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Exam 6C - Fall 2024 > Dutil.FA > Flashcards

Dutil.FA Flashcards

1
Q

Objective of FA (Facility Association)

A

Ensure auto insurance availability for all owners & licensed drivers who are unable to obtain coverage through the voluntary market

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2
Q

Description of FA (who created FA, etc.)

A
  • Created by insurance industry
  • Unincorporated, non profit of ALL auto insurers
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3
Q

Mission of FA (3)

A
  • Administer residual market mechanisms
  • Enchance market stability through RSPs
  • Minimize market share, so consumers benefit from private market
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4
Q

Types of risk-sharing mechanisms administered by FA (3)

A
  1. FARM (Facility Association Residual Market)
  2. RSPs (Risk-Sharing Pools)
  3. UAF (Uninsured Automobile Fund)
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5
Q

Key purpose/description of FARM

A

Provide coverage for risks that were not able to find insurance in the private market (also, FARM seeks to minimze market share)

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6
Q

Key purpose/description of RSP

A

Pool where private insurers can cede their unprofitable high risk business, and as such premiums and losses are shared with industry

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7
Q

Key purpose of UAF

A
  • Provide compensation in cases of no insurance or inadequate insurance
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8
Q

Where does FA operate its various mechanisms

A

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

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9
Q

FARM - what are servicing carriers

A

Member companies contracted by FA to issue/administer policies and adjust claims

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10
Q

Functions of FA’s board of directors (4)

A
  1. Considering and approving suggested rate changes and rate filings
  2. Authorizing expenses
  3. Establishing and maintaining standards to be followed by servicing carriers and members using a RSP
  4. Appointing committees and sub-committees to assist them with specific issues
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11
Q

FARM - 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

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)

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12
Q

FARM v RSP - areas of operational differences (6)

A
  1. R: rates
  2. UW Rules
  3. C: customer knowledge / awareness
  4. C: # of customers placed (limit on this)
  5. Type of risk
  6. Service provider
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13
Q

FARM v RSP - operational differences regarding - rates

A

FARM: rates set by FA

RSP: uses rates of ceding company

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14
Q

FARM v RSP - operational differences regarding - UW rules

A

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

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15
Q

FARM v RSP - operational differences regarding - customer knowledge / awareness

A

FARM: customer is aware they are with the FA

RSPs: customer is unaware they’ve been transferred to RSP

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16
Q

FARM v RSP - operational differences regarding - limit on # customers placed

A

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)

17
Q

FARM v RSP - operational differences regarding - type of risk

A

FARM: Any vehicle that is not a PPV and PPVs that have been declined by other insurers for specific reasons

RSP: PPV only

18
Q

FARM v RSP - operational differences regarding - service provider

A

FARM: policies/claims serviced and handled via service carriers

RSP: policies/claims serviced and handled by the insurers who issue policies

19
Q

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

A
  • 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
20
Q

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

A

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.

21
Q

Describe premium reimbursement from pool to insurer

A

Reimbursement = % of written premium ceded (as an expense allowance)
- Includes: claims adjustment, LAE, acquisition & operating expenses
- Excludes: taxes, license, fees

22
Q

In ON/AB/NB/NS, why is there a limit of 5% of risks that can be transferred to the pool

A

This is to prevent insurers from ceding all new business written and later cherry picking the good risks; encourages responsible underwriting

23
Q

Identify differences between the ON and AB RSPs

A

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

24
Q

Particularities of NS RSP

A

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

25
Q

How is the RSP used to lower total LR (Loss Ratio)?

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 participation ratio for RSP
26
Q

Is it possible to sustain a RSP running a profit?

A

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

27
Q

How does a rate freeze (at inadequate rates) impact availability of coverage

A

Availability is reduced - insurers would stop accepting high-risks because they are unprofitable

28
Q

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

A
  • Higher risk justifies higher returns to compensate
  • Using lower ROE may cause insurer’s to not offer products (reduces availability for consumer)
29
Q

Define a residual market risk

A
  1. Any motor vehicle that is not a private passenger vehicle; or
  2. 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

Exam 6C - Fall 2024 (56 decks)

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