FSRA’s webinar on the Automobile Insurance Rating and Underwriting Supervision Guidance (October 16, 2024)

Note: the text is automatically generated and has not been reviewed for accuracy.

0:02

Hello everyone and welcome to today's webinar, our new supervisory motto for auto insurance rating and underwriting in Ontario.

0:11

Before we get started, I'd like to go over a few items so you know how to participate in today's event.

0:16

You have the opportunity to submit your text questions to the presenters by typing your questions into the questions pane of the control panel.

0:24

You may send your questions at any time during the presentation.

0:27

We will collect these and address them during the Q &A session at the end of each of today's conclusions.

0:34

For now, I'd like to introduce Reena Arthur, Senior Policy Analyst for Auto Policy at FISRA. Hi, good morning.

0:44

Thank you for attending FISRA's webinar on the Automobile Insurance Rating and Underwriting Supervision Guidance.

0:50

My name is Reena Arthur and I'm joined by my colleagues Michelle Dodokin, Head of Auto Insurance Supervision and Kong ****, Chief Actuary of Auto Insurance Operational Risk Supervision. We will be your hosts for today.

1:04

A few housekeeping rules. Your video and sound will be turned off.

1:10

We will address questions at the end of the presentation. If questions are similar, we will group them and answer them at once.

1:17

Any questions we cannot take today as well as the recording of today's webinar and the slide deck will be posted to our website. I hope you find today's webinar informative. Let's get started.

1:30

It is important to acknowledge the land that we are on is the traditional territory of many nations, including the Mississaugas of the Credit, the Anishinaabeg, the Chippewa, the Hutinan Oshi, and the Wendat peoples.

1:45

It is now home to many diverse First Nations, Inuit and Metis people.

1:52

We acknowledge that Toronto is covered by Treaty 13 with the Mississaugas of the Credit and the Williams Treaty signed with multiple Mississaugas and Chippewa bands.

2:01

Let's begin.

2:04

For today's session, we will be talking about the progress on our strategy, the journey to becoming a principles-based regulator, the objectives of the new supervisory approach, benefits for consumers and the industry, an overview of the guidance, early industry response, consultative approach, and then we will finally bring it all together before moving on to questions. I would like to hand over the presentation now to Michelle Dudekin.

2:56

Let's tell just a reminder to unmute yourself using on the GoToWebinar control panel.

3:04

Hi there, I apologize for some reason it wasn't unmuting.

3:07

Thank you, Rena, and thank you for joining us this morning to talk about FISRA's new supervisory guidance for auto insurance rating and under underwriting.

3:16

Let's start with a recap of our existing rating and underwriting strategy.

3:21

The strategy has three pillars which most of you on the call are already quite familiar with. The first is fairness in rating and underwriting.

3:30

This includes a focus on pricing accuracy and ensuring that premiums closely reflect a consumer's individual profile as well as a sharper focus on unfair bias and discrimination and developing strategies to mitigate those risks to consumers.

3:46

Many companies are already leading the way with this and we some evidence of that through the territory submissions earlier this year, which was a very positive development. The second pillar is about fostering a healthy marketplace.

4:00

This is about robust competition and innovation.

4:03

We know that a strong dynamic market is essential for consumers to have more choices and receive better value for their money.

4:11

We believe that maintaining a competitive landscape ensures that the industry is responsive to consumer needs.

4:18

The third and final pillar is informed decision-making.

4:22

As a sector, I think we can all agree that we can improve in this area.

4:26

Consumers need to feel confident in understanding their premiums, what they're paying for and what their coverage options are.

4:32

Clarity and transparency are what consumers are asking for, whether it's to understand how their premium is calculated or to make educated decisions about their coverages.

4:43

By framing these three pillars, fairness, market health and informed decision making, we ensure that our regulatory strategy is not just about compliance, but about supporting a balanced, transparent and consumer focused auto insurance market.

5:00

Here is a summary of the major initiatives under our auto rating and under rating strategy and how they fit under the three pillars that I just described.

5:08

Today we will be focused on discussing principles-based regulation and our new supervisory model, but it's important to keep this work in context of our broader strategy and all the moving pieces.

5:20

I won't go into detail for each of these initiatives, as I'm sure they're familiar to you as well.

5:25

However, I did want to call attention to our technology transformation, which is a key enabler to the new supervisory model.

5:33

Insurers on the call involved in rating and rating filings know our legacy system, which is Arctics.

5:38

Arctics is an old system built on an outdated platform and can't be upgraded.

5:43

To enable the future changes, including new filing processes, accreditation, and proactive supervision, we need an enhanced system.

5:51

The timing of the new supervisory model will be partially aligned with the system implementation, and we'll share more on that as we progress along our roadmap.

6:02

Next slide.

6:04

As many of you know, the catalyst for our new supervisory model was the shift to principles-based regulation at FISRA. Principles-based regulation is not a light touch to regulation.

6:16

Sometimes we hear it described as management-led or self-regulation, and those terms are not quite accurate. PBR is not about stepping back and letting the market oversee itself.

6:27

It's a thoughtful and often more effective approach to regulating an industry that's continuously evolving.

6:34

Rules-based approaches work well in certain situations, but they often struggle to keep pace with the market.

6:40

It's hard to chase an industry with rules.

6:44

Principles on the other hand set high expectations, giving the industry more flexibility to determine how to satisfy those expectations while running their businesses.

6:54

Another benefit of PBR is that it puts greater emphasis on management accountability.

6:59

Unlike rules, principles require more interpretation, elevating the compliance discussion.

7:06

Moving to a fully principles-based regulatory model will take time to reach maturity, and we've had some of those discussions in our individual meetings with insurers.

7:15

It requires new processes and new capabilities to be effective both at FSRA and also within the industry.

7:22

The goal of our new supervisory model is to protect consumers while encouraging a more dynamic and more innovative insurance market in Ontario.

7:33

Next slide.

7:36

Now let's talk about what PBR actually looks like in practice.

7:40

PBR is about focusing on the big picture, and the big picture is the outcome that we want to achieve.

7:45

The principles or broad guidelines or values that, when embedded within organizations and in decision making, should lead to the right consumer outcomes.

7:55

There's also a tendency to believe that rules based regulation is old school and principles based regulation is new school, when in fact there are advantages to both.

8:04

While regulators will lean more towards one regulatory approach versus another, even in a PBR model, it may be reasonable to use rules or more prescriptive guidance to achieve an outcome.

