Facility Association board okays working group, opportunity to improve residual market mechanism structures: Tisdale

The Facility Association’s (FA) Board of Directors Wednesday authorized the creation of a working group to explore the optimal residual market mechanisms for automobile insurance in Canada, Bob Tisdale, outgoing chair of the board, announced at the association’s Annual General Meeting in downtown Toronto.

Although residual market volumes remain relatively stable, Tisdale told attendees Wednesday, the board’s view is that “there is enough of an opportunity to improve the residual market mechanism structures to the potential benefit of the industry and its policyholders to warrant further investigation.”

That being the case, the board gave the green light to creating the working group, which will have the president and CEO as its liaisons.

The automobile insurance industry established the Facility Assocaition – which serves Alberta, New Brunswick, Newfoundland & Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island and Yukon – to ensure auto insurance is available to all vehicle owners and licensed drivers where they are unable to obtain automobile insurance through the voluntary insurance market.

Tisdale likened current mechanisms to a “patchwork quilt” – since they “were created in response to specific circumstances at specific times over the years” – which has spawned five risk-sharing pools for private passenger vehicles, “each with different parameters and characteristics.”

The situation prompted FA’s board to spend considerable time and effort “looking at the various types of residual market mechanisms used in Canada the United States and elsewhere, and the relative merits of each,” he reported.

That said, Tisdale emphasized “no decisions have been made.” Having received its mandate from the board, the working group will report back later in the year.

Tisdale [pictured right] said reviewing, assessing and optimizing residual market mechanisms is the first of the four priorities in FA’s current three-year strategic planning cycle, which began last year. The other priorities are as follows:

• enhancing analysis, communication and reporting capabilities;
• enhancing operational efficiency and the control environment; and
• reviewing and strengthening the enterprise risk management (ERM) framework.

Overall, Tisdale suggested to those gathered for the meeting that the near outlook with regard to availability is good. “I am very pleased to inform you that we do not see pressures building at the present time,” he reported.

“Although we do not see availability pressures building in the immediate term, we do know from past history that they can emerge very quickly,” Tisdale pointed out. “I can assure you that the board and management will continue to remain vigilant, especially through our structured enterprise risk management process.”

While making clear it is far too early to tell whether or not it is an issue, Tisdale did say “there may be a mismatch between the product changes in Ontario and the rates approved by the regulator.”

He also cited the importance of a cost of capital provision being allowed in residual market rate-making. “This may seem like a technical matter, but the reality is that without all of the cost elements of the risk transfer being allowed in residual market rates, there is a significantly increased risk that residual market rates will be inappropriately in conflict, and competitive, with the rates of Facility Association’s member companies,” he explained.

“I am pleased to inform you that in the past year, a cost of capital provision has been approved for use in residual market rate-making in the Yukon, the Northwest Territories and Nunavut. That brings to eight of the nine jurisdictions that we serve that allow the cost of capital provision in our rates,” Tisdale said.

The board will address the issue with the only remaining jurisdiction, Newfoundland & Labrador, at some point in the future. “However, given the very costly nature of the regulatory framework there, and the need to maintain our focus on rates for specific lines of business, we will continue to prioritize our efforts there in the best interests of the membership,” he added.