Actuarial Notes

Technical Notes for Automobile Insurance Rate and Risk Classification Filings

By Financial Services Commission of Ontario · 2016

Study guide: Exam 6C

FSCO's technical requirements for Ontario automobile insurance rate and risk classification filings, keyed to the Major filing guidelines. Dated October 2016, the Technical Notes form part of the Financial Services Commission of Ontario's Filing Guidelines and are to be considered with them; their bolded and underlined passages are critical issues insurers must adhere to. The CAS copy also carries four exhibits: the criteria for simplified filings (January 2017), benchmark assumptions for private passenger filings (March 2019), the thresholds for other-than-private-passenger major filings (January 2015) and a rate filing checklist.

On the syllabus

  • Exam 6C — objective A1; Sections A–F, pp. 1–14.

A Introduction

  • Every insurer writing non-fleet automobile insurance on the OAP 1 or OPF 2 must have its rates and risk classification systems approved or authorized by FSCO.
  • There are five Rate and Risk Classification Filing Guidelines, chosen by the change proposed: Private Passenger Major, Simplified and CLEAR Simplified, and Other Than Private Passenger Major and Minor; the Facility Association uses the Major guidelines for all categories.

B Requirement to File

  • Section 7 of the Automobile Insurance Rate Stabilization Act, 2003 allows the Superintendent to order any insurer to apply for approval of its private passenger rates and risk classification system.
  • A filing is also required to use IAO advisory rates, to update vehicle rate groups, to change the rates of a dependent category, and for UBIP and rate capping anniversary reports.

C Filing Documentation

  • Documentation must let the reviewer trace the rates from the raw data; without the documentation the Filing Guidelines call for, a filing is deemed incomplete.

D Reviewing Rate Adequacy

  • FSCO will not begin reviewing another rate filing for a category until the most recent submission is approved.
  • By legislation, risk classification systems must be just and reasonable, reasonably predictive of risk and distinguish fairly between risks, and rates must be just and reasonable, not impair the insurer's solvency and not be excessive in relation to its financial circumstances (see Rate Regulation).

E Major Filings

  • 1 Loss Data (4.b.)
    • The insurer's own current direct Ontario loss data, subdivided at the major sub-coverage level of the GISA Automobile Statistical Plan, with payment patterns developed for discounting.
  • 2 Loss Development (4.b.1.)
    • Industry factors may not be used alone unless the insurer supports why they are more appropriate than its own development data.
  • 3 Loss Trend (4.b.2.)
    • Loss trends are usually based on industry-wide experience; a selection that does not follow the indicated trends must be explained, and past and future trend factors are given for reference in Exhibit 2.
  • 4 Treatment of Large Losses (4.b.3.)
    • A long period must be used to estimate the large loss provision, and capped development data should support capped development factors.
  • 5 Catastrophe Provision (4.b.4.)
    • The procedure removes aberrations caused by infrequent, multi-claim, weather-related events; a 2% loading on comprehensive, the comprehensive portion of all perils, and specified perils has been considered reasonable.
  • 6 Automobile Insurance Reform Adjustment Factors (4.b.5.)
    • Exhibit 2's industry-based benchmark factors adjust pre-reform loss costs for reforms, and may be too high for some insurers and too low for others.
  • 7 On-Level Premium (4.e.1.)
  • 8 Rate Group Drift (4.e.2.)
    • The shift of business to newer, more expensive cars raises physical damage premiums and must be reflected explicitly, and annually, in the indications.
  • 9 Finance Fees/Charges (4.e.)
  • 10 Tax Rates (4.e.)
  • 11 Expenses (4.f.)
    • A reasonable approach treats commissions and premium taxes as premium variable and all other expenses as fixed; treating all general expenses as variable is generally inappropriate.
  • 12 Underwriting Profit Provision
    • The indicated rate is generally I = (\text{Expected Loss Cost} + \text{Fixed Expense}) / (1 - \text{Variable Expense Provision} - \text{Target UW Profit Provision}), with all costs discounted for investment income on cash flows.
    • FSCO is unlikely to approve an underwriting profit above its benchmark on an all-coverages combined basis.
  • 13 Investment Returns and Cash-Flow Rate
    • The expected investment return should be close to the return the insurer actually earned in the recent past.
  • 14 Credibility (4.h.)
    • A standard of 1,082 claims is considered reasonable for short-tail, low-severity coverages, with a multiple of it for long-tail, high-severity ones (see Full Credibility Standard); BI and PD claim counts must not be combined for TPL.
  • 15 Indicated Rate Changes and Proposed Rate Changes (4.j.)
    • The indication should rest on at least three consecutive years of experience, and proposed changes must be in the direction of the indication at the coverage level.
  • 16 Territory, Class, Driving Record and Other Differential Changes (4.k. and 4.m.)
    • Differential changes are capped at ±10% from the current differential, in the direction of the coverage indication.
  • 17 Territorial Definition Changes (4.k.3.)
    • A new territory needs at least three years of insurer data and 2,500 annualized average vehicles; there may be no more than 55 territories in Ontario and 10 in Toronto, all contiguous (see Territorial Rating).
  • 18 Vehicle Rate Group Changes (4.l.)
  • 19 Predictive Models (4.m.)
    • A GLM, GAM or other analytical method must be summarized with its exposures, claims, indicated and re-balanced relativities and regression statistics, and its variables must be statistically significant and neither prohibited factors nor surrogates for one.
  • 20 Usage-Based Insurance Pricing (UBIP) Programs
    • a) Initial Discount
    • b) Subsequent Filings
    • c) Form and Endorsement Requirements (see also Forms Filing Guidelines)
    • d) Treatment of UBIP Program Costs and Expenses
    • FSCO approves UBIP programs conditionally and requires a subsequent application after two years of Ontario experience.
  • 21 Introduction of New Discounts/Surcharges or Differentials
    • An approved new discount must stay in the risk classification system for at least three years before the insurer can withdraw it.
  • 22 Dislocation and Capping Premium Increases (Rate Capping) (7.g.)
    • Positive capping is considered only for mergers and acquisitions and for extensive risk classification changes, for two years or less; it is not permitted for base rate changes only, broker portfolio transfers or premium decreases.
  • 23 Auto Insurance Manual Pages

F Rate Filing Checklist for Major Filings

  • Exhibit 4 is a checklist an insurer can use before submitting a Major filing.

Exhibit 1 Criteria for Simplified Filings

Exhibit 2 Benchmark Assumptions for Private Passenger Automobile Insurance Filings for Reference Purposes

  • 1 Loss Trends
  • 2 2015 and 2016 Reform Benchmark Cost Adjustment Factors
  • 3 Underwriting Profit Provision Benchmark
  • 4 Discount Rate for Cash Flow
  • 5 Expense Provision

Exhibit 3 Other than Private Passenger Automobile - Major Filings and Other than Private Passenger Automobile - Minor Filings

Exhibit 4 Rate Filing Checklist for Major Filings

Related readings

  • FSCO Private Auto — the Private Passenger Automobile Filing Guidelines - Major, of which the notes form part and whose sections Section E is keyed to

Sources