8:17

Let's look at what it makes sense to use each approach. Next slide.

8:23

Oh, sorry, back one. Rules-based approaches are effective when standardization is important and in situations where there is higher risk of public harm.

8:36

Rules create absolute clarity, and therefore compliance is easy to assess, and adoption is fast.

8:44

The downsides to an over-reliance on rules are mainly speed, as mentioned before, and the risk that rules can become outdated.

8:51

At that point, the regulations aren't effective anymore and can unintentionally create barriers to competition and innovation.

9:00

Principles-based regulation works well in industries that are changing more quickly.

9:03

I wouldn't have said that about auto insurance 10 years ago, but it certainly seems true today.

9:09

Principles act as guardrails, guiding the right practices without creating obstacles to progress for the industry.

9:16

Another benefit of PBR is how it engages senior leaders and boards.

9:21

In a rules-heavy system, the focus is on technical compliance.

9:25

Legal and risk departments are often responsible for reviewing pages of regulations written in complicated legalese to determine what is or isn't compliant.

9:35

However, when you have a much shorter list of easy to understand principles and outcomes and an increased level of management accountability for interpreting those principles, the conversation is elevated to a much more strategic level.

9:51

In more mature PBR models, if the principles are working well, there's less and less need for detailed prescription, such that there is evidence that the desired outcomes are being met.

10:01

It goes without saying though that if a principles-based approach isn't delivering the expected outcomes, either the principle needs to be refined or more prescription is needed.

10:12

So there's really no such thing as an all principles or all rules approach.

10:18

The key is to decide based on the market environment and specific circumstances which approach or combination of principles and rules will deliver the right outcomes for consumers and for the industry.

10:31

Next slide.

10:35

Here we have illustrated examples of different regulatory issues in auto insurance and how they might be managed using a rules-based approach or principles-based approach.

10:45

Keep in mind that this is only an example to demonstrate the differences between regulatory approaches.

10:51

You can see how principles set an expectation without the need for prescription.

10:57

If we look at underwriting rules, for example, the objective here is broad accessibility of coverages.

11:03

It's unnecessary to say exactly what the criteria should be for those eligibility rules because the principal clearly outlines the expectation and the outcome that we're looking for.

11:16

Next slide.

11:19

So now that we've had a recap of PVR and what it looks like in practice, let's move on to the details of our new supervisory guidance.

11:27

We have four main objectives in our supervisory guidance.

11:30

The first is to establish principles and consumer outcomes.

11:35

These are of course the foundation for principles based regulatory model and you can find those in the first chapter of our guidance.

11:43

Second is to start to close the gap between premiums and claims trends with more streamlined filing processes.

11:52

Third is to establish higher standards for operations and governance, specifically in the areas of rating and underwriting that are not addressed by prudential regulation and we'll talk more about that later in the presentation.

12:03

And finally, to create a more dynamic marketplace by introducing more flexibility into the regulatory approach.

12:11

Next slide.

12:14

There are substantial benefits of the new supervisory approach for both consumers and the industry.

12:19

On the consumer side, we want a fairer and more transparent market where consumers can feel confident about making auto insurance decisions.

12:28

On the industry side, there are benefits to getting rates and product changes to market faster, as well as the advantages of strengthening internal processes and controls which will reduce risk and create a more sustainable organization.

12:42

For insurers that decide to pursue accreditation, being able to say that you're a trusted organization committed to doing business fairly is a message that will resonate with consumers and also strengthen your value proposition. Next slide.

12:59

The guidance itself has four chapters.

13:01

The first chapter, as I mentioned before, outlines new principles and fair consumer outcomes.

13:07

All companies, regardless of accreditation status, will be supervised against the new principles and outcomes.

13:14

I don't think that the principles or outcomes will be a surprise to anyone in the industry, but this is the first time that we have articulated a list.

13:21

It's also intentional that the principles and target consumer outcomes can be summarized on one page and are written in straightforward language.

13:30

This makes it easier to get the right discussions going about how to integrate them into decision making at all levels.

13:39

The second and third chapters relate to the standards of accreditation, as well as the process for assessment, accreditation itself, and the details for post-accreditation supervision.

13:51

The final and fourth chapter, which is the filing guidance, will be released in January.

13:56

We've intentionally postponed the release of the filing guidance to allow more time for us to develop the approach and seek more input from our advisory committees.

14:07

Now I'm gonna turn it over to Kong to review the chapters of the guidance, Kong.

14:20

Thank you, Michelle.

14:22

Thank you everyone for providing me with this opportunity to guide you through the auto insurance reading and underwriting supervisory guidance.

14:29

My name is Kong ****, I'm the chief actor responsible for auto insurance reading and underwriting supervision.

14:35

with emphasis on Creditation Assessment and Proactive Supervision.

14:42

FASERAS Auto Insurance Supervisory Guidance is comprised of three chapters at this moment.

14:46

Chapter 1, Bearer Consumer Outcome.

14:49

Chapter 2, FASERAS Expectation on Insurance Companies' Operations, Governance, and Controls.

14:55

And Chapter 3, Creditation Assessment and Proactive Supervision.

15:01

Let's dive into the chapter one, bear consumer outcome first.

15:06

Traditionally, the industry has been using just and reasonable for decades.

15:12

This term just and reasonable has been used very well in auto insurance rating and underwriting decisions in guiding Fizzra's funding approval process.

15:22

This is because historically, insurance industry has typically using simple and straightforward rating models and classification plans.

15:32

So the just and reasonable term has been doing a great job for years and served its purpose.

15:39

However, the world is changing, especially for the property cash and the insurance industry with emergence of the big data and artificial intelligence.

15:48

Insurance companies started to use more data and building even more model compared to decades ago.

15:56

This presents a strong challenge for the entire insurance industry from two dimensions.

16:03

On one hand, it's from a quantitative perspective, even though insurance companies promise they are not using prohibited rating variables in their auto insurance rating and underwriting.

16:14

The effects of those prohibited rating variables are already reflected in the final premium outcomes.

16:21

On the other hand, insurance companies' complex models are usually resulting in unintentional bias, which results in the fact that some of the consumer groups are being treated more negatively than others.

16:37

From a qualitative perspective, the insurance industry is also experiencing the challenge that they are not able to interpret the model's inputs and calculations to their internal stakeholders and technical audience, and is also a challenge to expand the model results to consumers and regulators.

