Dutil.FA Flashcards
Objective of FA (Facility Association)
Ensure auto insurance availability for all owners & licensed drivers who are unable to obtain coverage through the voluntary market
Description of FA (who created FA, etc.)
- Created by insurance industry
- Unincorporated, non profit of ALL auto insurers
Mission of FA (3)
- Administer residual market mechanisms
- Enchance market stability through RSPs
- Minimize market share, so consumers benefit from private market
Types of risk-sharing mechanisms administered by FA (3)
- FARM (Facility Association Residual Market)
- RSPs (Risk-Sharing Pools)
- UAF (Uninsured Automobile Fund)
Key purpose/description of FARM
Provide coverage for risks that were not able to find insurance in the private market (also, FARM seeks to minimze market share)
Key purpose/description of RSP
Pool where private insurers can cede their unprofitable high risk business, and as such premiums and losses are shared with industry
Key purpose of UAF
- Provide compensation in cases of no insurance or inadequate insurance
Where does FA operate its various mechanisms
FARM: everywhere except provinces with public auto (BC, MB, SK, QC), so for ex: ON
RSPs: (ON, AB, NS, NB), note that Quebec operates its own RSP, called PRR
- An RSP has been newly introduced in Newfoundland and Labrador (not specifically covered in syllabus)
UAF: Atlantic Provinces
- NB, NS, NF, PEI
FARM - what are servicing carriers
Member companies contracted by FA to issue/administer policies and adjust claims
Functions of FA’s board of directors (4)
- Considering and approving suggested rate changes and rate filings
- Authorizing expenses
- Establishing and maintaining standards to be followed by servicing carriers and members using a RSP
- Appointing committees and sub-committees to assist them with specific issues
FARM - 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
RSPs:
(3) RSP in Ontario (except cat claim funds for ON accident benefits from insolvent insurer), so business ceded to this RSP
(4) RSPs in AB, NB, NS, so business ceded to those RSPs
UAF (Uninsured Automobile Fund) and the ON cat claim fund excluded from (3)
(5) Uninsured & unidentified motorist claim and the ON cat claim fund excluded from (3)
FARM v RSP - areas of operational differences (6)
- R: rates
- UW Rules
- C: customer knowledge / awareness
- C: # of customers placed (limit on this)
- Type of risk
- Service provider
FARM v RSP - operational differences regarding - rates
FARM: rates set by FA
RSP: uses rates of ceding company
FARM v RSP - operational differences regarding - UW rules
FARM: all policies written by the FARM are subject to the UW rules of the FA
RSP: Member companies underwrite policies according to their own rules
FARM v RSP - operational differences regarding - customer knowledge / awareness
FARM: customer is aware they are with the FA
RSPs: customer is unaware they’ve been transferred to RSP
FARM v RSP - operational differences regarding - limit on # customers placed
FARM: can be unlimited
RSPs: depend on province, usually a % of:
- (Total, Voluntary, PPA, non-Fleet, TPL) direct written car-years (T.V.PPA.NF.TPL direct WE)
FARM v RSP - operational differences regarding - type of risk
FARM: Any vehicle that is not a PPV and PPVs that have been declined by other insurers for specific reasons
RSP: PPV only
FARM v RSP - operational differences regarding - service provider
FARM: policies/claims serviced and handled via service carriers
RSP: policies/claims serviced and handled by the insurers who issue policies
What are the minimum requirements for risk-sharing pool transfer eligibility (5)
- PPA only
- Insured can’t be eligible for FARM
- Policy must satisfy statutory minimum coverage requirements (TPL limit)
- Insurer must follow proper classification & rating, and provide documentation
- Insurer must use approved rates
Describe how RSP operates regarding actual transfer of premium from insurer to pool
Member transfers premium charged net of premium payment service charge, and is subject to a limit depending on the province. The premium ceded must be the approved premium.
Describe premium reimbursement from pool to insurer
Reimbursement = % of written premium ceded (as an expense allowance)
- Includes: claims adjustment, LAE, acquisition & operating expenses
- Excludes: taxes, license, fees
In ON/AB/NB/NS, why is there a limit of 5% of risks that can be transferred to the pool
This is to prevent insurers from ceding all new business written and later cherry picking the good risks; encourages responsible underwriting
Identify differences between the ON and AB RSPs
Difference 1:
- ON has 1 RSP
- AB has 2 RSPs (Grid, Non-Grid)
Difference 2:
- ON has a 5% limit on risks that can be ceded
- AB GRID has no limit for Grid, 5% limit for Non-Grid
Particularities of NS RSP
Designed to accomodate inexperience drivers with good driving experience. Companies can only transfer risks for which at least one household member is a driver with less than 6 years of driving experience and who did not have any accidents or convictions in that period
5% limit on the number of risks transferred
How is the RSP used to lower total LR (Loss Ratio)?
- 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 participation ratio for RSP
Is it possible to sustain a RSP running a profit?
No: members only cede worst (unprofitable) risks so over time the pool would become unprofitable
Therefore not sustainable as it won’t operate at a profit
How does a rate freeze (at inadequate rates) impact availability of coverage
Availability is reduced - insurers would stop accepting high-risks because they are unprofitable
Justify ROE = 15% for high risk business (vs regulator ROE of 10%) (2)
- Higher risk justifies higher returns to compensate
- Using lower ROE may cause insurer’s to not offer products (reduces availability for consumer)
Define a residual market risk
- Any motor vehicle that is not a private passenger vehicle; or
- Any private passenger vehicle with respect to whom an application has been made to insure the risk is authorized at law to decline to issue or refuse to renew a contract of insurance in respect of such risk
