FACILITY ASSOCIATION

FACILITY ASSOCIATION

Considerations for Residual Market Regulation

November 2003

Table of Contents Introduction................................................................................................................................... 1

Executive Summary...................................................................................................................... 2

Basic Principles ............................................................................................................................. 4

Background: A brief overview of the North American experience.......................................... 4

Moving forward ............................................................................................................................ 8

Recommendation 1........................................................................................................................ 9

Recommendation 2...................................................................................................................... 10

Recommendation 3...................................................................................................................... 11

Recommendation 4...................................................................................................................... 13

Recommendation 5...................................................................................................................... 14

Recommendation 6...................................................................................................................... 14

Recommendation 7...................................................................................................................... 15

Concluding Remarks .................................................................................................................. 15

Glossary ....................................................................................................................................... 16

Selected Readings........................................................................................................................ 18


Introduction Healthy auto insurance markets, where coverage is widely available and affordable, are characterized by keen competition among companies, widespread choice for consumers, and small (i.e. less than 2% of written vehicles) residual markets. The following position paper, developed by Facility Association, provides principles and recommendations from a residual market perspective that will help to make healthy auto insurance markets a reality. It provides a brief overview of measures that have been tried in North America to keep residual markets small; it identifies measures that have worked and those that have not. We hope that the frameworks described in this paper provide a basis for shaping a regulatory environment that is both efficient and effective. At the very least, we believe that this paper contributes information and analysis useful to the discussion of residual market regulation. Facility Association looks forward to participating in that ongoing dialogue. In that spirit, we welcome questions and comments about this position paper. They should be directed to: Facility Association 151 Yonge St. 18th Floor Toronto ON M5C 2W7 or to: [email protected]

Facility Association 1 November 2003

mailto:[email protected]


Executive Summary The efficient and effective regulation of residual automobile insurance markets in Canada should be based on the following principles: • Consumers are best served by companies voluntarily competing for their business; therefore,

small (i.e. less than 2% of written vehicles) residual market populations should be a key goal of regulation.

• Benefits should match or exceed costs of regulation, including costs of administration, compliance and oversight.

• Regulations should be designed to produce desired outcomes and to avoid, or at least minimize, adverse unintended consequences.

• To ensure that the residual market remains the one of last resort, residual market rates must include all costs, and be monitored to ensure that rates in all cases exceed those of the voluntary market.

• To maintain cost efficiency, a harmonized approach to residual market administration should be maintained throughout Canada.

• Consumers must participate in shaping the market.

• All voluntary market insurers must share fairly in the financial results of the residual market, whatever mechanism is used.

• The regulatory perspective should be market rather than simply participantbased. Evidence in North American jurisdictions shows that non-monetary barriers to entry to residual markets are ineffective in the absence of the appropriate residual market/voluntary market pricing relationships. To provide a cost-effective residual market regulatory framework, Facility Association recommends that: 1. Regulators monitor auto insurance markets to ensure that they continue to be competitive;

that consumers have the widest possible choice; and that residual markets remain appropriately small.

2. For the residual market to be a true “market of last resort”, residual market rates should be monitored to ensure that they remain above those in the voluntary market.

3. Residual market rates, if regulated, be based on all costs incurred to provide insurance coverage, including costs incurred both by the residual market mechanism itself and costs incurred by its members (such as the cost of capital, health levies and premium taxes) as a result of their compulsory participation in the residual market.

4. Non-monetary barriers to entry to residual markets be eliminated or significantly reduced.



5. Regulators and the industry need to continue to work together to inform consumers about residual markets and ways for consumers to enhance their eligibility for the voluntary market.

6. All voluntary insurance market participants must share fairly in the financial results of the residual market, whatever type of mechanism is used.

7. Facility Association’s Plan of Operation should maintain a harmonized approach across Canadian jurisdictions.



Basic Principles Residual markets for automobile insurance are often volatile in both size and pricing. This sometimes provokes calls for a legislative and/or a regulatory response. This paper provides recommendations for the philosophical and practical regulatory frameworks for Canadian automobile insurance residual markets. These frameworks are derived from experience with various regulatory systems in North America and are based on the following principles: • Consumers are best served by companies voluntarily competing for their business; therefore,

small (i.e. less than 2% of written vehicles) residual market populations should be a key goal of regulation.