16:56

This is the reason why FISRA is now introducing the Fair Consumer Outcome in Chapter One of the Supervisory Guidance as a way to comprehensively interpret the traditional way, just and reasonable term.

17:13

FISRA defines fairness based on outcome, which is aligning with FISRA's based regulation approach.

17:20

Diving into a little bit in details, we understand that the insurance industry is not going to use the prohibited rating variables and protected grounds, as they are being prescribed in the regulations, UDAP, and Ontario Human Rights Code.

17:34

This will continue to be the case in the future supervisory model.

17:40

As a society, we mutually acknowledge that for those prohibited rating variables, it doesn't matter how predictive they are, they are not used in auto insurance rating and underwriting.

17:53

Actual justification continues to be the key consideration in the fairness assessment because it's a cost-based analysis.

18:02

Related to the proxy discrimination, we understand that even insurance companies are not using those prohibited rating variables in rating and underwriting.

18:11

Their predictive power may already be picked up in the final model results.

18:16

And we expect the insurance company to have a policy and procedure to actively identify, assess, and mitigate potential proxy discriminations.

18:29

Given the large amount of the data being used and the complex models being built, there are a certain group of policyholders being treated more negatively than others as a result of the unintentional bias in the model, and insurance companies are expected to perform active assessment of the disparate impact analysis to ensure that all risk groups are being treated fairly.

18:56

Again, from qualitative perspective, it is Fizer's expectation that insurance companies will need to provide transparent information to consumers in a timely manner and prepare sufficient information to get their brokers, agents, and distributors ready such that a consumer will be able to understand their premium and premium changes.

19:18

And with those information, consumers will be able to make an informed decision.

19:25

Fizra also expect insurance companies to provide meaningful choice to consumers and provide product offerings that are not limit accessibility to key insurance product and coverage for consumers.

19:39

Fizra also expect the pricing arteries in auto insurance rating and underwriting will apply reasonable underwriting profit probation assumptions in their pricing models.

19:51

We have so far covered the quantitative and qualitative perspective of the fair consumer outcome.

19:58

It is very important to understand that it is not possible to achieve all fair consumer outcome at the same time because some of them are actually conflicting with each other.

20:10

For example, when the rating accuracy has been achieved, there will be proxy discrimination.

20:17

While certain proxy discrimination has been addressed and resolved, the rating accuracy will be reduced.

20:25

Insurance companies are encouraged to assess their unique situation and find a fine balance between those competing fairness outcomes and demonstrate to officials how they're finding a fine balance between those fair consumer outcomes.

20:43

Fizra will apply proportionality principle in its fairness assessment.

20:48

The ultimate fair consumer outcome goal is the same for all insurers, no matter it's a small or large insurance.

20:55

But each insurance companies may have a different pathway to achieve the final destination, fair consumer outcome.

21:04

Fizra will be working with industry very closely to ensure, on one hand, we were providing insurance company opportunity to explore their own fairness assessment tests and models, and on the other hand, FISRA may suggest some recommended tests at the very beginning of the fairness journey.

21:24

Under the principle-based regulation approach, it doesn't require the regulated entities and FISRA to have continuous and interactive conversations to ensure we're working together to find a pathway such that insurance companies will be treating consumers more fairly and meeting the fairer consumer outcomes.

21:45

As Michelle mentioned, the fairer consumer outcome will apply to all areas, including pre-funding application reviews, accreditation assessment, and FISRA's proactive supervision in auto insurance weekend on the right.

22:01

Your auto insurance supervision relation manager is always here to support you on your fairness journey.

22:06

The fairness issue is not created by auto insurance The overall here is to ensure the fairness issue is not getting worse in auto insurance rating and underwriting We don't pretend we know everything about the fairness That's the reason FISRA is closely working with other jurisdiction regulators across the entire North America including the jurisdiction Colorado whose fairness is being focusing on the race and use of external data as as the District of Columbia whose focus of the fairness is on unintentional bias in the models.

22:42

We also assure that we will be working with the industry very closely to ensure that by the end the consumers in Ontario will be treated fairly and more fairly. Next slide.

22:58

Chapter two outlines phasorized expectations related to insurance companies' operations, governance, and controls in auto insurance rating and underwriting.

23:09

This OGC Operation Governance and Controls might be new, but the content of this guidance is not something new.

23:18

Two years ago, FISRA did issue a guidance called Auto Insurance Rating and Underwriting Operational Risk Management Information Guidance.

23:27

It is FISRA's expectation that insurance companies need to process sound, and foundational practice in operation governance and controls in auto insurance rating on the right.

23:40

Over the last one year and a half, FISRA has been conducting surveys, interviews, and consultation with more than 95 percent of the property capture insurance industry that are writing auto insurance in Ontario.

23:53

FISRA presented industry progress on operation governance and controls in its annual review guidance, and FISRA also encouraged all the insurance companies to talk to FISRA to understand their own operation, governance, and controls journey compared to the industry average.

24:13

Now FISRA is ready to transform this information guidance into approach guidance, and here are the areas of focus on operation, governance, and controls assessment.

24:27

FISRA will need assess if insurance companies process robust operation governance and controls with special areas in governance controls and oversight related to auto insurance retained on the writing.

24:40

We will evaluate if insurance companies are equipped with straight lines of defense and clearly defined role and responsibilities whenever it's related to auto insurance business decisions and business process.

24:52

We will also assess if insurance companies have a risk assessment framework with risk identification, assessment, controls, mitigation, monitoring, reporting, and escalation related to auto insurance rating and underwriting.

25:12

FISRA will always emphasize more on data and model risk management given that the insurance industry has been using even more data and building an even more sophisticated model Lately, based on the physical survey and interviews in the last year and a half, we do find that property capture insurance companies are behind in two particular areas.

25:34

Insurance companies are behind in the second-line independent model review, and insurance companies are behind on model documentation.

25:43

They pose a significant risk of the model errors, causing bites, and resulting unfair discrimination impacting consumers.

25:51

So these are the two areas that will be the focus area of FISRA's accreditation assessment in the future.

25:59

FISRA also expects the insurance company to meet its expectations on the interpretability and explainability of the model results.

26:09

Interpretability refers to how the insurance company will be able to understand the inputs and computation of the model and expand those inputs and computation to the technical audience and internal stakeholders.

