FA Flashcards
objective of FA
ensure auto insurance availability for all owners & licensed drivers who are unable to obtain coverage through the voluntary market
description of FA
- created by insurance industry
- unincorporated, non-profit of all auto insurers
mission of FA
- administer residual market mechanisms
- enhance market stability through RSPs
- minimize market share, so consumers benefit from private market
types of risk-sharing mechanisms administered by FA
- FARM
- RSPs
- UAF (unisured automobile fund)
key purpose of FARM
provide coverage for risks that cannot be placed privately, also, FARM seeks to minimize market share
key purpose of RSP
enhance market stability by allowing insurers to pool bad risks that has passed their own U/W criteria
key purpose of UAF
provide compensation in case of no insurance or inadequate insurance
where does FA operate its various mechanisms
- FARM: everywhere except provinces with public auto (BC, MB, SK, QC)
- RSP: ON, AB, NB, NS, NFL (QC has its own called PRR)
- UAF: Atlantic provinces
what are servicing carriers for FARM
member companies contracted by FA to issue/administer policies and adjust claims
functions of FA’s BoD
- rate changes: approve rate changes & filings
- expenses: authorize expenses
- standards: establish standards for servicing carriers & RSP users
- committees: appoint committees & subcommittees
5 classes of business for detemining a member’s participation ratio
FARM:
1. PPA
2. all auto excluding 1 and RSPs
RSPs:
3. RSP in Ontario except cat claim funds for ON accident benefits from insolvent insurer
4. RSPs in AB, NB, NS
UAF and the ON cat claim fund excluded from 3:
5. uninsured&unidentified motorist claims and the ON cat claim fund excluded from 3
FARM, RSP areas of operational differences
(RACCP.claims):
- rates
- admissions
- customer knowledge
- # customers placed
- participation ratio
- U/W & claims admin
FARM, RSP operational differences regarding rates
- FARM: rates set by FA
- RSPs: use rates of ceding company
FARM, RSP operational differences regarding admission
- FARM: only if agent/broker can’t place risk with voluntary company
- RSPs: use U/W rules of ceding company
FARM, RSP operational differences regarding customer knowledge
- FARM: yes
- RSPs: no
FARM, RSP operational differences regarding # customers placed
- FARM: can be unlimited
- RSPs: depends on province, usually a percentage of (total, voluntary, PPA, non-Fleet, TPL) direct WE
FARM, RSP operational differences regarding participation ratio
- FARM: established separately by jurisdiction, class, AY
- RSP: (total, voluntary, PPA, non-Fleet, TPL) direct EE
FARM, RSP operational differences regarding U/W& claims admin
- FARM: uses servicing carriers or 3rd party
- RSP: ceding company handles it
minimum requirements of risk-sharing pool transfer eligibility
- PPA only
- insured can’t be eligible for FARM
- policy must satisfy statutory minimum coverage requirements
- insurer must follow proper classification & rating, and provide documentation
- insurer must use approved rates
how RSP operates regarding actual transfer of premum from insurer to pool
transferred premium = premium charged net of premium payment service changes
describe premium reimbursement from pool to insurer
reimbursement = % of WP as an expense allowance
- includes: claims adjustment, LAE, acquisition&operating expenses
- excludes: taxes, license, fees
in Ontario, why is there a limit of 5% of voluntary, PPA, non-Fleet exposures that can be transferred to the pool
prevents insurers from ceding all new business written and later cherry pick the good risks, encourages responsible underwriting
differences between ON and AB RSPs
difference 1:
- ON has 1 RSP
- AB has 2 RSPs
difference 2:
- ON has a 5% limit on risks that can be ceded
- AB GRID has no limit, non-GRID has 5% limit
how is the RSP used to lower 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
is it possible to sustain a RSP running a profit
no, members only cede worst risks so over time the pool would become unprofitable
how does a rate freeze at inadequate rates impact availability of coverage
availability for that class is reduced - insurers would stop accepting risks because they are unprofitable
justify ROE = 15% for high-risk business vs. regulator’s ROE of 10%
- higher risk justifies higher returns to compensate
- using lower ROE may cause insurer’s not offer product (reduces availability for consumer)