• Benefits should match or exceed costs of regulation, including costs of administration, compliance and oversight.

• Regulations should be designed to produce desired outcomes and to avoid, or at least minimize, adverse unintended consequences.

• To ensure that the residual market remains the one of last resort, residual market rates must include all costs, and be monitored to ensure that rates in all cases exceed those of the voluntary market.

• To maintain cost efficiency, a harmonized approach to residual market administration should be maintained throughout Canada.

• Consumers must participate in shaping the market.

• All voluntary market insurers must share fairly in the financial results of the residual market, whatever mechanism is used.

• The regulatory perspective should be marketbased rather than simply participantbased. Background: A brief overview of the North American experience I. Rate regulation and pricing relationships

Because residual market size reflects how well the voluntary market is functioning, the residual market cannot be regulated effectively in isolation from the voluntary market. In North America, automobile insurance is regulated by individual provinces, territories and states, providing a wide variety of historical experience with various regulatory schemes, successful and otherwise. After researching rate regulation in 50 American states, Professor Scott E. Harrington of the University of South Carolina found that “…prior approval [rate] regulation is persistently and reliably associated with larger residual market shares, even when states with the largest residual market shares are excluded from the comparison”1.

1“Repairing Insurance Markets”, Scott E. Harrington; Regulation, summer 2002, p. 62



Specific examples of states where rate regulation has lead to problematic markets include Massachusetts and North Carolina. In Massachusetts, “…insurers are required to charge uniform, state-made rates according to state-designed rate classes and territories and state approved vehicle risk ratings.”2 In 2000, the private passenger residual market share in the state was 8.2%, compared to a countrywide figure of 1.35%. North Carolina, among other regulatory constraints, prohibits rates based on age and gender. In 2000, its private passenger residual market share was 21.3%.

In the Canadian context, the correlation between prior approval rate regulation and residual market volumes does not appear to have been studied. However, what is clear in Canada is the relationship between average residual market premium levels and average total industry premium levels, and residual market shares. Broadly speaking, the closer the average residual market premiums are to those of the total market, the larger the population of the residual market. Figure One illustrates this for private passenger vehicles insured through the residual market in six Canadian provinces for the period 1996 to 2002.

2 “ModEugene

Facilit

Figure One

FACILITY ASSOCIATIONComparison of FA Written Premiums to Industry vs FA Market Share

(1996 - 2002 Private Passenger Only)

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ernizing Insurance Rate Regulation—Tacking to the Winds of Change” by Phillip R. O’ Connor, Ph. D. and P. Esposito, J.D., 2001, p. 29

y Association 5 November 2003


The Canadian evidence shows that if the market share of the private passenger residual market is to be maintained below 2%, average residual market premiums need to be two-and-a-half to three-and-a-half times higher than the market as a whole.

The Canadian reality is entirely consistent with the statement by David J. Cummins, the Harry J. Lorman Professor of Insurance and Risk Management, Wharton School, University of Pennsylvania, that, “If the residual market begins to grow after adoption of residual market rates in a competitively rated state, it is strong evidence that residual market prices have been set too low.”3

This reality should also lead to a serious examination of media reports of insurance buyers being “forced” into purchasing coverage through the residual market mechanism. Consumers may, in fact, be willing purchasers on the grounds that coverage is relatively less expensive through the residual market than the voluntary market.

The North American experience suggests that to ensure the size of the auto insurance residual market remains small:

• voluntary market regulation should foster competition between companies and

• voluntary market regulation should provide choice for consumers to the greatest degree possible, and

• residual market rates should be monitored to ensure that they remain meaningfully above rates in the voluntary market for a given risk.

II. Non-monetary entry barriers to residual markets

Various non-monetary barriers designed with the laudable goal of keeping policyholders out of residual markets have been tried in numerous jurisdictions in Canada and the United States. In the absence of the appropriate voluntary/residual market pricing relationships mentioned above, these measures are relatively ineffective; that is, they are quickly and demonstrably overwhelmed by market forces. Examples of non-monetary barriers to entry to residual markets in North America include mandatory voluntary-market declination letters, caps on agent/broker compensation, binder control registry systems, and “take all comers” underwriting regulations.

