Volume 33, pp 54-84.

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 that 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. JEL codes: G22, G28. [Keywords: solvency
regulation, statutory surplus, property/casualty insurance.]