The Financial Services Regulatory Authority of Ontario (FSRA) published for commentary on Dec. 8, three proposed guidance documents intended to make Ontario’s auto insurance practices faster and more transparent, while further strengthening consumer protections.

“Together, these guidances are a significant and important move towards the implementation of the auto insurance rates and underwriting regulation strategy, which is a target outcome in FSRA’s 2022-23 Statement of Priorities,” the regulator wrote in a statement announcing the publication of the new guidance and approach documents.

Stakeholders interested in commenting on FSRA’s interpretation of existing regulations and the new guidance proposed, can submit their feedback to the regulator by Feb. 25, 2022.

The three documents include: 

  •         Proposed Guidance for Operational Risk Management Framework in Rating and Underwriting of Automobile Insurance; 
  •         Proposed Guidance for Reporting and Resolution of Automobile Insurance Rating and Underwriting Errors and 
  •         Automobile Insurance Non-Standard Forms, Endorsements and Certificates of Insurance Approval Filing Process Guidance.

Implementation dates for the first two guidance documents are still to be determined while the third guidance document becomes effective April 1, 2022.

Operational risk  

The first document, Proposed Guidance for Operational Risk Management Framework in Rating and Underwriting of Automobile Insurance, outlines foundational practices for Operational Risk Management (ORM) in the rating and underwriting of automobile insurance. “FSRA has identified gaps in operational risk management and model governance practices in the industry,” the document states.

“Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems from external events. FSRA’s concerns about operational risk are driven by the negative consumer outcomes and breaches of applicable law that can occur if operational risk, including model risk, is not well managed,” they add.

The document goes on to outline the operational risk management cycle, when the ORM cycle should occur, what company frameworks should include, data governance, training, documentation and review expectations, and model risk management. “The development of any model should be addressed by the insurer’s ORM framework. Insurers should have a model inventory, enabling a comprehensive view of all models being used by the insurers,” they state. “For each model identified, the insurer should assess the operational processes and controls in place used to managed model risk. Going through this exercise will allow the insurer to articulate the inherent operational risk in its modelling activities.” 

They add that an insurer’s ORM framework should outline a process to assess and classify the materiality of the models being used and outline a governance structure suitable to the model’s materiality. “The degree of governance and control in place for each step of model lifecycle should at least be commensurate to the model’s materiality.” 

The paper also discusses a model approval function (MAF) which, they say should be implemented for the purpose of approving new or revised models for operational use. “The MAF may be a senior accountable person or a standalone internal committee or a function incorporated into and existing internal committee – insurers may decide what is appropriate for them,” the guidance states. “Models approved for use by the MAF should satisfy all applicable legislative requirements and regulatory guidance. The MAF should also understand how any other models may have materially influenced the development of an implemented model.” 

Finally, the guidance states that insurers should be able to explain a model’s results and its drivers to stakeholders not involved in the development of the model.

Rating and underwriting errors  

The second guidance document, Proposed Guidance for Reporting and Resolution of Automobile Insurance Rating and Underwriting Errors, meanwhile, sets out regulatory requirements and expectations regarding the reporting and resolution of rating and underwriting errors. Presently there is no guidance establishing the regulator’s view on reporting and resolving such errors. It says reporting remains inconsistent across the automobile insurance sector and there is a lack of transparency regarding how FSRA will address unreported errors discovered while reviewing customer complaints or when reviewing an insurer’s rate or underwriting rules.

The guidance document first provides the regulator’s interpretation of the Insurance Act, stating that the act requires insurers to report and resolve rating errors. “Insurers are expected to report all rating and underwriting errors to FSRA through FSRA’s Automated Rates and Classification Technical Information Communication System (ARCTICS) or any future system that may succeed ARCTICS,” they write. The document outlines error types, error thresholds and how errors should be reported.

“Regardless of whether the error is major or minor, insurers must remediate in favour of all consumers affected by the error. FSRA will require additional information from the insurers, including a complete description and source of the error, how it was discovered, its impact and timing, corrective measures taken to date, and an action plan to remediate the impact on affected consumers and proposed timing,” the guidance states. It says errors must be corrected within 45 business days from the time the error is first identified. Consumer remediation must then take place within 12 months.

Non-standard form approvals  

Finally, FSRA’s document, Automobile Insurance Non-Standard Forms, Endorsements and Certificates of Insurance Approval Filing Process Guidance, communicates the approval process for insurers to obtain approval of non-standard forms and certificates. “Non-standard refers to a document that is approved for use by one insurer (or multiple insurers within an insurer group), instead of one that is approved or prescribed for the general use by all insurers.” 

The document outlines the process to obtain such approvals and states that FSRA will notify insurers in writing of its decision to either reject or approve the filing within 25 business days.