In Ontario, since early 1998, consumers have been required to have one declination letter from a voluntary market insurer before being eligible for coverage through the residual market. Despite this, monthly new business private passenger applications received by Facility Association’s servicing carriers in the province climbed steadily from 3,666 in June of 2002 to 22,384 in June 2003, a more than six-fold increase. Informal surveys by Facility

3 “Deregulating Property-Liability Insurance--Restoring Competition and Increasing Market Efficiency”, J. David Cummins, editor. AEI-Brookings Joint Center for Regulatory Studies, 2002 p. 20



Association showed that residual market rates were 25-50% below rates of non-standard insurers in the province during that time.

California experienced a similar phenomenon in the 1980s. In that state, insurance consumers were required to be rejected by two voluntary markets before being eligible for coverage through that state’s residual market. From 1983 through 1989, residual market rates were suppressed, and the annual residual market application volume steadily increased from 94,400 in 1983 to 1,233,400 in 1989.4

Since 1987, the province of Ontario has required broker commissions, also known as service fees, to be capped. While these caps have been adjusted over time, their existence does not seem to have any bearing on residual market size. Since 1990, the private passenger market share for the residual market in Ontario has varied between 5.33% and 0.14%. In Alberta, where no such caps exist, private passenger market share has ranged from 6.73% to 0.94% in the same period. Similarly, in Nova Scotia, again a jurisdiction where no such caps exist, private passenger market share has ranged from 5.65% to 0.76% in the same time-frame. (Readers are reminded that Ontario has an artificially low residual market population owing to a second residual market mechanism, the “Risk Sharing Pool” that provides for enforced cross-subsidization of both insurers and policyholders.) Clearly, residual market volumes go up and down, but they do not do so as a result of limits on broker compensation as those limits have been applied thus far.

Binder control registry systems were implemented in Nova Scotia and New Brunswick in 1996. The binder control registry requires the broker or agent to record why a car and/or driver is being insured through Facility Association and to affirm that the applicant has been informed that he/she is having his/her coverage placed through Facility Association. While this can be a useful tool for market monitoring, in that it aids understanding which types of risks are having difficulty finding coverage in the voluntary market (and perhaps in identifying entrepreneurial opportunities for insurers), it has not proven useful for limiting the number of cars and drivers insured through Facility Association. In Nova Scotia, private passenger market share rose from 1.88% in 2001 to 4.94% in 2002. The comparable figures for New Brunswick are 1.51% and 4.85%, respectively.

“Take all comers” regulations typically require an insurer to accept business that fits the underwriting guidelines that have been filed with a regulator. The ostensible purpose is to enhance availability for auto insurance consumers. In reality, these regulations have had the opposite effect. Reducing the flexibility of companies to underwrite leads to companies canceling brokers and their entire “book of business” rather than individual risks that are undesirable from a company standpoint. The February 17, 2003 issue of Thompson’s World Insurance News, noted in a front page article: “It [the “take all comers” rule] appears to be leading to more and more broker cancellations as companies scramble to avoid the prospect of being the last market in a broker’s office, Lanark Mutual general manager Jim Moffat told

4 “Automobile Insurance Regulation, Direct Democracy, and the Interests of Consumers”, Benjamin Zycher; Regulation, summer 1990



Thompson’s.” The same article also said, “He [Insurance Brokers Association of Ontario CEO Bob Carter] said the rule seems like a good idea in theory, but it needs to be eliminated. It creates too many problems in a hard market, primarily that canceling brokers is the best way to get rid of bad business.”

The persistence of a “take all comers” rule can lessen the attractiveness of the market for insurers, causing companies to exit (or not enter) a given jurisdiction, reducing the range of choice available to consumers. In Ontario, a specific consequence of the “take all comers” rule is the persistent existence of the Risk Sharing Pool. Essentially a reinsurance mechanism funded by all auto insurance companies in the province, it fosters cross-subsidization between competitors and of higher-risk drivers. It creates additional administrative complexity and cost for insurers, and ultimately their customers, in the province.

New Jersey, like Ontario, is one of the few North American jurisdictions to have a “take all comers” rule. In his speech to insurance agents in that state of March, 2003, Governor James E. McGeevey bemoaned the fact that “twenty-six carriers have left New Jersey in the past decade, including six in the past eleven months.” In that same speech, he promised that the “take all comers” rule would be gradually lifted in the state, a promise he kept when, in June, 2003, he signed into law a multi-faceted auto insurance bill.