26:23

And explainability of the model result means how insurance companies are able to understand its model result and expand those model results to non-technical audience, including consumers.

26:36

The model approval function is also the area of the focus in Fizra's future accreditation assessment.

26:43

The model approval function will need to demonstrate how insurance companies are reviewing and understanding their data inputs and model calculation and process, understanding the documentation and version controls of all models related to auto insurance reading and underwriting, such that they will be able to make a decision to execute the model and put the model into implementation.

27:08

Consumer impact assessment is one of the important assessment within the model profile function.

27:15

It is important to reiterate the proportionality principle that's not only applied in the fairness assessment, but also applied in assessment of the insurance company's operations, governance, and controls.

27:30

FSRA will significantly increase the confidence in those insurance companies who process robust, adequate, and effective operations, governance, and controls.

27:39

And this will allow FISRA to move away from input-focused review, focusing on data assumptions and judgments, and shift towards outcome-focused regulation reviews, which align with FISRA's principle-based regulation approach.

27:56

A robust operation, governance, and controls is very important.

28:00

But the effective implementation of those policy procedures on Ontario Auto Insurance line of business is even more important.

28:10

It is important to emphasize that physical auto-supervision function is not a potential function.

28:17

And we're not supervising insurance companies process, but we're looking for evidence of robust and effective and adequate operation governance controls that deliver fair consumer outcomes.

28:30

And those insurance companies will be able to provide evidence, will be provided accreditation status.

28:38

Insurance companies getting accreditation status will be provided funding privilege for faster rating changes.

28:47

And this will also significantly reduce the regulatory lag for insurance company that getting accreditation status.

28:55

And to be specific, the regulatory lag means the FISRA's review timeline for processing and proving refining applications.

29:05

And for the accredited insurance company, this regulatory lag can be significantly reduced from months to a day.

29:15

Next slide.

29:20

Chapter three of the supervisory guidance outline FISRA's approach, how we will perform accreditation assessment and how we will perform the proactive supervision of auto insurance rating and underwriting activities.

29:34

The accreditation program is optional, which means insurance companies that are not interested in the accreditation program or they are not ready on the accreditation program on day one will always be welcome to apply for accreditation at a later time.

29:52

The accredited insurance companies will be provided privilege such that they can perform rating changes and speed to market in expedited funding approach.

30:00

And for non-credited insurance companies, including those who are not interested and not able to get accreditation status, we'll continue to use the traditional prior approval funding approach.

30:14

As part of the accreditation assessment process, FISRAware assessed insurance companies' fair consumer outcome, as well as assessment on insurance companies' operations, governance, and controls was emphasized on data governance and model risk management related to auto insurance rating and underwriting.

30:35

As a principal-based regulator, we understand that one size fits all is not working in the PBR environment, so the proportionality principle reflecting the size and complexity will also apply in the accreditation assessment.

30:51

The one example that I can provide related to the model approval function is the large insurance companies expected to have a committee with diverse stakeholders in the model approval function.

31:03

While small insurance companies may have a single, senior, accountable person that worked in the second line independent review of the model can also be acting as a model approval function.

31:17

Under the principle-based regulation, it does require FISRA to have continuous and active dialogue with insurance companies to understand better about the final outcome to guide them through the final destination.

31:31

So the transparency of the insurance companies to the regulator is also very important.

31:39

Once the insurance company has been provided accreditation status, the accreditation status will be good indefinitely.

31:46

The accredited insurance companies will be using expedited filing approach for faster reading change.

31:53

They will be provided privilege for reading change such that insurance company will be accountable for their own business decisions related to how, how much, and when they want to implement any reading change such that the reading change will be speed to market.

32:10

Because Pfizer understand we know those insurance company who's been credited accountable for their business decisions, accountable for their business practice, and accountable for their customer results, customer outcomes.

32:27

The proactive supervision were applied to all insurance companies, no matter they are being credited or not.

32:35

For the credited insurance companies, Fizra were used proactive supervision to continuously monitoring them to ensure that they continue to deliver fair consumer outcomes.

32:45

Fizra were also used the proactive supervision to identify high-risk insurance company, which require FSRA to deploy more regulatory attention, aligning with FSRA's risk-based supervision approach.

32:58

The proactive supervision also allows insurance companies to provide more information and data to FSRA outside of the filing approach, no matter insurance companies filing once a year, twice a year, or once every two years.

33:12

FSRA will use the proactive supervision to identify and act on emerging issues in the market.

33:22

Collecting more data and information under the proactive supervision allow FISRA to assess, reassess, evaluate, and reevaluate insurance companies' accreditation status, and take action to ensure fair consumer outcomes are consistently delivered to consumers, no matter as credited insurance companies or not.

33:42

The accreditation program will reorganize insurance companies who process robust and adequate operation governance and controls, reorganize insurance companies that deliver fair consumer outcomes, and it will improve consumer trust and confidence.

34:01

For any question that you have related to fairness assessment, operation governance and controls expectations, as well as physicalized accreditation assessment and proactive supervision, your auto insurance supervision relation manager is also your first point of contact.

34:19

Physical experts in supervision, actuarial service, policy, legal, and market conduct will always be here to support your principal-based regulation journey and will always be here to support your success in accreditation application and program.

34:36

Ultimately, what we achieve is both consumers and insurers where benefit from this accreditation program.

34:44

That's the end of my presentation. I will hand it over to Michelle.

34:52

Thank you so much, Kang.

34:54

As mentioned before, we've been in informal consultations with various stakeholders for over a year.

35:00

So we've had lots of encouraging feedback and support on the direction that we're moving again, that we're moving in.

35:05

So I just want to thank everyone for that, and the time that's been committed to all of those meetings and conversations.

35:12

On the positive side, the clarity of the principles and outcomes as well as new standards for sound controls and governance have been very positively received.

35:22

We also know that the industry is enthusiastic and excited to hear more detail on the new filing processes and I promise that it's coming soon.

35:30

Our goal is to achieve a good balance between speed and flexibility as I've mentioned a number of times before and while at the same time obviously maintaining strong regulatory oversight.

35:43

Proportionality is a hot topic as well. It comes up often.

35:46

We certainly understand and agree that this should not be a one-size-fits-all approach because we have organizations of varying sizes and complexity.

35:55

We will adjust our assessment criteria accordingly to ensure that our approach is both realistic and practical for different sizes of organizations.

