Increased need for Canada’s auto insurer of last resort

By Martin Beaudry | March 20 2003 05:12PM

For auto insurer of last resort, Facility Association (FA), premium volume more than quintupled in the last two years and it expects its market share to double in coming years. The automobile insurance market is still tightening up and coverage choices – at least for the higher risk segment of the marketplace – may be further reduced.

David Simpson, President and CEO, says the Facility Association, mandated as insurer of last resort in the Territories, the Atlantic provinces, Ontario, and Manitoba, has seen a sharp increase in demand for its services in the last three years. The association is an insurance pool comprised of all the general insurers active in a given province.

The association provides coverage to drivers who cannot be insured by any other carrier. Typically that will be people with a very poor driving and accident record, those without any proven driving experience, or those who for some other reason are considered at high risk of making a claim.

The bulk of those insured in Atlantic Canada, between 55% and 60% on average, are individuals who have had “no convictions and no at fault accidents in the last three years, so they are coming to Facility Association for reasons other than driving record to begin with,” says Mr. Simpson. “That is actually quite stable, that percentage. It might be no evidence of private insurance, it might be a new driver to Canada, or it might be a type of vehicle. A bit more than half would fit what a layperson would think of as a high-risk driver population.”

Mr. Simpson continues, “The third party liability frequency throughout Atlantic Canada is two to three times higher than the industry average. These people are crashing into other people and other things two to three times more often than the average driver . They could be high-risk for other reasons”

It is precisely because of the higher risk being underwritten that Facility Association premium rates are the highest in the industry. That is also why, in an era of rapidly rising claims costs, the Facility Association is instituting sky-high rate hikes. After a 21% raise in July 2002, the association will again be hiking its rates in April this year, but this time by 45%.

Those hikes go some way to explain the sharp increase in premium volume written by the insurer, says Mr. Simpson, but it is also a matter of returning to more traditional market share. “This is part speculation,” he says, “but we seem to be rising from what was historically low levels to historically average levels. Up until the mid-1990s in the private passenger market, residual market populations would be about 4%-7% on a vehicle-count basis.”

Facility Association has held less than 2% of the market since 1998, reaching a low of 1.39% in 2000. Mr. Simpson explains this was the result of increased competition from regular risk insurers.

Looking back on the late 90s, the association president comments, “You see an increase in the number of non-standard writing companies, presumably because companies feel there is an opportunity to make some money. You also see some of the mainstream companies getting into the non-standard market simply through their own rate programs. Some companies might set up a non-standard writer as a subsidiary, or they might set up a non-standard program within a regular program in an effort to get more market. That was the story of the late 1990s. Many if not all auto insurers were pursuing market share very aggressively.”

No longer. Now the story is one of withdrawal through pricing and underwriting as insurers feel the pain of hard markets and high claims costs. The result is the increase seen in the amount of drivers needing to resort to Facility Association.

Insurers will want to keep a sharp eye on that increasing market share. Since Facility Association is a not-for-profit pool, an increase in share can only mean an increase in claims to be proportionally divided among member companies as liabilities.

Clean driver discount

That is part of the reasoning behind a 10% clean driver discount instituted by the insurer effective January 15 in Ontario, April 1 in New Brunswick, and May 1 in Nova Scotia and Alberta. “Somebody who falls into that category identified as no convictions within the last three years and no at-fault accidents within the last five years will get a 10% discount,” says Mr. Simpson.

“We are here as the market of last resort but also we want to encourage good driving behaviour to help drivers that are insured through Facility to re-establish their eligibility for the voluntary market,” he explains.
About 30% of the drivers insured by the association are under age 25. The hope is that a program such as the discount will encourage drivers to be extra careful and thereby establish the records they need to be accepted by standard insurers.

The association has a 50% lapse cancellation rate, meaning it turns over its entire book of business once every two years. “People are typically insured through the Facility Association for a relatively short period of time,” says Mr. Simpson. “What we have done with the discount program is to help encourage a little bit of modification of individual behaviour and to encourage them to re-establish their eligibility for the voluntary market.”

The bottom line is that increased market share by the insurer of last resort is not a good thing. That is why Mr. Simpson would like to track more closely the types of drivers being covered. That would allow the association to track trends and perhaps even identify opportunities for non-standard insurers.

At the least, a better tracking system would allow more programs like the 10% discount. “My standing line is that I am probably the only CEO who wants to shrink his business, and if I thought there was a particular risk profile that was coming our way then that might be something we would want to flag for our member companies and say ‘Hey, there might be a business opportunity here,’” says Mr. Simpson.