In addition to the adverse market impacts of “take all comers” regulation, the very effectiveness of the regulation in limiting access to the residual market has to be questioned. Despite the existence of “take all comers” regulation in Ontario, the number of monthly new business private passenger applications received by Facility Association’s Servicing Carriers, as we have noted earlier, rose more than six-fold between June 2002 to June 2003, suggesting that the market has indeed found ways to avoid its intent.

All of these non-monetary barriers to entry to residual markets have some costs, be they costs of compliance, administration, regulatory oversight, or all three. Their implementation, or continued use, should be carefully considered in light of those costs and the absence of intended outcomes.

Moving forward Considering the principles outlined at the beginning of this paper, and the experience in other jurisdictions, Facility Association recommends that: 1. Regulators monitor auto insurance markets to ensure that they continue to be competitive;

that consumers have the widest possible choice; and that residual markets remain appropriately small.

2. For the residual market to be a true “market of last resort”, residual market rates should be monitored to ensure that they remain above those in the voluntary market.



3. Residual market rates, if regulated, be based on all costs incurred to provide insurance coverage, including costs incurred both by the residual market mechanism itself and costs incurred by its members (such as the cost of capital, health levies and premium taxes) as a result of their compulsory participation in the residual market.

4. Non-monetary barriers to entry to residual markets be eliminated or significantly reduced.

5. Regulators and the industry need to continue to work together to inform consumers about residual markets and ways for consumers to enhance their eligibility for the voluntary market.

6. All voluntary insurance market participants must share fairly in the financial results of the residual market, whatever type of mechanism is used.

7. Facility Association’s Plan of Operation should maintain a harmonized approach across Canadian jurisdictions.

Recommendation 1 Facility Association recommends that regulators monitor auto insurance markets to ensure that they continue to be competitive; that consumers have the widest possible choice; and that residual markets remain appropriately small. Because the size of residual markets is determined by the competitive health of voluntary markets and the pricing relationships between residual and voluntary market rates, ongoing monitoring of the total automobile insurance market (voluntary and involuntary) is essential. Given the United States’ reputation for “free enterprise,” many Canadians would probably be surprised that property and casualty insurance rates are more heavily regulated in some states than in any Canadian province, with the possible exception of Ontario. Following their experience with rate regulation, and recognizing the adverse consequences of prior approval rating laws, regulators and legislators in the United States are moving away from prior approval laws and towards a regulatory model focused on solvency and market conduct. They recognize that a competitive market is the most efficient regulator of pricing. Most states continue to monitor the competitiveness of markets as well as rates to ensure they are not unfairly discriminatory. A recent example of this trend is the “Statement of Principles for the Regulation of Property and Casualty Insurance” adopted in July of 2003 by the Executive Committee National Conference of State Legislatures (NCSL) which included the following:

“State legislatures are encouraged to consider systems of product regulation that rely increasingly on competitive forces to determine P/C insurance rates and to provide the more efficient introduction of new products into the marketplace while they preserve the authority to take action in a non-competitive market and against rates that are inadequate or unfairly discriminatory. Modern insurance markets that are relatively free from regulatory constraints on rates and risk classifications exhibit clear evidence of competitive performance.”



From a regulator’s perspective, Ernst N. Csiszar, Director of Insurance for the State of South Carolina, offered the following in his testimony at congressional hearings on “The Effectiveness of State Regulation: Why Some Consumers Can’t Get Insurance” on April 10, 2003 when highlighting the results of regulatory and legislative changes based on a “competitive rating model”:

“Our [auto insurance] residual market has decreased from over 600,000 policies in 1999 to approximately 340 policies as of March 1, 2003 in all residual market mechanisms.”

Because prior approval rate regulation is a key driver of residual market size, rate regulation needs to be a key area of regulatory focus. “File and use” rate regulation of voluntary market insurers allows regulators to monitor rates in the marketplace for unfair discrimination while preserving the consumer advantages that flow from a high degree of competitive intensity. Recommendation 2 Facility Association recommends that for the residual market to be a true “market of last resort”, residual market rates should be monitored to ensure that they remain above those in the voluntary market. A residual market should be a true “market of last resort”. Theoretically, the consumer should approach every insurer for coverage in the voluntary market (not simply those companies with whom their broker has a contract) before seeking coverage in the residual market. Consumers, or their representatives, should not be seeking coverage through the residual market on the basis that coverage can be obtained at a price below that of voluntary market insurers. Monitoring of the relationship of Facility Association’s rates and rates in the voluntary market could be done by Facility Association, the regulator, or both working cooperatively. Monitoring could be achieved by developing several profiles of “typical” non-standard risks and then using those profiles to compare Facility Association rates against both standard and non-standard writers in a given jurisdiction.



