Actuarial Notes

Facility Association

By Rachel Dutil · Casualty Actuarial Society · 2008

Study guide: Exam 6C

A CAS study note summarizing the key elements of the operations of the Facility Association, which administers Canada's residual automobile insurance market. The industry created the Association in June 1977 as an unincorporated, non-profit organization to ensure that automobile insurance is available to every owner and licensed driver who needs it. Rachel Dutil's note (May 2008) covers its organization, board and membership rights, participation ratios and risk sharing pools; the content outline assigns it with pp. 2–5 of the Association's Risk Sharing Pool Procedures Manual (revised January 1, 2023), also outlined here.

On the syllabus

  • Exam 6C — objectives B1–B3; the study note, including the FA Risk Sharing Pool Procedure Manual, January 1, 2023, pp. 2–5.

Organization

  • Every insurer licensed to write automobile liability insurance in a jurisdiction the Association serves must become and remain a member.
  • The Facility Association — operating in Alberta as the "Market Availability Plan" — works through two risk sharing mechanisms, risk sharing pools and the more traditional residual market, and also administers the Uninsured Automobile Funds in the four Atlantic Provinces.
  • It does not operate in British Columbia, Manitoba and Saskatchewan, which have public automobile insurance, or in Quebec, where the Groupement des Assureurs Automobiles administers the Plan de Répartition des Risques (P.R.R.), a risk sharing pool that fulfils essentially the same role.
  • Facility Association Residual Market (FARM)
    • FARM is a residual market for owners and operators of personal and commercial vehicles who may otherwise have difficulty obtaining insurance; a few member insurers, the Servicing Carriers, issue and administer its policies and adjust its claims, under FA rates, rules and classification that require regulatory approval.
    • A policy may be written only if it carries at least the statutory minimum coverage and the risk is a "Residual Market Risk": a vehicle that is not a private passenger vehicle, or a private passenger vehicle an insurer is authorized at law to decline or refuse to renew.
    • Every FARM policyholder knows the policy is part of the residual market, and FARM results are pooled among all licensed insurers by participation ratios.
  • Risk Sharing Pools
    • Risk sharing pools let insurers transfer certain personal auto exposures they believe carry a higher risk of loss to an industry-wide pool — essentially industry-wide reinsurance, invisible to consumers and intermediaries; FA administered them in Ontario, Alberta, New Brunswick and Nova Scotia.
  • The Uninsured Automobile Funds
    • In the four Atlantic Provinces, FA administers funds compensating persons who cannot obtain satisfaction for their damages under an automobile insurance contract, with payment governed by the provincial Insurance Acts.

Board of Directors and membership rights

  • The Board, of elected or appointed representatives of member insurers and insurance brokers, manages FA's affairs — among other things approving rate changes and rate filings, authorizing expenses, setting standards for Servicing Carriers and pool users, and appointing committees.
  • A member's votes are set by its automobile third party liability direct written premium for the latest full calendar year; on a matter affecting one jurisdiction, only members operating there vote, weighted by their premium there.

Participation Ratios and Sharing

  • The Plan of Operation lists five classes of business that determine a member's participation, among them private passenger non-fleet non-pool business, business transferred to a risk sharing pool, and uninsured or unidentified motorist claims.
  • FA allocates the profit or loss of each class by each member's participation ratio at each fiscal year end; the basis of the ratio varies by jurisdiction, and profit or loss is determined separately for each accident year in each jurisdiction.

Risk Sharing Pools

  • Five pools operated in Canada, each in one jurisdiction; they are designed to promote stability by letting insurers accept risks for which they believe their prices are not totally adequate, so they are generally expected to operate at a loss overall.
  • A risk must meet five minimum requirements to be transferred: a private passenger vehicle; not a residual market risk (which belongs in FARM); at least the statutory minimum third party liability limit; the appropriate classification and rating procedures followed; and the approved premium charged.
  • Each member shares in a pool's results by its share of voluntary private passenger, non-fleet, third party liability direct earned car years not ceded to a pool (in Ontario, also by the number of risks ceded), so a member that transfers nothing still shares.
  • The member receives a percentage of the transferred written premium as an expense allowance, excluding premium tax and professional fees.
  • Ontario Risk Sharing Pool
    • Established in 1993 as Canada's first; it covers 85% of each risk transferred (the others 100%), and a member may transfer at most 5% of its voluntary private passenger non-fleet written exposures.
  • Alberta Risk Sharing Pool
    • A "Grid Pool", with no transfer limit, for exposures subject to the statutory maximum premium, and a "Non-Grid Pool" limited to 4% of the member's voluntary private passenger non-fleet written exposures not transferred to the Grid Pool; both began on October 1, 2004.
  • New Brunswick Risk Sharing Pool
    • The "First Chance" pool, from January 1, 2005, for exposures where a household member qualifies for the recently licensed drivers with good driving records discount; the transfer limit is 8%.
  • Nova Scotia Risk Sharing Pool
    • The "Inexperienced Driver" pool, from January 1, 2007, for risks with a household driver of less than six years' experience and no accidents or convictions; there is no transfer limit.

Conclusion

  • The Facility Association was created by and for the Canadian insurance industry and serves an important role in ensuring the availability of automobile insurance coverage; for details the note refers to the Plan of Operation.

Risk Sharing Pool Procedures Manual

I Introduction

  • A Overview of the Risk Sharing Pools
    • The pools operate in Ontario, Alberta (two), New Brunswick, Nova Scotia and Newfoundland and Labrador under the FA Plan of Operation; members issue policies on their own accounts and may transfer all or part of a policy.
    • The issuing member remains responsible for servicing the policy, including settling its claims; FA funds the pools by a monthly sharing among members of premiums received net of claims and expenses paid.
    • Each province sets its eligibility rules, much alike: a private passenger vehicle, classification and rate procedures followed with previous-insurer reports and driver abstracts requested, at least the statutory third party liability limit, and approved premiums (in Alberta, the regulated grid or filed premium); Ontario also excludes risks eligible for FA as Residual Market Risks.
    • Risks are transferred at 100% — in Ontario since January 1, 2022.
    • Ontario shares results 50% on share of market and 50% on the member's usage of the pool; the other pools share by non-ceded voluntary private passenger non-fleet third party liability direct earned car years.
    • A member's transfer limit is 5% of its previous year's voluntary private passenger non-fleet third party liability direct written car years; Alberta grid risks are unlimited.
  • B Management Structure
  • C Claim Responsibilities
  • D Claims Reporting
  • E Auditing of Members
  • F More Information

II Communication with the Risk Sharing Pools

III Overview: Transfer Methods

IV Reporting RSP Risk/Premium and Claims Transactions

V Risk/Premium Transaction Reporting Errors

VI Claims Transaction Reporting

VII The Transfer Limit Report

Glossary of Terms

Sources