The Financial Services Regulatory Authority of Ontario ("FSRA") recently released their Proposed Guidance: Automobile Insurance Rating and Underwriting Supervision Guidance (the "Proposed Guidance"). The Proposed Guidance uses a principles-based, outcomes-focused approach to automobile insurance rate regulation and underwriting rules, and will affect all insurance companies and their intermediaries providing automobile insurance in Ontario, including but not limited to those underwriting private passenger automobile, non-private passenger automobile, and fleet. These changes are intended to uphold principles of consumer protection and fairness, while promoting a competitive environment for insurers.
The Proposed Guidance embeds desired consumer outcomes into rating and underwriting decision-making. To do so, it is split up into four chapters that build on each other:
- Chapter 1 describes FSRA's interpretations of certain sections of the Automobile Insurance Rate Stabilization Act ("AIRSA") and the Insurance Act to guide its decisions on approving or changing automobile insurance rates and rules. FSRA also provides guidance on operationalizing risk classification systems, rates, and underwriting rules to ensure "fair" outcomes for consumers and to avoid unfair or deceptive practices.
- Chapter 2 outlines strong characteristics of operations, controls, and governance for delivering fair outcomes in rating and underwriting.
- Chapter 3 explains how insurers may pursue voluntary accreditation, and how FSRA assesses the demonstration of fairness outcomes and strong practices in this determination.
- Chapter 4, which has yet to be drafted, will explain the filing requirements for accredited and non-accredited insurers.
FSRA is now inviting stakeholders to submit their feedback on the first three chapters, with the consultation period ending on November 15, 2024. FSRA will have a similar consultation process for the fourth chapter, but not until 2025.
Until then, this article will provide an overview of the key requirements outlined in each chapter of the Proposed Guidance.
Chapter 1: Fair Consumer Outcomes
The first chapter provides that the automobile insurance system must provide accessible, affordable, and adequate coverage that meets consumer demands, while balancing the needs for insurers to be able to cover expenses and to make a reasonable profit. The Risk Classification System Provisions and the Underwriting Provision play key roles in achieving this objective:
- The Risk Classification System Provisions are criteria that FSRA uses to decide whether to approve all or part of an insurer's application for automobile insurance rates. These criteria are found in subsections 3(5), 7(7), and 7.1(1) of AIRSA and subsections 412(6) and 415(1) of the Insurance Act. In FSRA's view, an insurer's risk classification system and the rates it proposes must be (i) just and reasonable, (ii) reasonably predictive of risk or distinguish fairly between risks, (iii) not impair an applicant's solvency, and (iv) not be excessive in relation to the applicant's financial circumstances. FSRA considers criteria (i) and (ii) to be satisfied if the rates generated by a risk classification system are consistent with the Fair Consumer Outcomes set out in the Proposed Guidance.
- The Underwriting Provision sets out criteria that FSRA will consider when determining whether to approve an underwriting rule. Consistent with subsection 238(4) of the Insurance Act, underwriting rules will generally not be considered subjective, arbitrary, bearing little or no relationship to the assumed risk, or contrary to public policy, if the resulting underwriting decisions demonstrate the Fair Consumer Outcomes set out in this Proposed Guidance.
Fair Consumer Outcomes
Insurers must align their risk classification, rating, and underwriting practices with FSRA's intended consumer outcomes for fairness, profitability and transparency (the "Fair Consumer Outcomes"). They must also take reasonable steps in operationalizing these systems to ensure any act or omission does not result in, or create the likelihood of resulting in, the prohibited outcomes set out in Section 9 of Rule 2020 – 002 Unfair or Deceptive Acts or Practices Rule such as "using credit information or a prohibited factor" or "engaging in unfair discrimination."
The table below summarizes the Fair Consumer Outcomes outlined in the Proposed Guidance. It also includes a non-exhaustive list of best practices for evaluating the achievement of each respective Fair Consumer Outcome as described in Chapter 3 of the Proposed Guidance.
Principle |
Fair Consumer Outcomes |
Best Practices |
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Fairness |
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Accurate pricing and underwriting |
Premiums and coverages charged to consumers are actuarially justified and reflective of individual risk profiles.
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Absence of unfair discrimination, bias, or proxies |
Rating and underwriting practices are free from unfair discrimination and bias with insurers taking steps to mitigate this risk. |
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Accessible products and coverages |
Rating and underwriting practices balance pricing accuracy with considerations about not unfairly impacting the ability of consumers to access automobile insurance coverage. |
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Costs mitigation |
Prevent unnecessary costs from being passed onto consumers and taking reasonable steps to mitigate fraud and increase efficiency. |
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Profitability |
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Balancing profitability with consumer interests |
Appropriately balance needs for sustainable growth and profitability with fair treatment of consumers and ensure premiums are based on reasonable profit assumptions. |
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Transparency |
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Clear consumer communications |
Clear communications about any impact to the rights of a policyholder and providing consumers with the ability to access the information needed to understand the factors that influence pricing and underwriting decisions on their policy. |
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These practices are consistent with the principles of "fair treatment of customers" that FSRA and other regulators expect.
