Purpose of consultation

FSRA serves the public interest by protecting consumers and fostering a strong, stable, competitive and innovative auto insurance sector. FSRA is responsible, under the Auto Insurance Rate Stabilization Act, for approving, rejecting or requesting variance in proposed automobile insurance rates based on whether they meet statutory standards. Ratemaking benchmarks (“Benchmarks”) assist FSRA in determining whether an insurer’s assumptions are appropriate when the insurer seeks approval for changes to its rates. 

FSRA retained Oliver Wyman (the “Consultant”) to independently analyze loss trend rates and reform factors along with other key actuarial assumptions, the results of which assist FSRA in conducting its statutory reviews of insurers’ rate filings. The Consultant’s preliminary report was posted on our website, and feedback was requested on their assumptions and methodologies. This public consultation reflects FSRA’s broader commitment to transparency in rate regulation and meaningful consultation.

Feedback received and response

FSRA appreciates the significant effort that went into the comments submitted in response to the Consultant’s preliminary annual review respecting the proposed Benchmarks.  FSRA received 4 submissions from July 26, 2021 to August 13, 2021. FSRA has considered all feedback during the public consultation. All individual submissions have been made available in Appendix 1. 

Responses have been broadly categorized as technical or general:

  • Technical feedback on the Consultant’s preliminary analysis: The Consultant has addressed these submission comments in Appendix J of their final report.
  • General feedback addressed towards FSRA: These comments were generally beyond the scope of the Benchmarks exercise and have been addressed in Appendix 2. 

FSRA adoption of the consultant’s results

FSRA has undertaken a thorough review of the Consultant’s analysis on loss trend rates and reform factors along with other key actuarial assumptions and believes that the Consultant’s analysis is prudent and reflective of recent developments and current conditions. Furthermore, the Consultant’s analysis has been developed in accordance with accepted actuarial practices. Therefore, FSRA will be adopting the analysis results as FSRA Benchmarks to assist in reviewing rate filings. As Benchmarks may not represent an individual insurer’s business, FSRA requires that all actuarial assumptions be fully supported with an analysis of the insurers’ own data, to the extent credible, regardless of whether FSRA Benchmarks are assumed. 

Appendix 1: Individual submissions

Below is a list of all submissions provided for this iteration of the Benchmarks exercise. 

Co-operators General Insurance Company
Desjardins General Insurance Group 
Facility Association 
Insurance Bureau of Canada 

Appendix 2: FSRA consultation responses

This table addresses comments submitted that were intended for FSRA. 

1. Co-operators General Insurance Company

Theme Comment Response
Flexible Trend Rates “each insurer has a unique mix‐of business and unique claims handling and reserving practices. As a result, one cannot expect the loss trends for an individual insurer to align with the overall industry selections. There is value in understanding the trends in the overall industry. However, we also believe that internal data and insights are valuable for loss trend selections.” FSRA recognizes that the Benchmarks developed from the industry data may not represent an individual insurer’s business. Accordingly, we support insurers using internal data to derive alternative loss trend rates when feasible, as it best reflects their book of business. FSRA’s Guidance has set clear expectations that require insurers to use their internal data to the extent credible for deriving actuarial assumptions and will no longer allow insurers to directly adopt FSRA’s Benchmarks without justification.
Investment Returns "CGIC supports FSRA’s consideration in replacing its current minimum investment yield benchmark of 2.25% with a rate selected by each individual insurer that reflects their own investment strategy". FSRA welcomes the positive feedback received through public consultation concerning discontinuing the investment return on cash flow benchmark. All insurers have the data needed to calculate this assumption, which is why FSRA will be discontinuing this benchmark. This decision aligns with the Canadian Institute of Actuaries’ (CIA) Consolidated Standards of Practice (SOP), Section 2620.15-17, which states that "the investment return rate for calculating the present value of cash flows would reflect the expected investment income to be earned on assets that might be acquired with the net cash flows resulting from the revenue at the indicated rate". Section 4.5 of the Consultant's report discusses FSRA's approach to the investment return on cash flow assumption in the determination of the indicated rates. To align with the CIA SOP, investment yield from all sources of funds would be considered for discounting rather than the risk-free rate.
Discount Rate "The Co-operator suggests that risk-free rate should be used for discounting, not investment yield on capital."  