Recommendation 3 Facility Association recommends that residual market rates, if regulated, should be based on all costs incurred to provide insurance coverage, including costs incurred both by the residual market mechanism itself and costs incurred by its members (such as the cost of capital, health levies and premium taxes) as a result of their compulsory participation in the residual market. Residual market rates, like those in the voluntary market, need to be actuarially based. To ensure that the residual market remains the provider of insurance for the “highest risk/highest rate” driver and vehicle population and to avoid artificially low rates, which ultimately must be subsidized by the entire marketplace, residual market rates, like voluntary market rates, need to include all costs incurred in making the insurance coverage available, whether incurred by the mechanism itself or incurred in the hands of member companies. In other words, consumers buying insurance through the residual market mechanism must be faced with all the cost elements faced by those buying insurance in the voluntary market. This approach is entirely consistent with the “Statement of Principles Regarding Property and Casualty Insurance Ratemaking” published by the Casualty Actuarial Society. The first principle is that:

“A rate is an estimate of the expected value of future costs. Ratemaking should provide for all costs so that the insurance system is financially sound.”

In the case of Canada’s residual market mechanism, the Facility Association residual market, not all costs incurred as a result of the existence of the Facility Association residual market are incurred by the Association itself. Some costs are incurred by member companies directly. This is highlighted in note 2 of Facility Association’s audited annual financial statements:

“Various costs, related to business underwritten in the insurance pools, are incurred by individual members directly and accordingly, are not reflected in these financial statements. All the premiums, claims and expenses of the insurance pools are allocated to member companies who are required by regulation to record these amounts in their books. Member companies of the Residual Market Segment pay premium taxes and health levies directly to the provinces based on their share of Residual Market premiums. They also pay certain other costs such as association dues, directly. Accordingly, these costs are not recorded in these financial statements.

Investment income earned by members on amounts due to the Association and certain premium levies charged by members in respect of uninsured automobile exposures are also not reflected in these financial statements. No provision for income taxes has been recorded in these financial statements. The results of operations of the insurance pools, including administrative



expenses incurred by the Association and investment income earned on insurance pool assets invested by the Association, are included in the members' income for tax assessment purposes.”

Costs incurred by member companies as a result of their participation in Facility Association include health levies, premium taxes, and industry trade association (not Facility Association) dues; all of which are based on written premium volume. Other costs include the cost of capital required to support the members’ share of Facility Association business and members’ cost of administering their share of Facility Association business. The impact of income and capital taxes needs to be included as well. While it is difficult for some of these costs to be precisely known, they are subject to reasonable estimation. Failure to include all of these costs in setting Facility Association’s rates results in residual market rates being set too low compared to voluntary market rates which include consideration of all of these factors. Because some risk-based premiums can be very high, especially in the residual market, there are sometimes calls for residual market rates to be suppressed, i.e., held at a level where all costs are not expected to be covered by approved rates. If residual market rates are suppressed, several consequences follow: • Residual market populations rise as consumers find they can buy coverage at a premium that

is lower than a risk-based premium in the voluntary market.

• If inadequate rates are allowed to persist, the residual market must be subsidized by the entire market, with the end result that lower-risk drivers subsidize higher risk drivers.

• If companies cannot recover persistent residual market rate inadequacies through their voluntary market rates, they will likely reduce their voluntary market writings or exit the market entirely, reducing choice for consumers.

The consequences of rate cross-subsidization between the residual market and voluntary market companies go beyond dollars-and-cents impacts. Making insurance artificially cheaper results in what basic pricing theory predicts—more higher-risk drivers buy insurance, they drive more and cause more accidents, adding more costs to the system in terms of human misery as well as dollars.5 Another consequence of residual market rate suppression and the resulting cross-subsidization is a reduction of choice in coverage providers available to higher-risk drivers and vehicles. Since the mid-1990s, there has been an increase in insurers specializing in marketing auto insurance to higher risk drivers (the so-called “non-standard” insurers). If residual market rates are suppressed, those companies that have taken the entrepreneurial risk to serve customers in the

