Actuarial Notes

Private Passenger Automobile Filing Guidelines - Major

By Financial Services Commission of Ontario · 2016

Study guide: Exam 6C

FSCO's guidelines for a major filing to change private passenger automobile insurance rates and risk classification systems in Ontario. Their stated purpose is to communicate the Financial Services Commission of Ontario's requirements for filings that do not qualify for a simplified process, and to give insurers a systematic way to supply that information. Dated October 2016, they are to be read with the Technical Notes, which form part of the Filing Guidelines, and they carry the forms a filing attaches — the summary of information and the officer's and actuary's certificates among them.

On the syllabus

  • Exam 6C — objective A1; pp. 1–5 (excluding filing format), pp. 11–21 (starting from Section 3), and Appendix B2.

A General Information

  • Rate and Risk Classification System Legislation and Regulations
    • Sections 410 to 417 of the Insurance Act set requirements for automobile rates and risk classification systems; they apply to contracts on the Ontario Automobile Policy (OAP 1) or Ontario Driver's Policy (OPF 2), but not to fleets.
    • Section 7 of the Automobile Insurance Rate Stabilization Act, 2003 allows the Superintendent to order any insurer to apply for approval of the risk classification system and rates it intends to use for private passenger automobile.
    • Section 16 of Regulation 664 prohibits, among other elements, claims for which the insured was 25% or less at fault (accidents from 1 September 2010), a lapse in coverage (with stated exceptions), income, employment history, credit history or rating, home ownership, and a minor accident on or after 1 June 2016 — see Risk Classification Restrictions.
  • Processes for Approval and Authorization
    • Private passenger changes go through the Simplified guidelines (where they meet the criteria in Exhibit 1 of the Technical Notes), the CLEAR Simplified guidelines (vehicle rate groups), or these Major filing requirements.
  • Filing Requirements
    • The Technical Notes form part of the Filing Guidelines; an insurer wishing to deviate from the requirements must seek FSCO's prior written approval.
  • Affiliated Insurers
    • The Superintendent may require affiliated insurers to file concurrently and may consider the affiliates' rates and systems, so as to look at the consolidated picture; every criterion that decides which affiliate insures an individual must be filed for approval.
    • Under Regulation 7/00, failing to offer the lowest rate available from the insurer or any of its affiliates is an unfair or deceptive act or practice.
  • Required Rates and Risk Classification System Elements
    • Insurers must file rates for the optional accident benefits set out in the Statutory Accident Benefits Schedule, $500 deductibles for Comprehensive, DC-PD and Collision or Upset, and a mandatory retiree's discount and winter tire discount (private passenger only).
    • Under graduated licensing, Level One drivers are not rated, and a driver who moves up a level with no chargeable convictions or at-fault accidents should receive a 10% reduction for one year on coverages rated on driving experience.
  • Filing Format
  • Approval Process

B Definitions

C Guidelines for Private Passenger Automobile - Major Filing

1 Table of Contents

2 Summary of Information

3 Certificates of the Actuary and of the Officer/Designate

  • 3.a Certificate of the Officer/Designate
    • Signed by the President, CEO, COO, CFO or Chief Agent for Canada, or by a designate of Vice-President rank or above.
  • 3.b Certificate of the Actuary
    • Required from a Fellow of the Canadian Institute of Actuaries for a filing that changes the rate level or differentials, or covers a category the insurer has not written before; not required for fee changes or for Optional Accident Benefit/Tort Deductible filings.