36:05

We also want to make sure that accreditation does not unfairly favor large companies or make light of the responsibilities of smaller companies.

36:13

So I'm confident that we're going to strike the right balance there.

36:17

We've also had questions about the time and effort involved in becoming accredited.

36:21

The standards for accreditation are, in my view, capabilities that will build stronger and more sustainable organizations.

36:29

Therefore, companies will benefit from strengthening in those areas, whether they decide to pursue accreditation or not.

36:36

If a company is well prepared with evidence to support their accreditation, the process is not intended to be unnecessarily long or arduous.

36:45

Between now and implementation, we'll develop additional tools like self-assessments and list of evidence that we can provide back industry help insurers understand what we're looking for and feel more confident about their readiness for accreditation. Most importantly though, accreditation is not supposed to be easy.

37:05

The bar needs to be high, but not so high that it's unachievable.

37:09

In our view, the way to make progress and to level up as an industry is if a substantial portion of the market becomes accredited over time. So that'll be a key success factor.

37:21

With respect to prudential regulation, we don't believe that there is overlap, but we commit to eliminating any duplication if and where it exists and we're having many conversations with other regulatory bodies in the industry to make sure that that doesn't happen.

37:36

Prudential regulatory oversight of ORM in our observation tends to be at the enterprise level and our focus will be on evidence of sound practices in auto insurance rating and under rating specifically as Kong mentioned.

37:50

Finally we've also had lots of questions about references to profitability benchmarks and the guidance.

37:56

I want to emphasize that these are the same guidelines that have been in place for a long time. There really has been no change.

38:03

There will be an opportunity in the future to review the profitability benchmarks but it's out of scope for the initial phase of the new model.

38:11

We understand that healthy markets means that insurers need to have the opportunity to make a reasonable profit.

38:17

And that's good for both the industry and also for consumers. Next slide. I won't spend much time here.

38:27

It's really just to illustrate the journey that we've been on, as I mentioned before, consulting with various industry and consumer stakeholder group groups.

38:36

I particularly want to express appreciation to members of our technical and strategic advisory committees, as well as the Insurance Bureau of Canada for providing us with feedback on earlier drafts of this guidance.

38:48

Their feedback has helped challenge our thinking and was critical to ensuring that our approach is both practical and effective.

38:56

Next slide.

38:59

This illustrates the maturity cycle for a major shift to principles-based regulation.

39:04

At FISRA, we're undergoing substantial changes inside the organization to build new capabilities, to redesign processes, to build the systems to support the new principles-based supervisory model.

39:18

This will also require major changes within your organizations as well.

39:23

If the discussions up to this point about PBR and changes in auto insurance supervision are mainly taking place in small circles in your pricing departments or government relations areas, it's time to start raising the awareness more broadly across different business functions and personal insurance and with senior leaders and the board.

39:43

My final comment on this slide is simply that the new model for auto insurance supervision is not meant to be static.

39:51

When implemented, we will assess what's working and what needs more refinement and make those adjustments as we go, using the consultative process that I have referred to throughout this presentation.

40:04

Next slide. Just a few key dates here. You have about a month left to submit feedback for the first three chapters.

40:12

The filing guidance will be in consultation in the new year for about 30 days.

40:18

All four chapters will be finalized by the end of March, subject to the feedback that we receive.

40:25

We are, you know, as I mentioned before, we've met with many insurance companies on requests leading up to this point, who are very curious about the direction that we're going in with the supervisory guidance.

40:35

We continue to be very available, Kong and I and others on the team for meetings with individual insurance companies, so we encourage you to reach out to us and book a time with your team and we're more than happy to do that.

40:49

Before we open up for Q &A, I know that this has been a very well-attended webinar and we're grateful.

40:54

We want to thank everyone for making the time and continuing to invest in a two-way dialogue that we know is so important for the success of the new supervisory model for auto insurance.

41:05

Reena, we're ready to take some questions.

41:13

Thank you.

41:13

Thank you.

41:14

That was very informative.

41:15

So this concludes the formal presentation.

41:18

Thank you for attending today's session.

41:20

We'll now take some time to respond to questions that we received through the chat.

41:24

If you have any questions, you can still enter them using the Q &A icon on your screen.

41:29

There's a number of questions that have come in.

41:31

We'll do our best to respond, but for those that were not able to answer today, we will issue an email to those in attendance with the answers.

41:38

And in some instances where questions are similar, we will respond once.

41:43

So now for the first question, I'm going to send this question to you, Michelle.

41:51

And then we can discuss, is there a cost associated with accreditation?

41:59

I think the major investment with accreditation is just building those internal capabilities that we talked about to be ready for the assessment process.

42:07

So, Kong highlighted a few areas where, through previous conversations and prior surveys that we've done on ORM practices within rating and underwriting, that there are some areas where organizations have gaps.

42:20

Some of those gaps are obviously in fairness capabilities.

42:22

There are some companies that have been really proactive and invested significantly in learning and understanding methodologies for testing fairness, and then there are other organizations that are still learning, and we're here to support that process, of course.

42:40

Some of the other areas, as you mentioned before, model risk management, data governance also typically tends to be a gap.

42:47

So I think the issue there is really understanding what is required, what capabilities you already have within your organization, what capabilities you need to build, and the time that will take to really embed those new practices and capabilities into your organizations.

43:02

So I don't want to make that sound like it's it's not like there's significant work there They're not necessary. It's not necessarily, you know, a major one-time investment.

43:11

There are investments that are going to make your organization stronger They're going to reduce risk in the areas of rating and underwriting and in my view undoubtedly result in a better customer experience as well But there is time and effort there and maybe some resources if you don't have them already in your organization maybe you're going to need to go to market to to find some of those so Kong, do you have anything to add?

43:35

Thank you, Michelle.

43:36

I think you covered well on the cost side, but I also want to dive a little bit more in the benefits side.

43:43

As the goal of the accreditation is not just assessing insurance companies' operation and governance and controls, but by providing benefits, the filing privilege to the insurance companies that are being credited.

43:55

And the over goal is to reduce regulatory lag, such that insurance company we're able to reduce regulatory lag and implement the weighting and unweighting change more faster into the market.

44:06

And this is going to achieve a better outcome in terms of lining their premium and loss cost, premium change and loss cost change.

44:14

And this is what industry has been looking for for many years.

44:20

Thank you.

44:22

Sorry, Michelle, did you have something to add to that?

44:26

No, I just said thank you.