5 “False Kindness” Perspective, Volume 8, Number 5, p. 4, September 2002



non-standard market find themselves being squeezed out of the marketplace by the residual market which is, in fact, a cooperative enterprise supported by the full financial strength of the auto insurance industry in a given jurisdiction. Nova Scotia Consumer Advocate George Jordan captured much of the forgoing in his report released September 24, 2003:

“When Facility Association (FA) has a loss, everyone who buys auto insurance ends up subsidizing it. Accordingly, it is in the general public interest to ensure that FA rates recover its costs. …FA's target is not to be in competition with the general market, and even to put itself out of business. Obviously, it ought not to be in competition with its members, who are subsidizing its costs, but apparently to some extent it is. Occasionally it will have rates lower than those of some companies specializing in higher risks, driving them out of the market with the result that many drivers who could have had other coverage end up in FA to their chagrin, if not to their cost."

Despite the socially desirable deterrence effects that result from risk-based pricing, it is sometimes criticized for making insurance unaffordable for some drivers and presumably increasing the number of uninsured drivers on the road. Car insurance is one of the few, if not the only, areas of commerce where public policymakers suggest prices be artificially lowered to prevent people from breaking the law. By comparison, no one seems to seriously suggest that the problem of auto theft be addressed by lowering the price of cars. Affordability is better dealt with through modification of the underlying risk characteristics of cars and drivers rather than through artificial rate suppression and the uninsured driver phenomenon is better dealt with through proper enforcement of compulsory insurance laws. With the acknowledgement that risk-based rating is the fairest to all consumers must also come the recognition that predicting risk is an evolving science and that innovation in this area is beneficial to consumers, and should be fostered. Recommendation 4 Facility Association recommends that non-monetary barriers to entry to residual markets should be eliminated or significantly reduced. As demonstrated previously, non-monetary barriers to entry to residual markets are largely ineffective and needlessly add costs to the system. Facility Association recommends elimination, or at the least, gradual removal of the “take all comers” rule in Ontario and cautions against implementation of similar regulation in other jurisdictions. Similarly, Facility Association recommends elimination of the mandatory voluntary market declination letter requirement in Ontario on the grounds that, as a barrier to entry to the residual market, it is ineffective and adds needless costs to the system.



Binder registry systems, where currently used, should be maintained as a useful market monitoring tool but should not be regarded as a barrier to entry to the residual market. Facility Association will pursue ways to share more effectively information gathered by binder registry systems to member companies and concerned stakeholders. Recommendation 5 Facility Association recommends that regulators and the industry continue to work together to inform consumers about residual markets and ways to enhance their eligibility for the voluntary market. Consumers have a right to know that they are insured through Facility Association and that there may be alternative sources of coverage in the marketplace. Facility Association and regulators in all provinces and territories have worked together to ensure that Facility Association is identified on the application and the temporary liability slip in all jurisdictions. Consumers in Atlantic Canada are being provided with an information brochure advising them of steps they can take to re-enter the voluntary market. Facility Association’s own website has an online version of the consumer brochure as well as contact information for the Insurance Bureau of Canada (IBC) consumer centre. The increase in the amount of information available to consumers about Facility Association has taken place in an environment where, thanks to the internet, Canadian consumers have greater access to personal lines auto insurance information and pricing than ever before. Popular “portals” such as yahoo.ca and msn.ca have links to multi-company insurance quote engines prominently displayed. Most, if not all, larger companies have their own websites, some with quoting facilities. As well, the websites of companies, governments and the IBC all have significant amounts of information about all aspects of auto insurance. That said, more can be done and Facility Association looks forward to continuing to work creatively in this area. Recommendation 6 Facility Association recommends that all voluntary insurance market participants must share fairly in the financial results of the residual market, whatever type of mechanism is used. The sharing formula in use by the residual market mechanism should not confer a competitive advantage to any industry participants (presumably by disadvantaging others), because doing so would increase the possibility of companies being dissuaded from entering the market, thereby reducing the potential range of choice open to consumers.



