Actuarial Notes

Facility Association

Study guide: Exam 6C

The Facility Association (FA) is the non-profit entity through which Canada's automobile insurers jointly provide coverage to drivers who cannot obtain it in the voluntary market. Every insurer licensed to write auto in a participating jurisdiction is a member, and each shares FA's results in proportion to its voluntary market share — so all insurers bear the residual market whether or not they service it.

\text{Member share of FA result} = \frac{\text{Member's voluntary premium}}{\text{Total voluntary premium}}

  • How business reaches FA. A driver unable to obtain coverage applies through a broker to a servicing carrier — an insurer that administers FA business under contract, issuing policies and handling claims for a fee, but not bearing the risk. FA's rates are filed with each provincial regulator like any insurer's and are typically well above voluntary market rates.
  • FA's programs: the Facility Association Residual Market (FARM) for private passenger and commercial auto that no insurer will write, plus risk sharing pools in several provinces — a different mechanism, described below — and an Uninsured Automobile Fund in some jurisdictions.
  • FARM versus a risk sharing pool is the distinction most often examined:
    • FARM — the policy is issued by FA, the driver knows, and the rate is FA's higher rate.
    • RSP — the policy is issued by an ordinary insurer at its ordinary rate; the insurer transfers the risk to the pool without the driver knowing.
  • Who ends up in FARM: drivers with serious conviction or claim records, unusual commercial vehicles, drivers with no insurance history who fail every filed underwriting rule, and — in provinces where rates are suppressed — ordinary risks that no longer fit anyone's rules.
  • Interpreting FA volume. Growth signals rate inadequacy or classification restriction, not a change in driver behaviour. FA publishes volume by province, which makes it a public indicator of each province's rate regime.

FARM or the Risk Sharing Pool? For each driver, say which residual mechanism is likely to apply and what the driver experiences.

  1. A driver with two impaired-driving convictions in three years.

  2. A newly licensed 19-year-old whom the insurer would rather not write but who meets its filed rules.

  3. An owner-operator with a specialty heavy vehicle no insurer's rating plan contemplates.

Answer

  1. FARM. No insurer's filed underwriting rules accept this record, so the driver applies through a broker to a servicing carrier and pays FA's rates — several times a standard premium. The driver knows they are in the residual market, and that is intentional: the price signal is part of the deterrent.
  2. Risk sharing pool. The insurer is obliged to write the driver (Take-All-Comers Rule) at its filed rate because the driver meets its rules. Believing the filed rate inadequate for this risk, the insurer writes the policy and cedes it to the pool. The driver pays the normal rate and never learns of the transfer — which is exactly the design intent: the pool exists so that take-all-comers does not force insurers to absorb losses on business regulation compels them to write.
  3. FARM, most likely, since the vehicle falls outside every voluntary rating plan. FA maintains commercial and specialty programs for precisely this case.

The pattern: FARM handles risks nobody will write; the pool handles risks everybody must write. Both socialise the result across the industry by market share, but only one is visible to the policyholder.