44:29

And so the next question, And I think this will go to you as well, Michelle.

44:34

How will my organization know we are ready for accreditation?

44:39

So as we mentioned earlier in the presentation, we will develop some tools to support the industry.

44:45

So I mentioned a self-assessment tool, which I think is really important, but also being really clear about the evidence that we're looking for in terms of achievement of those fair consumer outcomes and also evidence of sound practices in place for operations controls and governance and rating and underwriting.

45:04

So, you know, right now we're going through the process of finalizing the guidance, but there's much more work to come in terms of building those tools that we can provide to the industry and the kind of support that insurers will need to know if they're ready for assessment and accreditation.

45:21

And so there'll be more to come on that.

45:22

We'll have training sessions.

45:23

There'll be lots of support from the FISRA team, but that's all in due time through 2025 basically.

45:36

Excellent.

45:39

The next question is how long will it take to get accredited and neither one of you can answer this question.

45:47

Maybe Michelle you can start.

45:48

Yeah, I don't think that we have a definitive answer for that question at this point.

45:53

I think it probably depends on how ready the organization is, so I think preparation is key there and as I mentioned before, making sure that you know what evidence is required to satisfy our requirements, going through the self-assessment process, probably having lots of preparatory meetings with our team and getting advice and coaching as you're preparing for that assessment process are all things that will lead to a shorter assessment cycle leading to accreditation.

46:26

Kong, anything else to add on that?

46:30

Yeah, I think Michelle, I think for the insurance companies, the best way is to work very closely with all your auto insurance supervision relation manager to understand the progress, not only the insurance company's progress, but also FISRA's progress on over supervisory strategy journey.

46:51

If you take a look at the current in-ear view guidance, you will be able to find there is specific section talking about, based on FSRA's interviews, surveys and consultation, how each insurance companies are performing in each dimension of their operation, governance and controls, data governance and model risk management.

47:10

There is a very detailed chart demonstrating industry performance.

47:15

And in the same interview guidance, we did encourage insurance company to have a conversation with FSRA to understand their progress in each of the dimension of the operation governance controls and model risk management to make sure they understand where they're lagging, where they're advanced, and where they're aligning with industry general practice.

47:35

So we do have received quite a lot of invitation from insurance company to have this conversation.

47:41

And if you're also nation haven't started contacting your relation manager for this conversation with Fisher to understand your progress compared to industry average, please feel free to do so.

47:55

The next question that we have from the audience is, will accredited insurers have immediate access to filing benefits?

48:05

Michelle, you can take this.

48:08

Yes.

48:10

When we say immediate, I mean, fairly soon after accreditation, but the idea is that accreditation as a benefit to insurers, as Kong mentioned, will unlock accelerated or fast track filing processes.

48:22

And so once an organization is accredited, we'll set an effective date for some time in the near future after accreditation is confirmed, and then the insurer can start filing using the new privilege processes.

48:43

This next one's going to go to you, Kong. How do FISRA's OGC requirements differ from OSFI?

48:53

So, I would say here in FSRA, we are very closely looking at the E21 ORM guidance issued by OSPI as well as E23 related to model risk management related expectations.

49:09

We're also very closely monitoring the development of those two guidance related to ORM and model risk management.

49:17

At FSRA, internally, we do have expertise to review those guidance page by page, line by allowing to ensure that we're not creating duplications, we're not creating burdens for the insurance companies.

49:29

But it's very important to realize the fact that OSPI's ORIM, ERM and their model risk management relying is focusing on the enterprise level of the financial institutions, including their solvencies and resilience.

49:45

Well, for physical auto insurance supervision, over focus is on auto insurance rating and underwriting to ensure that consumer will be treated fairly in their life cycle of the auto insurance policy process.

50:00

OSPI supervised process, as I said during the presentation, because they're the potential regulator, they supervise the process.

50:08

The mandated insurance company must have a great and robust process.

50:12

Well, as the provincial regulator focusing on auto insurance rating on the writing, we observe evidence.

50:19

So we're not supervising process, we're looking for evidence that insurance companies are carrying robust, effective, and adequate operation, governance, and controls.

50:30

And on the other hand, OSFIS requirements related to ORM and modern risk management are mandatory for all financial institutions in Canada that are registered with the federal governments.

50:43

Well, over-creditation program, as I mentioned during the presentation, is optional because we're only looking for evidence.

50:52

One of the examples that I can provide you during over-consultation, survey, and interview with insurance industry over the last year and a half is by going through each dimension of the model risk management wisdom to understand how insurance companies are progressing in those areas.

51:08

Do they have policy procedures in each of those areas.

51:12

And based on over study, the model deconventioning process is one of the key consideration in our office supervision.

51:25

While the property cash insurance companies told us that the model deconventioning process may not be too much relevant to all insurance written and underwritten.

51:41

The example that provided by the property capture insurance company includes, reliable indication is one of the basic models used in auto insurance written and underwritten.

51:50

And they never decommission a reliable indication.

51:53

And instead, they're updating assumptions and data, actual judgments in the reliable indication from time to time.

52:02

So the decommissioning process actually doesn't apply to them.

52:06

So that's the reason if you're looking to over guidance chapter one, two, three, we are actually not placing greater emphasis on decomposition process.

52:15

While this is one of the key consideration of OSFIS supervision approach.

52:21

Thank you for that. I was very, very comprehensive.

52:27

So we only have about time for about two, maybe three questions if we're lucky.

52:34

So I'm just going to move on to the next one.

52:36

Michelle, will there be any filing enhancements for unaccredited insurers?

52:43

Yes, absolutely.

52:44

We're looking at all of our filing processes, both for unaccredited insurers and accredited insurers.

52:51

Any opportunities for us to streamline the process, make sure that the documentation and the analysis that we're collecting to support the rate filings is only what we need to make decisions as opposed to requiring documentation that's not necessarily critical.

53:12

So the idea is to tighten up the amount of time it takes for insurers to prepare a filing, as well as the time that it takes on our side to review a filing and make a decision.

53:22

So whether the insurer needs to wait for prior approval because they're an unaccredited insurer or whether they can fast track that filing.

53:33

The preparation that goes into the filing is another thing that we're trying to address with better processes and just streamline documentation requirements for all of the filings.

53:42

So you can look for benefits on both sides.

53:44

Naturally for accredited insurers, we're trying to provide material benefits there so they can get rates to market faster.

