Headed Into the Abyss

The proposed Facility Association (FA) Market Redesign continues to be discussed and has the potential to affect not only the Province of Ontario, but also each and every province that deals with FA. It is therefore important for brokers to be aware of what’s happening with the redesign, and particularly some of the issues arising from the discussions.

The current proposal would have Facility risks meet eligibility criteria in order to prove they are the worst of the worst. Brokers would assign to insurers those risks that do not meet Facility eligibility criteria, but are poor enough to meet the voluntary markets’ declination rules. The insurers would cede 100% of both the risk and the premium of these assigned risks into a newly created Risk Sharing Pool. Automobile insurers, which currently do the Facility risks, would then share the pooled risks based on their market share.

WHAT WENT WRONG

I’m not sure what the purpose of the suggested change to FA was or who actually suggested it, but from what I can see, there is no reason for it. Originally, the proposed redesign was to reduce, or at least maintain, the current number of Private Passenger Vehicles in the Facility Association (FA) when the next hard market hits. When FA reached its peak in March 2004 during the last hard market, FA held 3.8% of the market share (226,108 vehicles) compared to current statistics of 0.6% of the market share (33,072 vehicles) in Ontario.

So, what went wrong in the last hard market that is causing us so much concern today? During the last hard market cycle, we at the Insurance Brokers Association of Ontario (IBAO) received calls from member brokers who reported experiencing a difficult time placing business that fit the underwriting guidelines of their insurers, but did not meet their current appetite. As well, we heard from consumers trying to find a home for their insurance.

We are hearing from some insurers that things have changed with respect to the new proposed model and that, on a go-forward basis, our brokers can be assured that things will be different this time around. These comments are ones I’d certainly like to believe. But I’ve had a hard time being convinced that the industry will stand together and hold true to their word. Some insurers will stand up and do what they can for both brokers and consumers alike; others will continue with their back-door policies, placing undue pressure on their brokers to try and curb business elsewhere.

Currently, insurers in Ontario are looking for market share and accepting those risks that fall within their filed reasons. The current government has introduced changes that have benefited the consumer and have had a positive effect on the broker. They include wording changes to the OPCF 28 endorsement, as well as a positive statement from FSCO that makes it clear to all of the players that this endorsement cannot be refused. The result is a simplified process resulting in a reduction in the number of risks either placed in the FA pool or in the non-standard market and lower premiums for consumers.

During the hard market cycle, insurers were canceling broker contracts for no reason at all. We witnessed broker cancellations that had nothing to do with poor underwriting practices or relationship issues. Yes, the broker was victimized for absolutely no reason, but the consumer was left looking for a new market that would underwrite their risk at a reasonable cost.

In my opinion, this was the Number 1 influence leading to growth in the Facility market during the last hard market cycle. Thousands of Ontarians were forced to look for alternative markets; unfortunately, some of those consumers dealt with either payment problems or minor accidents that would qualify them for Facility. If the contract cancellation had not taken place, the consumer would have remained in the standard market and not been forced to become a statistic in the FA pool.

CONSUMER RIGHTS

The Consumer Code of Rights and Responsibilities is another step in the right direction. As a result of its introduction, the consumer has the right to remain with their insurance company even if that company no longer sells insurance through their broker or agent. The result is positive for the consumer and, as brokers, our first priority of interest is the consumer. The same consumer who would have faced a shopping nightmare in the hard market can now simply look for both a broker and insurer that represent their market of choice and not be faced with the potential of FA. The Consumer Code has also dealt with the issue of non-payment: the consumer now has the right to keep their policy in place if they pay their premium within 30 days following one or two non-sufficient fund (NSF) situations. This change has also resulted in new rules that keep consumers from being trapped in the FA pool.

As an association, IBAO pushed the current government to consider the re-introduction of true accident forgiveness for insureds that were being penalized after a loss. We have seen a variation of what we asked for, which is a positive step in the right direction. Many insurers are offering accident forgiveness; as a result, consumers who carry the additional coverage and have the misfortune of an accident will not see an increase in their rates when their policy renews.

We can, however, improve on this solution. Brokers are doing their part by communicating the options to their insureds and educating them as to how the accident forgiveness programs work. Unfortunately, some service providers out there believe that if they manipulate the facts, their service can be sold by using fear-mongering online quoting practices that do nothing more than mislead the consumer and damage the image of our industry. Therefore, we need to collectively step up to the plate and do what we can to correct this situation.

All of these changes have been introduced after the previous hard market, so they have not had a chance to prove their worth during a hard market cycle. Even so, they all have the potential to prevent the drastic numbers we witnessed in 2004. The solution FA has put forward will not provide consumers or brokers with better alternatives, and will not alleviate what transpired during the last hard market.

STEPPING UP TO THE PLATE

We can do more. Some solutions can be improved upon – for example, better cancellation guidelines, true accident forgiveness policies and insurers need to hold true to their word that the games will stop. Currently in Ontario, insurers are looking for market share and accepting those risks that fall within their filed reasons. As I stated earlier, currently only 0.6% of the market share or 33,072 vehicles in Ontario are insured in the Facility market. This number seems reasonable and is what I would consider politically acceptable. This shows that FA is working the way it was designed to in the first place.

Against this backdrop, what is being recommended for FA now is no more than a twist on a previous FA version that failed miserably – and will do so again, should it become the way of the future. If the redesign proceeds as is currently proposed, some insurers will prosper while others will become victims of the new design. Consumers with good driving habits will be combined with those who are not as fortunate. Contracts that were at risk for no reason during the hard market will now be at further risk in the future. The reality is that the next hard market will not change the driving habits of consumers. The industry is in control, so let’s not lose it.