2. Desjardins General Insurance Group

Theme Comment Response
Flexible Trend Rates Industry cost benchmarks are not valuable or appropriate for evaluating individual insurer rate change applications. The differences in client profiles, pricing and claims business practices and a variety of other factors can lead to unique and legitimate cost needs. Please refer to item 1 - Flexible Trend Rates for our response.
Physical Damage Trend Rates "New collision avoidance technology and increasing driver distraction is putting an upward pressure on severity and frequency physical damage trends. As a result, loss trends for the physical damage continue to increase which we urge FSRA to reflect in each subsequent update." FSRA will continue to publish Benchmark loss trend rates and reform factors twice a year. This enables FSRA to monitor the insurance industry loss experience and proactively review and respond to emerging issues.
Investment Returns and Profit Provision "We would like to express our strong support for this proposal, and comment that transitioning from a minimum benchmark to an experience informed selection is aligned with FSRA principles-based guidance framework. We agree that selecting an ROI specific to the insurer would more accurately reflect the risk tolerance and experiences of that insurer." Please refer to item 1 - Investment Returns and Discount Rate for our response.

3. Facility Association

Theme Comment Response
Rate Regulation Principles ”we believe it is important to reiterate our position that FSRA should use the benchmarking exercise to inform its consideration of rate filings, rather than to set specific targets, caps, or floors with respect to any one particular assumption. This approach opens the opportunity for insurers to reflect their own assessment of future costs in providing their product / service to the consumer, and allows them to set their rates based on their assessment of the competitive market in which they operate. This, we believe results in the greatest consumer choice in both providers and product, while maintaining fairness to all parties.” Benchmarking and consultation are crucial to assessing regulatory effectiveness, and part of FSRA’s commitment to principles-based regulation, enhancing regulatory effectiveness, transparency and flexibility. As such, Benchmarks are consulted annually and updated twice a year to identify industry cost trends and provide the regulator’s outlook on future loss costs trends and forecasts. Benchmarks also provide a means for insurers to compare their loss experience with industry in building their own future rate projections.
Flexible Assumptions "More broadly (i.e. beyond just a focus on reform factors and trends), there are areas of uncertainty where we believe FSRA should allow flexibility for companies selecting assumptions supporting their applications. These include:
• COVID-19 and its impacts;- selection of industry ultimate claim counts and amounts supporting their analyses (including trend analyses);
• selection of trend models (including the underlying methodology and approach) and associated estimates of trends or other changes to claims metrics;
• return on investment rate;
• operational expenses; and
• profit provisions (both in terms of the metric to use, and the level to target)."		 Please refer to item 1 - Flexible Trend Rates for our response.
Competition and Insurance Availability "Our concern from a voluntary market availability standpoint, is that benchmarks based on the OW Preliminary Report may act to discourage insurers from filing for rate changes and pull back from the market, reducing competition and availability." Benchmarking and consultation are crucial to assessing regulatory effectiveness, and part of FSRA’s commitment to principles-based regulation, enhancing regulatory effectiveness, transparency and flexibility. As such, Benchmarks are consulted annually and updated twice a year to identify industry cost trends and provide the regulator’s outlook on future loss costs trends and forecasts. Benchmarks also provide a means for insurers to compare their loss experience with industry in building their own future rate projections. FSRA agrees that insurance availability through open competition in a voluntary market is important.  As indicated in the Guidance, FSRA regulates Ontario automobile insurance rates and uses the Benchmarks to assist in reviewing rate filing applications based on statutory requirements.

FSRA has undertaken a thorough review of the Consultant’s analysis on loss trend rates and reform factors and believes that the Consultant’s analysis is prudent and reflective of recent developments and current conditions. Furthermore, the Consultant’s analysis has been developed in accordance with accepted actuarial practices.

4. Insurance Bureau of Canada

Theme Comment Response
Flexible Trend Rates "Accordingly, it is important that FSRA to recognize that despite operating in the same market, insurers have very different claims development expectations. It is critical that FSRA permit Ontario insurers to use different trend rates based on their individual experiences."

  "IBC strongly recommends insurers be permitted the flexibility to bring their own COVID-19 claims experience and related actuarial analysis when applying their individual trend factors."

"Finally, recent government and judicial developments, coupled with the uncertainty of the impact of COVID-19 on claims development, could contribute to a return to rising claims costs in the near future. For these reasons, it is critical that FSRA continue to encourage competition in the Ontario auto insurance market and provide insurers greater flexibility in their application of these trend rates to accurately reflect their different claims development expectations."		 Please refer to item 1 - Flexible Trend Rates for our response.
Investment Returns “Oliver Wyman further notes that FSRA is considering replacing its current minimum benchmark ROI of 2.25% for rate applications with rates selected by each individual insurer that reflects their own unique investment portfolio assets. IBC strongly supports this proposal, as it is a more principle-based and less prescriptive approach, would accurately reflect individual insurers’ unique experiences and different risk tolerances, and offer them the flexibility needed.” Please refer to item 1 - Investment Returns and Discount Rate for our response.