Chapter 2: Automobile Insurance Rating and Underwriting Operations, Controls and Governance Guidance
When reviewing proposed automobile insurance rating, underwriting, and risk classification changes, FSRA's exercise of discretion will focus on whether an insurer's operations, controls, and governance ("OCG") have appropriate characteristics for delivering Fair Consumer Outcomes. OCG concerns all related processes, products, systems, and models (including third-party products and services), as well as data governance and model risk management.
Further guidance relating to these concepts is outlined in the table below:
Operational Risk and Risk Controls |
|
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Risk identification and assessment |
Assessing and understanding the operational risk inherent in rating and underwriting processes. |
Risk controls
|
Maintaining appropriate risk controls and implementing measures to address potential risk events. |
Risk mitigation
|
Implementing effective mitigation measures to reduce the severity and probability of identified risks. |
Risk prioritization |
Prioritizing risks by ranking and assessing where all risks and mitigations fall within an established risk appetite. |
Risk monitoring and reporting |
Performing continuous monitoring of processes and internal reporting on operational risk. |
Governance |
|
Risk Appetite
|
Establishing a comprehensive risk appetite statement for automobile insurance rating, underwriting, and risk classifications. |
Clearly Defined Roles, Responsibilities and Accountabilities |
The Board of Directors is responsible for establishing the necessary strategies and governance structures as well as overseeing and approving operational risk management policies. Insurers' Boards of Directors and Senior Management are accountable for ensuring rates are reasonable and fair, in accordance with their fiduciary obligations, such as those specified in Sections 166(1) and 166(2) of the Insurance Companies Act (Canada). |
Three Lines of Defence for rating and underwriting |
Establishing an organizational structure where automobile insurance rating and underwriting operational management activities are conducted by: (1) the business and process owners, (2) are reviewed and challenged by risk management, and (3) independent assurance is provided by internal audit. |
Data Governance |
|
Data quality assessments |
Credible estimates based on data verification and fit-for-use assessments. |
Identification of data problems and opportunities |
Prompt identification and resolution of problems and implementation of improvements in data processes. |
Identification of data limitations |
Identifying data limitations and evaluating the rationale for using such data. |
Data ownership |
Data sets have designated owners and are subject to oversight and challenge. |
Model Risk Management |
|
Model Policies and Procedures |
Establishing and maintaining policies proportionate to the size, complexity, and importance of the models for each phase of the model life cycle. |
Model Fairness |
Having tools and processes in place to minimize, control and mitigate unfair discrimination and bias in models used throughout the modelling process. |
Model Risk Scoring and Measurement |
Implementing a scoring and measurement process to assess and quantify the level of risk associated with various models. |
Model Interpretability and Explainability |
Implementing tools that ensure interpretability and explainability of advanced predictive models. |
Model Approval Function |
Establishing a designated member of Senior Management or a standalone internal committee that reviews all relevant materials. |
Model Review and Performance Monitoring (Validation) |
Addressing identified risks to maintain the model's viability and relevance to business objectives and comprehensively evaluating the model's technical functionality. |
Model Inventory |
Maintaining a centralized and current model inventory with version controls that ensure accuracy and deployment of correct models. |
Please refer to Appendices A-C of the Proposed Guidance for additional examples of sound OCG characteristics for delivering Fair Consumer Outcomes in rating, underwriting and risk classification systems.
Chapter 3: Accreditation, Proactive Supervision and Assessment Approach Guidance
Accreditation
Demonstrating delivery of Fair Consumer Outcomes from Chapter 1 and appropriate OCG characteristics from Chapter 2 will allow insurers to be eligible for accreditation. While accreditation is voluntary, becoming an "accredited insurer" offers the benefit of a privileged filing process through FSRA's discretion under s. 413 of the Insurance Act. Chapter 4 of the Proposed Guidance, which is yet to be announced by FSRA, will detail the filing requirements for accredited and non-accredited insurers.
Proactive Supervision
FSRA's proactive supervision for rating and underwriting applies to all insurers regardless of accreditation status, and involves regular collection of data to monitor the market and mitigate adverse consumer outcomes. Insurers are required to proactively inform FSRA of material changes to their business, such as risk appetite and governance.
Insurers that fail to meet accreditation standards will be provided feedback and an opportunity to reapply. Those that are accredited but have failed to maintain the accreditation standards may be placed under review or lose their accreditation status. Insurers will have one year to address deficiencies identified by FSRA and if the deficiencies are not resolved within this period, then the accredited status will be lost. However, insurers may reapply for accreditation. Importantly, material changes to an insurer's demonstration of Fair Consumer Outcomes, soundness of OCG characteristics, corporate structure, financials, or regulatory issues reported by FSRA or other regulators may also trigger a reevaluation of an insurer's accreditation status.
Proportional Approach to Assessments
Finally, FSRA will apply the "proportionality principle" in their assessments. This means that, depending on their size and complexity, insurers may adopt different approaches and mechanisms to achieve fair consumer outcomes and sound OCG characteristics. For example, small insurers may combine their model reviewer and model approval functions, provided any conflict of interest risks are mitigated. Likewise, small insurers may independently report risks to the Head of Risk and Compliance, CRO, or CEO, whereas large insurers may require a specific business owned risk committee (e.g., an automobile insurance risk committee) reporting to an enterprise risk committee. Large insurers will require a greater degree of documentation on policies, processes, and controls for identifying, assessing, monitoring, and mitigating risks commensurate with their size.
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