53:51

And frankly, we're also trying to create an incentive for insurance organizations to want to become accredited.

53:57

So I think there are benefits there all around.

53:59

I think for accredited insurers, we can be certain that, you know, they have really sound practices in place, and those practices, as I mentioned before, will help to reduce risk within organizations, but also protect consumers.

54:12

And then on the other side, insurers are benefiting from those faster processes, getting rates to market faster.

54:19

And I think for anybody that's working on the industry side, you know, there are real economic benefits to being able to really stay on top of claims trends and reduce the process, reduce all the steps involved in getting premiums to market and making sure the premiums best reflect the current claims trends and being responsive to the market.

54:45

Thank you for that answer, Michelle.

54:48

Next question is, is accreditation for everyone?

54:52

I think you can take this, Michelle.

54:54

Yeah, I think this speaks to some of the questions we've responded to on proportionality.

54:59

So with some smaller organizations, they wonder whether accreditation is something that they should be investing in or whether there would be any benefits there.

55:08

And I would say there are benefits for both large and small organizations, I think, or smaller organizations, I think smaller organizations are also need to worry a lot about, you know, having good operations in place.

55:23

And I think developing those capabilities help them to build a stronger competitive advantage in the future.

55:30

But even on the filing side, if an organization has somewhat limited resources, which I imagine is the case for smaller organizations, one of the reasons why they file less often and why they fall further behind in terms of claims trends is because they don't have the resources to prepare the filing and really stay on top of it.

55:51

I think if you're an accredited organization of smaller size And you can fast track those rate changes, perhaps you file more often.

55:58

And again, I think there are economic benefits for smaller organizations too.

56:03

The approach that we're gonna be taking for assessing those organizations again is, will be different depending on the size of the organization and the complexity of the organization.

56:12

We are setting a high bar, but we also wanna be realistic in terms of applying some of those principles within the context of a smaller organization with fewer resources.

56:24

and less sophisticated resources in some of the areas that we'll be reviewing in the assessment process.

56:31

So the short answer is yes, it's for everyone and we absolutely want that to be the case because we want a large portion of the market to become accredited in time. Brilliant.

56:43

So this is going to be our last question and this is going to go to you Kong.

56:48

Are the fairness testing expectations the same between one, the accreditation process and two, the prior approval filing process for a company that's not accredited?

57:02

I think on the outcome folks or regulation approach, the fairness assessment will be consistent in terms of how the fairness will be assessed in the accreditation application, the filing application, and physical proactive supervision.

57:18

However, in the accreditation application process, as I said during the presentation, we're still working with the industry to find the best solution to find a fine balance by providing insurance companies opportunity to demonstrate their own fairness test and models.

57:34

At the same time, at the earliest stage, physical may want to provide some suggested test because we're still at the earliest stage of the fairness development.

57:44

On the filing side, I don't see that's too much different from how the fairness assessment is being required in the accreditation application.

57:53

And I actually want to refer to the great example that we see insurance companies making the fairness journey progress in their territory TLE funding applications.

58:04

As you recall that in January, FSRA opened the door for the insurance company to file territory TLE applications without, you know, territory constraints previously in the territory bulletins such that now we have, you know, 50% of the market being proved for territory TLE and another 25% of the market finding related to TLE territory changes are in-house for review.

58:29

In this territory TLE finding, insurance companies are not only making territory definition and territory differential changes based on new model, new external data used to refine the territory to treat consumer more fairly, they're also learning by looking into different methodologies that's presented by Katchadee Actuarial Society, Canadian Institute of Actuaries, and other auxilations across the North America.

58:57

And they are performing their fairness test to ensure that consumers are not being treated more fairly or unfairly compared to other groups.

59:08

And some of the insurance companies even are on their journey to define their own definition of the vulnerable consumers and protected class based on some external data source, including statistical Canada sensors data in order to demonstrate that their territory proposal are not creating fairness issues.

59:29

So I'm not terribly worried about the progress on the fairness assessments, either in the funding application or the predication assessment, because we started to see insurance company making progress on the fairness journey, not only on the modeling, not only on the fairness test, but also on their internal process and procedures related to the fairness assessment.

59:56

Thank you. Thank you so much for that. Well, that concludes our presentation today.

1:00:03

We're at time right now. Thank you so much for being with us today.

1:00:07

Thank you for giving us your time. Please take the time to submit your feedback with respect to the guidance.

1:00:13

The consultation period will close on the 16th of November 2024.

1:00:18

I would also like to remind that today's webinar was recorded and the recording will be available on FISRA's website in the following weeks. As always, you can contact FISRA if you have any questions as well.

1:00:30

We really hope that you found the session helpful. Thank you so much.

1:00:33

Have a brilliant rest of your Thank you.

1. Is there guidance or framework that you will be providing for us to complete for consistency in accreditation?
   FSRA is developing a self-assessment tool that will help insurers prepare their accreditation applications.

2. How does FSRA substantiate its approach to accreditation and how is this approach supported by underlying laws? How will FSRA ensure that new, smaller competitors are not unduly disadvantaged when seeking and maintaining accreditation compared to larger auto writers with more resources?
   FSRA’s approach is substantiated by its interpretation of sections 3(5), 7(7) and 7.1(1) of the Automobile Insurance Rate Stabilization Act (“AIRSA”) and/or sections, 238(4)(d), 412(6), or 415(1) in the Insurance Act, R.S.O. 1990, c. I.8 (“Insurance Act”). These sections guide FSRA’s judgement when exercising its discretion to approve, reject, vary or reconsider risk classification systems, rates, and/or prohibit underwriting rules.

   FSRA's supervision focuses on areas of higher risk, considers insurers’ size and complexity, and is informed by adherence to FSRA Guidance. FSRA will apply the proportionality principle when assessing whether an insurer has met the criteria necessary to attain accreditation. This ensures that smaller insurers are not unduly hindered in seeking accreditation.

3. When is the effective date of the accreditation?
   Accreditation status becomes effective once insurers receive written notification from FSRA approving their application.

4. With regards to accreditation, do we have to check and update it yearly, and if it is static, will there be a mechanism for downgrade, upgrade, or review? Additionally, is there an expiration date on accreditation, or how often will FSRA reassess insurers’ accreditation?
   FSRA does not specify a fixed duration for accreditation status and accredited insurers do not need to regularly check and update their accreditation status.