4 Actuarial Support

  • The support must contain the data and a narrative of every ratemaking step, in enough detail for the reviewer to trace the rates from the raw data; FSCO requires no specific methodology, but coverage detail is required even for coverages whose rate level is not changing.
  • Overall Rate Level Indication:
    • 4.a Overall Description of the Ratemaking Methodology and Summary
    • 4.b Losses
      • Direct losses, not reduced by cessions to the Risk Sharing Pool, and excluding Facility Association Residual Market business and losses covered by endorsements.
      • 4.b.1 Loss Development
        • At a minimum, the insurer's unadjusted loss development history valued at 12-month intervals.
      • 4.b.2 Loss Trend
        • The trend period depends on the term of coverage, the proposed effective date and the valuation date; past and future trend components, if used, are each supported.
      • 4.b.3 Treatment of Large Losses
      • 4.b.4 Catastrophe (or Excess Claim) Procedure
      • 4.b.5 Automobile Insurance Reform Adjustment Factors
        • Historical losses are adjusted for the expected effect of reforms; benchmark factors for the 2015/2016 reforms are in the Technical Notes.
      • 4.b.6 Other Adjustments
    • 4.c Allocated Loss Adjustment Expenses (ALAE)
    • 4.d Unallocated Loss Adjustment Expenses (ULAE)
    • 4.e Premium
      • 4.e.1 On-level Adjustments
      • 4.e.2 Premium Trend
      • 4.e.3 Other Adjustments
    • 4.f Other Expenses
      • Split into exposure variable (fixed) and premium variable (variable) expenses; FSCO is not likely to approve a provision significantly above the industry average in Exhibit 2 of the Technical Notes.
      • 4.f.1 Exposure Variable Expenses
      • 4.f.2 Premium Variable Expenses
    • 4.g Underwriting Profit Provision
      • Indications use a target underwriting profit provision, and all costs are discounted for investment income on policyholder-supplied funds before it is added.
    • 4.h Credibility
      • The standard for 100% credibility, the partial credibility formula and the data used as the complement must be disclosed and supported.
    • 4.i Other Adjustments
    • 4.j Summary Rate Level Indications
  • Rate Differential Indications:
    • 4.k Territorial Indications
      • 4.k.1 Indicated Differentials
        • Territorial differential changes are capped at ±10% from the current differential, in the direction of the coverage indication.
      • 4.k.2 Off-balance
      • 4.k.3 Definitions
        • No more than 55 territories in the Province, at most ten in the City of Toronto, all geographically contiguous — see Territorial Rating.
    • 4.l Implementation of Rate Group System Differentials
      • 4.l.1 Overall Description for Implementing CLEAR
      • 4.l.2 Off-balance
    • 4.m Classification/Limit of Liability/Deductible or Other Rate Differential Indications
      • 4.m.1 Indicated Differentials
        • A predictive model such as a Generalized Linear Model or GAM requires a complete description of the model, data, variables and assumptions; for composite variables, univariate analysis is not sufficient.
      • 4.m.2 Off-balance
    • 4.n Rating Based on Group Membership
      • 4.n.1 Indicated Discounts or Rates
      • 4.n.2 Off-balance
    • 4.o Usage Based Insurance Pricing Programs (UBIP)

5 Discount/Surcharge Changes

6 Rating Rule Changes

  • 6.a Rating Rule Changes for Classification Variables
  • 6.b Rating Rule Changes for Discounts and Surcharges

7 Final Rates/Rate Level Change

  • 7.a Algorithm
  • 7.b Base Rates
  • 7.c Differentials
  • 7.d Discounts and Surcharges
  • 7.e Calculation of Final Rates
  • 7.f Calculation of Rate Level Change and Average Rate
  • 7.g Dislocation and Capping Premium Increases (Rate Capping)

8 Other than Private Passenger Automobile - Dependent Categories

9 Auto Insurance Manual Pages Containing Revised Risk Classification System

10 Rating Examples

11 Fees Changes

12 Optional Accident Benefits and Tort Deductible Changes

Appendix A Summary of Information

Appendix B1 Certificate of the Officer/Designate

Appendix B2 Certificate of the Actuary

  • A Fellow of the Canadian Institute of Actuaries certifies the categories the filing covers and its effective dates for new and renewal business.
  • The actuary has reviewed the data for reasonableness and consistency, and believes it reliable and sufficient to determine the indicated rate changes.
  • The indicated rate changes have been calculated in accordance with Accepted Actuarial Practice.
  • In the actuary's opinion the risk classification system is just and reasonable, reasonably predictive of risk, and distinguishes fairly between the classes.

Appendix D Summary of Information

Appendix E

  • Optional Accident Benefits
  • Tort Deductible

Related readings

  • FSCO Tech Notes — the Technical Notes, which the guidelines say form part of the Filing Guidelines and which Section 4 refers to throughout
  • Ontario Reg. 664 — Regulation 664, whose section 16 prohibited rating elements Part A lists

Sources