Recommendation 7 Facility Association recommends that Facility Association’s Plan of Operation should maintain a harmonized approach across Canadian jurisdictions. A harmonized approach to Facility Association’s operations over the years has allowed the Association to operate with considerable efficiencies. Balance has been achieved through provinces’ and territories’ retaining authority over aspects of the insurance provided that have the most impact on consumers: pricing and underwriting rules. A balanced, harmonized approach is consistent with the strategic vision statement adopted by the Canadian Council of Insurance Regulators (CCIR):

“An acknowledged leader in the development and harmonization of insurance regulation and policy, working co-operatively with other financial services regulators to enhance consumer protection.”6

Taking a harmonized approach to regulation of auto insurance in Canada generally reduces the non-monetary barriers to entry to the auto insurance market, thereby increasing the potential for new entrants to the industry and choice for consumers. A fragmented approach to the regulation of Facility Association’s operations has the potential to create the opposite effect. Concluding Remarks Much can be done to enhance the regulatory environment for residual markets in Canada to increase the probability that such markets will be no larger than is absolutely necessary. Existing measures that are costly, ineffective, and often inequitable, can be reduced or eliminated, and new measures that have a higher likelihood of success can be introduced.

6 CCIR Strategic Plan 2000-2005 (revised 2001), page 3



Glossary Binder An agreement by an insurer, or authorized representative on behalf of an insurer, to provide coverage until a policy is issued. Canadian Council of Insurance Regulators (CCIR) The Canadian Council of Insurance Regulators (CCIR) is an inter-jurisdictional association of regulators of insurance. Its mandate is to facilitate and promote an effective regulatory system in Canada to serve the public interest. CCIR works cooperatively with other financial services regulators to enhance consumer protection and to develop and harmonize insurance policy and regulation across jurisdictions. Facility Association The Facility Association ensures that automobile insurance is available to all owners and licensed drivers of motor vehicles where such owners or drivers are unable to obtain automobile insurance from an individual company. Established by the automobile insurance industry, the Facility Association is an unincorporated non-profit organization of all automobile insurers operating in the Canadian provinces and territories where auto insurance is provided through a competitive market. Every insurer licensed to write automobile liability insurance in any jurisdiction in which the Association is qualified to operate is required to be, and remain as, a member of the Association. Health levies Government health plans are eligible to recoup auto accident-related injury treatment expenses from at-fault motorists (and their insurers). Health levies are money paid by insurers in lieu of case-by case subrogation. Insurance Bureau of Canada The Insurance Bureau of Canada (IBC) is the national trade association of non-government property and casualty ("P&C" or "non-life") insurers, the private companies which insure the cars, homes and businesses of Canadians. Member insurance companies provide about 90 per cent of the non-government P&C insurance sold in Canada. Non-standard insurers Non-standard automobile insurers are those that specialize in writing higher-risk vehicles and drivers. Plan of Operation The Plan of Operation governs the operation of Facility Association. It consists of articles of Association and Operating Principles. The Plan of Operation is approved by the relevant regulatory authorities in the jurisdictions Facility Association serves. The Plan of Operation may be found at Facility Association’s website, www.facilityassociation.com.


http://www.facilityassociation.com/


Residual Market The residual market for auto insurance is made up of those consumers who cannot obtain coverage through an individual insurance company. Residual markets are sometimes known as “involuntary markets”, “markets of last resort”, or “shared markets”. Risk Sharing Pool The Risk Sharing Pool is operated only in the province of Ontario and it applies only to private passenger vehicles. The Risk Sharing Pool is administered under the umbrella of the Facility Association, and is monitored by the Financial Services Commission of Ontario. Risks are underwritten by members at their normal premium levels; they then have the option of keeping such business for their own account or transferring it to the Risk Sharing Pool. An individual company cannot transfer more than 5% of its private passenger vehicles to the Risk Sharing Pool. All licensed automobile insurers in Ontario must participate in the results of the risk sharing pool according to their market share and the extent to which they use the Pool. The operation of the Risk Sharing Pool results in some consumers receiving insurance at a subsidized price, and in some insurers being subsidized by others. Servicing Carriers Servicing Carriers are member companies authorized to issue and endorse policies, receive premiums and adjust claims for the account of the Facility Association. (As Facility Association is not an insurer, it cannot perform these functions.) They are reimbursed for losses paid, an allowance for adjusting claims and a fee for policy handling. All policies written through the Association by the Servicing Carriers are subject to the rules, rates and classification of the Facility Association.



