Merced Property and Casualty Company: How Climate Risk Led to Its Failure

Facilitated by hot Diablo winds, dry weather, and combustible vegetation, the Camp Fire in November 2018 almost destroyed the town of Paradise in Butte County, California. The fire also led to the demise of Merced Property and Casualty Company (Merced), a small property and casualty insurer based in Atwater, California. Following the Camp Fire, homeowners’ insurance claims exceeded Merced’s ability to pay out their insurance claims, and in December 2018, Merced was put into liquidation by the California Insurance Guarantee Association. In September 2021, Jessy Picado, chief executive officer of Insuredhouse, a small property and casualty insurer in Alberta, Canada, decided to scrutinize the case of Merced in a bid to restructure Insuredhouse’s climate risk management plan. Picado appointed Dany Voisin, chief risk officer, to identify the reasons for the downfall of Merced and draw lessons from it. Voisin had to determine what available information and financial ratios would have been indicators of Merced’s business vulnerability and use them in his analysis before making recommendations to Insuredhouse.

This case is suitable for courses in insurance, risk management, and financial management at the senior undergraduate and graduate levels. The case can help instructors introduce insurance-specific financial ratios and explain how to use them when analyzing risk for a company. The case is also well suited to analyzing risks associated with climate change. After completing this case, students will be able to<br><br><ul><li>better understand what climate risk is and identify the risks that could endanger a neighbourhood;</li><li>understand and calculate key financial ratios for property and casualty insurers under statutory accounting principles (SAP) reporting and identify the differences between SAP and generally accepted accounting principles (GAAP) reporting; and<li></li>analyze the financial health of a given property and casualty insurer using financial ratios and risk management strategies.</li></ul>

• Property and Casualty
• Insurance
• Climate Risk
• Statutory Accounting