Regulation (October 01, 2008)

FACILITIES ASSOCIATION CALLS ON FSCO TO RECOGNIZE COST OF CAPITAL

Ontario bumped up rates for its private passenger auto insurance by 2% at last filing, but the rate change did not include a “cost of capital” provision that Facilities Association wants the provincial regulator to include.

In a report to the Insurance Brokers Association of Canada (IBAC), Facilities Association (FA) maintained its position that a cost of capital be included in the actuarial process to determine the province’s auto insurance rates.

Ontario’s insurance regulator, the Financial Services Commission of Ontario (FSCO), does not currently recognize the inclusion of the cost of capital in the rate-setting process.

“Cost of capital has always been a bone of contention for stakeholders and legislators alike,” FA noted in its report. “The argument for the acceptance of this process will be ongoing and certainly one that will not be solved in the immediate future.”

FA says the cost of capital is necessary to ensure that rates set for the residual market are higher than those set for the voluntary market, so that the two markets don’t compete with one another on pricing.

Based on its cost of capital model, FA says Ontario auto rates for the residual market should have been set higher than 2%.

IBAC, TIC JOIN FORCES TO HELP SIMPLIFY EXCISE TAX PROCEDURE

The Insurance Brokers Association of Canada (IBAC) and the Toronto Insurance Conference (TIC) have proposed a model ‘Export List’ to make life easier for brokers’ clients when they apply for an exemption from the excise tax on unlicensed insurance.

Clients of commercial insurance brokers must pay an excise tax when purchasing insurance through foreign, unlicensed markets. Canada Revenue Agency (CRA) allows an exemption from paying the excise tax if clients can prove not enough capacity exists in the licensed Canadian market to insure their risk (therefore making it necessary to go to an unlicensed market to find the capacity).

To qualify for the exemption, CRA requires clients to provide five letters of declaration from insurance companies recording their refusal to provide coverage. The letters must be dated prior to the inception of the policy.

In its 2008 annual report to IBAC, TIC noted CRA is testing a user-friendly ‘Export List’ created by a joint TICIBAC committee.

The export list itemizes insurance coverages that are not available from insurers licensed in Canada.