   FSRA will proactively supervise both accredited and unaccredited insurers against the Fair Consumer Outcomes described in Chapter 1 of FSRA’s Auto Insurance Rating and Underwriting Supervision Interpretation and Approach Guidance (“Guidance”). In addition, accredited insurers will be required to maintain the standards of accreditation and could be placed under review if they do not. If an insurer is placed under review, they will be notified by FSRA.

5. It was mentioned that once accredited, an organization maintains the accreditation indefinitely. How will you ensure that the accredited organization continues to treat customers fairly and stays on top of initial requirements to become accredited?
   All insurers, both accredited and unaccredited will be proactively supervised. FSRA will continue to monitor insurers to ensure that the standards of accreditation are maintained post-accreditation. If deficiencies are observed, FSRA may place the insurer under review.

6. What percent of insurers do you anticipate will apply and receive accreditation and how long will this take?
   FSRA cannot say at this stage how many insurers will apply for accreditation. However, consultations held in support of developing the Guidance suggests there is sector-wide interest.

7. How would accreditation impact capital or solvency requirements compared to current levels?
   FSRA’s supervisory model covers auto insurance rating and underwriting and does not include capital or solvency requirements.

1. While the consultation process is in progress, what is the approach for on-going filings without the finalization of the guidance?
   Until final publication of the Guidance, insurers should continue to follow the existing filing processes.

   FSRA will provide further information about the transition period as work progresses.

2. Would an accredited insurer be able to complete a rate change in one day, or is it about shortening the rate filing process from months to days?
   Insurers will have access to a blend of expedited and prior approval filing processes depending on the nature and type of the proposed filing and the insurer’s accreditation status. Although all insurers will have access to the expedited filing stream for certain types of filings, accredited insurers will have access to the expedited stream for more types of filings. Insurers filing under the expedited filing process for rating changes will be able to implement new rate changes in one business day with the appropriate actuarial support and documentation.

3. Does the accreditation apply to both pricing and underwriting changes, or only one? Additionally, can you talk more specifically about underwriting changes and whether they will they be eligible for fast tracking?
   In the initial phase of the new supervisory model, the expedited processes will focus primarily on rate changes. In the future, FSRA may consider providing expedited filing privileges to underwriting filings. That will be determined at a future date.

   The Guidance will be supplemented by a Filing Manual that will outline additional processes and requirements for different types of filings. FSRA will share more information as work progresses.

4. Will legacy filings from ARCTICS be transposed to the new platform?
   The digital transformation of FSRA’s auto insurance rating and underwriting operations is in the planning stage. There will be a data transfer from the existing system to the new system to maintain historical filing documentation. FSRA will provide updates as work progresses.

5. Will FSRA be making changes to the approved Rating Classes for auto insurance based on the principles set out in Chapter 1?
   Chapter 1 of the Guidance outlines the Fair Consumer Outcomes that all insurers must demonstrate in their auto insurance filings and practices. If existing approved rating classifications are determined unfair, changes may be required.

1. Since fairness is a subjective measure, how do we ensure that fairness measures will be consistent across multiple insurers?
   FSRA is committed to consistent regulation across the sector. FSRA continues to develop its supervision model and will keep the sector updated on progress.

   Insurers will be proactively supervised and will be held accountable for aligning their rating and underwriting practices with FSRA’s intended consumer outcomes for fairness, profitability and transparency (the “Fair Consumer Outcomes”).

2. You mentioned that there is a balance between fairness and rating accuracy. How do we ensure that companies leaning more towards fairness don't get over-penalized in the market due to adverse selection?
   All insurers regardless of size or accreditation status will be supervised against the Fair Consumer Outcomes.

   The Fair Consumer Outcomes need to be considered holistically, and FSRA expects insurers to evaluate how these outcomes interact when filing risk classification systems and underwriting rules.

   Insurers are accountable for putting in place clear, well documented, actionable, and measurable policies, procedures and oversight to identify, assess, monitor, control, and mitigate operational risks.

3. Are the fairness testing expectations the same between the accreditation process and the prior approval filing process for a company that is not accredited?
   The approach to fairness testing will be the same for accredited and unaccredited insurers.

4. Going forward, FSRA intends to assess fairness and discrimination by looking at outcomes across different "customer groups". Can FSRA please share the definition of "Customer groups"?
   Although this Guidance does not prescribe how consumers should be grouped, further detail may be provided as work progresses to ensure consistency in the sector. This Guidance is drafted in alignment with The Human Rights Code and the broader legal framework for auto insurance in Ontario.

1. Is there a fee imposed by FSRA to obtain accreditation in addition to proving the insurer meets accreditation status?
   Insurers applying for accreditation will not be charged a fee.

2. With the big data and more complex models being possible for large insurers, is there any assistance that FSRA could provide for smaller insurer to adapt? Would we be publishing approved changes similar to other regulation bodies?
   FSRA's assessment of Fair Consumer Outcomes and sound OCG characteristics considers the size and complexity of each insurer. Insurers may adopt different approaches and mechanisms to achieve Fair Consumer Outcomes. The Guidance provides examples of approaches insurers can take, depending on their size and complexity, to demonstrate sound OCG characteristics and Fair Consumer Outcomes.

3. How would you define "independent" in the second line of defense? Does it have to be a separate team, all together. Can the second line of defense be within the same pricing team, but done by someone not directly working on the analysis?
   In auto insurance rating and underwriting, the second line of defense provides independent oversight to ensure pricing and underwriting decisions are actuarially sound, statistically justified, and aligned with regulatory expectations.

   "Independent" means that the reviewers are not directly involved in the initial analysis or decision-making process, ensuring objectivity and mitigating biases. While larger insurers may require dedicated, separate teams for this oversight, smaller insurers can achieve independence through internal reviewers who are not directly part of the pricing team, as long as they can provide unbiased and expert validation. The degree of independence should be proportional to the complexity and impact of the decisions, with all insurers ensuring the review process is robust and transparent to protect consumers and maintain regulatory compliance.

4. How does Fleet business fit into Principles Based Regulation? Fleet is mentioned under "Scope" in the guidance.
   Although fleet is exempted from rate and risk classification filings under Section 413 of the Insurance Act, fleet is required to file underwriting rules under Insurance Act 227(5) and nonstandard OAP forms and endorsements under Insurance Act 227(1). These requirements fall within the definition of auto insurance filings and are within the scope of the Guidance.