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CAS Exam 6C > Dutil - Facility Association > Flashcards

Dutil - Facility Association Flashcards

1
Q

What is the goal of the FA (Facility Association)?

A

To ensure auto insurance availability for all owners and licensed drivers unable to obtain coverage through the voluntary market.

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2
Q

Provide some facts about the FA (Facility Association). (2)

A
  • it was created by the insurance industry

- is an unincorporated non-profit of all auto insurers

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3
Q

3 types of risk-sharing mechanisms administered by the FA (Facility Association).

A

FARM - Facility Association Residual Market
RSPs - Risk Sharing Pools
UAF - Uninsured Automobile Fund

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4
Q

What is the operational difference between FARM (Facility Association Residual Market) and RSP (Risk Sharing Pool).

A
  • FARM uses rates set by the FA’s (Facility Association) pricing department
  • RSP uses rates set by the ceding company
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5
Q

What is the mission of the FA (Facility Association)? (3)

A
  • administer residual market mechanisms
  • enhance market stability through RSPs
  • minimize market share, so consumers benefit from the private market
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6
Q

What is the key purpose of FARM (Facility Association Residual Market)?

A

To provide coverage for risks that cannot be placed privately; also, FARM seeks to minimize market share.

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7
Q

What is the key purpose of RSP (Risk Sharing Pool)?

A

To enhance market stability by allowing insurers to pool bad risks that have passed their own U/W criteria.

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8
Q

What is the key purpose of the UAF (Uninsured Automobile Fund)?

A

To provide compensation in cases of no, or inadequate, insurance.

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9
Q

Where does FA (Facility Association) operate its various mechanisms?

A

FARM - everywhere, except provinces with public auto (ie: BC, MB, SK, QC)
RSP - (ON, AB, NS, NB), note that QC operates its own RSP called PRR
UAF - Atlantic provinces

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10
Q

What are servicing carriers?

A

They are member companies contracted by the FA (Facility Association) to issue and/or administer policies and adjust claims.

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11
Q

What are the functions of the FA’s (Facility Association) Board of Directors? (4)

A
  • RATE CHANGES: approve rate changes & filings
  • EXPENSES: authorize expenses
  • STANDARDS: established standards for servicing carriers & RSP (Risk Sharing Pools) users
  • COMMITTEES: appoint committees and subcommittees
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12
Q

What are the 5 classes of business for determining a member’s participation ratio?

A 
FARM:
1) PPA (non-fleet, non-pool)
2) all auto EXCLUDING 1) and RSPs
RSP
3) RSP in Ontario (except CAT claim funds for ON accident benefits from insolvent insurer)
4) RSP in AB, NB, NS
UAF:
5) UM claims + the ON CAT claim fund excluded from 3)
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13
Q

Differences in areas of operation between FARM (Facility Association Residual Market) and RSP (Risk Sharing Pool). (hint: RACC P.claims)

A 
R: Rates
A: Admission
C: customer knowledge
C: # Customers placed
P: Participation ratio
Claims: U/W & Claims administration
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14
Q

FARM vs RSP - Difference in RATES

A

FARM: rates are set by the FA
RSP: uses the rates of the ceding company

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15
Q

FARM vs RSP - Difference in ADMISSION

A

FARM: only if the agent/broker can’t place the risk in the voluntary market
RSP: use U/W rules of the ceding company

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16
Q

FARM vs RSP - Difference in CUSTOMER KNOWLEDGE

A

FARM: the customer knows they are in FARM
RSP: the customer doesn’t know that they are in RSP

17
Q

FARM vs RSP - Difference in the # CUSTOMER PLACED

A

FARM: can be unlimited
RSP: depends on province, usually a % of (T.V PPA (non-fleet) TPL) direct car years

18
Q

FARM vs RSP - Difference in COVERAGE REQUIREMENTS

A

FARM: requires statutory minimum auto coverage in that jurisdiction
RSP: minimum TPL statutory limit in the applicable province

Note: a policy ceded to the RSP must have already passed the ceding insurer’s U/W standards, which means it must have the minimum statutory requirements in that jurisdiction.

19
Q

FARM vs RSP - Difference in CLAIMS ADMIN & U/W

A

FARM: uses servicing carriers (or a 3rd party)
RSP: ceding company handles it

20
Q

What are the minimum requirements for risk-sharing pool transfer eligibility? (5)

A
  • PPA only
  • the insured can’t be eligible for FARM
  • the policy must satisfy statutory minimum coverage requirements
  • insurer must follow proper classification & rating, and must provide documentation
  • the insurer must use approved rates
21
Q

Describe how an RSP operates regarding the actual transfer of premium from the insurer to the pool.

A

Transferred premium = premium charged NET of premium payment service charges

22
Q

Describe premium reimbursement from the pool to the insurer.

A

Reimbursement = % of the written premium (as an expense allowance)

  • this includes claims adjustment, LAE, acquisition & operating expenses
  • exclude taxes, license, fees
23
Q

In Ontario, why is it that only 85% of each transferred risk covered?

A
  • the insurer retains the incentive to manage claims well and use effective U/W to maintain adequate pricing
  • otherwise they could simply off-load bad consequences of poor management
  • Note: FARM transfer is 100% of risk
24
Q

In Ontario, why is there a limit of 5% of voluntary, PPA, non-fleet exposures that can be transferred to the RSP?

A
  • for the same reasons as why only 85% of the risk is transferred
  • also, to prevent insurers from sending all new policies to the pool for the first year, and then cherry picking the renewals from the pool in year 2
25
Q

How is the RSP used to lower the total LR?

A
  • cede policies to RSP that have a higher LR than the RSP average
  • then other companies will end up subsidizing the losses on these policies
  • ALSO, ceding the maximum amount lowers the participation ratio for the RSP
26
Q

Is it possible to sustain a RSP running a profit?

A

NO, members will only cede the worst (unprofitable) risks, so, over time, the pool will become unprofitable. Thus, non sustainable.

27
Q

How does a rate freeze (at an inadequate rate) impact availability of coverages?

A

The availability of that class is reduced - insurers would stop accepting risks because they are unprofitable.

28
Q

How to solve the rate freeze at inadequate rates issue without enforcing a ‘take-all-comers’ rule?

A
  • Set up a residual market, where coverage can be given to insureds that cannot get insurance through the voluntary market.
    AND/OR
  • Set up a RSP where the insurers can cede unprofitable business that they have written according to their own U/W rules, up to a certain amount of risks ceded.
29
Q

Justify ROE = 15% for high-risk business (vs regulator’s ROE of 10%) (2)

A
  • higher risk justifies higher returns to compensate
  • using lower ROE may cause the insurers to not offer the products, and therefore would reduce the availability for the consumer

CAS Exam 6C (70 decks)

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