Dutil - Facility Association Flashcards
What is the goal of the FA (Facility Association)?
To ensure auto insurance availability for all owners and licensed drivers unable to obtain coverage through the voluntary market.
Provide some facts about the FA (Facility Association). (2)
- it was created by the insurance industry
- is an unincorporated non-profit of all auto insurers
3 types of risk-sharing mechanisms administered by the FA (Facility Association).
FARM - Facility Association Residual Market
RSPs - Risk Sharing Pools
UAF - Uninsured Automobile Fund
What is the operational difference between FARM (Facility Association Residual Market) and RSP (Risk Sharing Pool).
- FARM uses rates set by the FA’s (Facility Association) pricing department
- RSP uses rates set by the ceding company
What is the mission of the FA (Facility Association)? (3)
- administer residual market mechanisms
- enhance market stability through RSPs
- minimize market share, so consumers benefit from the private market
What is the key purpose of FARM (Facility Association Residual Market)?
To provide coverage for risks that cannot be placed privately; also, FARM seeks to minimize market share.
What is the key purpose of RSP (Risk Sharing Pool)?
To enhance market stability by allowing insurers to pool bad risks that have passed their own U/W criteria.
What is the key purpose of the UAF (Uninsured Automobile Fund)?
To provide compensation in cases of no, or inadequate, insurance.
Where does FA (Facility Association) operate its various mechanisms?
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
What are servicing carriers?
They are member companies contracted by the FA (Facility Association) to issue and/or administer policies and adjust claims.
What are the functions of the FA’s (Facility Association) Board of Directors? (4)
- 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
What are the 5 classes of business for determining a member’s participation ratio?
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)
Differences in areas of operation between FARM (Facility Association Residual Market) and RSP (Risk Sharing Pool). (hint: RACC P.claims)
R: Rates A: Admission C: customer knowledge C: # Customers placed P: Participation ratio Claims: U/W & Claims administration
FARM vs RSP - Difference in RATES
FARM: rates are set by the FA
RSP: uses the rates of the ceding company
FARM vs RSP - Difference in ADMISSION
FARM: only if the agent/broker can’t place the risk in the voluntary market
RSP: use U/W rules of the ceding company
FARM vs RSP - Difference in CUSTOMER KNOWLEDGE
FARM: the customer knows they are in FARM
RSP: the customer doesn’t know that they are in RSP
FARM vs RSP - Difference in the # CUSTOMER PLACED
FARM: can be unlimited
RSP: depends on province, usually a % of (T.V PPA (non-fleet) TPL) direct car years
FARM vs RSP - Difference in COVERAGE REQUIREMENTS
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.
FARM vs RSP - Difference in CLAIMS ADMIN & U/W
FARM: uses servicing carriers (or a 3rd party)
RSP: ceding company handles it
What are the minimum requirements for risk-sharing pool transfer eligibility? (5)
- 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
Describe how an RSP operates regarding the actual transfer of premium from the insurer to the pool.
Transferred premium = premium charged NET of premium payment service charges
Describe premium reimbursement from the pool to the insurer.
Reimbursement = % of the written premium (as an expense allowance)
- this includes claims adjustment, LAE, acquisition & operating expenses
- exclude taxes, license, fees
In Ontario, why is it that only 85% of each transferred risk covered?
- 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
In Ontario, why is there a limit of 5% of voluntary, PPA, non-fleet exposures that can be transferred to the RSP?
- 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
How is the RSP used to lower the total LR?
- 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
Is it possible to sustain a RSP running a profit?
NO, members will only cede the worst (unprofitable) risks, so, over time, the pool will become unprofitable. Thus, non sustainable.
How does a rate freeze (at an inadequate rate) impact availability of coverages?
The availability of that class is reduced - insurers would stop accepting risks because they are unprofitable.
How to solve the rate freeze at inadequate rates issue without enforcing a ‘take-all-comers’ rule?
- 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.
Justify ROE = 15% for high-risk business (vs regulator’s ROE of 10%) (2)
- 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
