Regulation (May 01, 2009)

STRICT RATE REGULATION HAS INDIRECT ROLE IN INSOLVENCIES: PACICC

Inadequate pricing is the primary reason why insurers fail, and strict rate regulation is among several contributors to inadequate pricing, the Property and Casualty Insurance Compensation Corporation (PACICC) says in its recently released report, Why Insurers Fail: Inadequately Pricing the Promise of Insurance.

PACICC’s most recent publication, the third in a series of reports on why insurers fail, identifies several factors leading to inadequate pricing. Among them, strict rate regulation threatens to de-link the relationship between insurance premium pricing and the insurers’ claims costs.

PACICC’s report clarifies that rate regulation is not in itself a direct cause of inadequate pricing. Rather, rate regulation can adversely affect an insurer’s ability to respond to changes in claims trends.

“Risk increases if claims costs increase at a rate faster than can be accommodated under the rate regime, requiring an insurer to draw down its capital,” the report says. “Insurers with less capital and/or greater rate inadequacy are therefore less likely to achieve rate adequacy before the onset of financial distress…

“Put simply, price controls that de-link prices from claims costs for an already stressed insurer can have a detrimental effect on the company’s solvency.”

QUEBEC REGULATOR SAYS AUTO DEALER GUARANTEES COUNT AS “INSURANCE”

The Autorit des marchs financiers (AMF) considers a motor vehicle replacement guarantee offered by car dealers to be an insurance product subject to AMF oversight.

“Motor vehicle replacement guarantees must therefore be issued by insurers, whose regulatory framework — administered by the AMF — gives consumers better protection against the risks of insolvency,” the AMF says in a bulletin on its Web site.

“Consumers will now be able to contact the AMF to ask for information about motor vehicle replacement guarantees, file a complaint and benefit from mediation services.”

AMF said its oversight over guarantees would cause contracts to be standardized, thus clarifying the roles and responsibilities of each party involved.

Quebec brokers have been urging the AMF to consider motor vehicle replacement guarantees — available at point of sale from car dealers — to be insurance products, so that only those licensed to sell insurance can offer the product.

The AMF said it “considers it advisable to provide the main network stakeholders with a 12-month time period to carry out the changes needed for compliance with the act respecting the distribution of financial products and services.

“During this period, the AMF will work with the main stakeholders to ensure a harmonious transition and the protection of consumers’ interests.”