Actuarial Notes

Rate Regulation

Study guides: Exam 6C, Exam 6U, Exam GH-201U

Rate Regulation is provincial oversight of the premiums insurers may charge. The statutory standard across Canada is that rates be not excessive, not inadequate, and not unfairly discriminatory — the same three-part test used in the United States — and it applies most intensively to compulsory private passenger automobile insurance.

\text{Rates must be} \begin{cases} \text{not excessive} & \text{(consumer protection)} \\[4pt] \text{not inadequate} & \text{(solvency)} \\[4pt] \text{not unfairly discriminatory} & \text{(equity)} \end{cases}

  • The three regimes, in decreasing order of regulatory grip:
    • Prior approval / file-and-approve — rates may not be used until the regulator approves. Ontario private passenger auto works this way, through FSRA.
    • File-and-use — the insurer files and may use the rates immediately, subject to later disapproval.
    • Use-and-file / open competition — the market sets the price; the filing is a record. Most commercial lines and most non-auto personal lines in Canada operate here.
  • The tension is direct: prior approval protects affordability in a compulsory line but introduces lag, so approved rates chase a cost level that has already moved. In a rising-cost environment lag alone produces inadequacy, which is a solvency problem the rate regulator does not own.
  • A filing is judged on prospective cost: historical experience developed to ultimate, trended forward to the average date of loss of the policy period, adjusted for enacted reforms, plus expenses and a permitted profit provision.
  • Regulators also approve the risk classification system, not just the overall level. A filing can be approved on level and rejected on structure, and prohibited variables must be excluded regardless of predictive power.
  • Suppressed rates do not remove cost — they relocate it, into reduced availability, growth of the residual market and the Facility Association, and ultimately into insurer withdrawal from the province.

Indicated Versus Approved An insurer's Ontario auto indication is +11.4\%. FSRA approves +4.0\%. The insurer writes \$80 million of Ontario auto premium at a 101\% combined ratio before the change.

What is the consequence, and what are the insurer's options?

Answer The shortfall is roughly 11.4\% - 4.0\% = 7.4\% of premium — about \$5.9 million of annual underwriting result on the current book. The combined ratio worsens rather than improving toward the target.

Realistic options, and what each costs:

  • Refile with better support. Sometimes the gap is evidential, not political: a thinly supported trend or an unadjusted reform is the actual reason for the cut.
  • Re-underwrite. Tighten eligibility so the mix shifts to segments adequately priced at the approved level. This works, but it is exactly the mechanism that produces an availability problem and grows the Facility Association.
  • Reduce writings in the province, releasing capital to a jurisdiction where the rate is adequate.
  • Absorb it while the rate lag unwinds, if the insurer believes approval will catch up.

What the actuary may not do is restate the indication downward to match the approval. The indication is a technical estimate; the approved rate is a regulatory decision. Documenting the difference — and its effect on projected MCT and on the FCT adverse scenarios — is the actuary's job.