Selected Readings 1. “Attempts to Socialize Insurance Costs in Voluntary Insurance Markets: the Historical

Record”, Dwight K. Bartlett, Robert W. Klein, David T. Russell; Centre for Risk Management and Insurance Research, Robinson College of Business, Georgia State University 1999

http://rmictr.gsu.edu/Papers/Socialize_Insurance_Costs.pdf 2. “Automobile Insurance Regulation, Direct Democracy, and the Interests of Consumers”,

Benjamin Zycher; Regulation, summer 1990 http://www.cato.org/pubs/regulation/regv13n2/reg13n2-zycher.html 3. “The Causes and Consequences of Rate Regulation in the Auto Insurance Industry”, Dwight

M. Jaffee, Thomas Russell in The Economics of Property-Casualty Insurance, National Bureau of Economic Research, 1998

http://faculty.haas.berkeley.edu/jaffee/Papers/Auto1.PDF 4. Consumer Advocate's Final Report, Auto Insurance (Nova Scotia, George Jordan Auto

Insurance Consumer Advocate, September, 2003. http://www.gov.ns.ca/enla/pubs/ConAdvAutoInsFinal.pdf 5. “Deregulating Property-Liability Insurance--Restoring Competition and Increasing Market

Efficiency”, J. David Cummins, editor. AEI-Brookings Joint Center for Regulatory Studies, 2002, p. 20

http://aei-brookings.org/admin/pdffiles/cummins.pdf 6. “False Kindness” Perspective, Volume 8, Number 5, p. 4, Insurance Bureau of Canada,

September 2002 http://www.ibc.ca/ShowDown.cfm?AccDate=%26%238L%2BXA%5DV%0A 7. Governor James E. McGreevey: Auto Agents Alliance Breakfast Tuesday, March 4, 2003

(speech of New Jersey Governor James E. McGreevey) http://www.state.nj.us/governor/speeches/030304_auto.html 8. “Insurance Deregulation and the Public Interest”, Scott E. Harrington, AEI-Brookings Joint

Centre for Regulatory Studies, 2000 http://www.aei.brookings.org/admin/pdffiles/harrington.pdf 9. “Modernizing Insurance Rate Regulation – Tacking to the Winds of Change”, Philip R.

O’Connor, Eugene P. Esposito; A report delivered to the National Conference of the Insurance Legislators, March 2001


http://rmictr.gsu.edu/Papers/Socialize_Insurance_Costs.pdf

http://www.cato.org/pubs/regulation/regv13n2/reg13n2-zycher.html

http://faculty.haas.berkeley.edu/jaffee/Papers/Auto1.PDF

http://www.gov.ns.ca/enla/pubs/ConAdvAutoInsFinal.pdf

http://aei-brookings.org/admin/pdffiles/cummins.pdf

http://www.ibc.ca/ShowDown.cfm?AccDate=%26%238L%2BXA%5DV%0A

http://www.state.nj.us/governor/speeches/030304_auto.html

http://www.aei.brookings.org/admin/pdffiles/harrington.pdf


10. “Outline of Testimony Before the Congress of the United States of America House of Representatives Committee on Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises”, Ernst N. Csiszar, Director of Insurance, State of South Carolina, April 10, 2003

http://financialservices.house.gov/media/pdf/041003ec.pdf 11. “Repairing Insurance Markets”, Scott E. Harrington; Regulation, summer 2002

http://www.cato.org/pubs/regulation/regv25n2/v25n2-10.pdf 12. “Shopping for a Solution – Effective consumer protection through competitive regulation of

insurance rates”, Nathaniel S. Shapo; Texas Public Policy Foundation, April 2003 http://www.texaspolicy.com/pdf/2003-04-01-insurance-shapo.pdf 13. “Statement of Principles Regarding Property & Casualty Insurance Ratemaking”; Casualty

Actuarial Society http://www.casact.org/standards/princip/sppcrate.pdf 14. “Statement Of Principles For The Regulation Of Property And Casualty Insurance”;

National Conference of State Legislatures http://www.ncsl.org/programs/insur/ncslp&cstatement.htm


http://financialservices.house.gov/media/pdf/041003ec.pdf

http://www.cato.org/pubs/regulation/regv25n2/v25n2-10.pdf

http://www.texaspolicy.com/pdf/2003-04-01-insurance-shapo.pdf

http://www.casact.org/standards/princip/sppcrate.pdf

http://www.ncsl.org/programs/insur/ncslp&cstatement.htm

FACILITY ASSOCIATION

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