FSCO.TechNotes

Reading: “Technical notes for Automobile Insurance Rate and Risk Classification Filings,” October 2016, Sections A-F, pp. 1-14.

Author: FSCO (Financial Services Commission of Ontario)

Forum

BA Quick-Summary: Ontario Technical Notes Insurers must file with FSCO when changing rates or classification systems. Filings must align with approved formats, and failure to do so can result in regulatory action. FSCO prohibits certain rating factors and requires actuarial certification for rate changes. Filings using GLMs or UBI must meet strict standards: full model disclosure, statistical validation, and ongoing monitoring.

Study Tips

This reading is 26 pages but only the first 14 pages covering Major Filings are on the syllabus. It's basically just a long list of filing requirements for auto insurers in Ontario. There are 23 sections, each with multiple bullet points listing specific filing requirements. If you're an Ontario auto insurer and you write insurance on either of the policy forms listed below, you must have your rates and risk classification system approved by FSCO (Financial Services Commission of Ontario):

• non-fleet auto written on OAP 1 (Ontario Automobile Policy 1)
• non-fleet auto written on OPF 2 (Ontario Driver’s Policy)

Don't ask me why OPF is the acronym for Ontario Driver's Policy. Unless I'm missing something, it seems like is should be called ODP (not OPF!).

If you think about how to approach this reading and what's likely to be asked on the exam, you'll very quickly realize there's way too much to memorize. This is the type of reading you'd keep handy if you were actually doing a rate filing in Ontario. So we have to figure out what the CAS actually wants you to learn. Here's what I think is reasonable for you to know:

• the 5 types of rate and risk classification filing guidelines (depending upon the types of changes proposed)
• categories of information that must be provided in a filing (loss data, expense data, territory definitions, discounts,...)
• a few of the more important specific filing requirements (no more than 55 territories in Ontario, and no more than 10 in the City of Toronto)

The Exhibits that are referred to in the reading start at page 15 and are not on the syllabus. (The syllabus covers only pages 1-14) There do not appear to be many good exam questions from this material and I believe it will be only lightly tested.

Estimated study time: ½ a day (not including subsequent review time)

BattleTable

No past exam questions are available for this reading.

reference	part (a)	part (b)	part (c)	part (d)

In Plain English!

Sections A, B, C, D

Section A: Introduction

The only relevant information in this short section are the 5 types of Rate and Risk Classification Filing Guidelines depending upon the types of changes proposed.

Here's what to memorize: The 5 categories and when they're used. I think this has a low probability of being asked on the exam but I wouldn't completely rule it out.

1. PPA Filing Guidelines – Major:

   → used when an insurer is initially entering the private passenger automobile insurance market

   or

   → when changing existing automobile insurance rates but the changes proposed do not meet the criteria for the Simplified Filing Guidelines.

2. PPA Filing Guidelines - Simplified

   → used for changes that satisfy the simplified filing guidelines (not on syllabus)

3. PPA Filing Guidelines – CLEAR Simplified

   → used when implementing the current year CLEAR vehicle rate group (VRG) table (not on syllabus)

4. Other Than PPA Guidelines - Major

   → when an insurer is initially entering the insurance market for a category other than PPA (not on syllabus)

5. Other than PPA - Minor

Sections B & C: These short sections have no testable information.

Section D: This section has 2 items that might be worth memorizing:

Legislative Requirements for Rates:

• just and reasonable (you can't charge people with red hair less than people with blond hair! 😝)
• solvency of insurer cannot be impaired (you can't charge rates that don't cover your expenses)
• not be excessive in relation to the financial circumstances of the insurer (you cannot build in a profit margin of 30%! 😝)

Legislative Requirements for Risk Classification:

• just and reasonable (you can't create a separate class for tall people 😝)
• predictive of risk
• distinguish fairly between risks

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Section E: Major Filings

Introduction

This section contains most of the testable information. Broadly speaking, the 23 subsections in Section E can be grouped as shown below. These groupings are not given in the reading but I find it helps my understanding to "chunk" information in this type of manner. Spend a moment scanning this list then take a look at Alice's proposed exam questions further down: (See also this forum post)

• Loss-Related Information

1. Loss Data

2. Loss Development

3. Loss Trend

4. Treatment of Large Losses

5. Catastrophe Provision

6. Automobile Insurance Reform Adjustment Factors

• Premium-Related Information

7. On-Level Premium

8. Rate Group Drift

• Other Standard Components of Rate Changes

9. Finance Fees/Charges

10. Tax Rates

11. Expenses

12. Underwriting Profit Provision

13. Investment Returns and Cash-Flow Rate

14. Credibility

• Important Types of Changes within a Filing

15. Indicated Rate Changes and Proposed Rate Changes

16. Territory, Class, Driving Record and Other Differential Changes

17. Territorial Definition Changes

18. Vehicle Rate Group Changes

• Miscellaneous Information

19. Predictive Models

20. Usage-Based Insurance Pricing (UBIP) Programs

21. Introduction of New Discounts/Surcharges or Differentials

22. Dislocation and Capping Premium Increases (Rate Capping)

23. Auto Insurance Manual Pages

Alice's Proposed Exam Questions

Advice from me and Alice: We couldn't think of any good way to study this reading because there are just too many disconnected facts. So we pretended we were on the exam committee and just made up what we thought might be good exam questions. Playing make-believe is so fun! If Alice were taking this exam again, she would just memorize the answers to these questions then call it a day. If you can think of a better way to study this junk, let us know!

General Information

General Information: Identify 5 items of required information in an Ontario major rate filing from the list of 23 items above. (Select only 1 item from each of the 5 categories.)

• Many answers are possible. Here's what Ian-the-Intern chose:

1. Loss Data
2. On-Level Premium
3. Finance Fees & Charges
4. Indicated & Proposed Rate Changes
5. Usage-Based Insurance Pricing (UBIP) Programs (if applicable)

Loss-Related Information

Section 1: Identify 2 requirements for loss data in an Ontario rate filing.

• must be specific to Ontario
• must be at the major sub-coverage level such as:

→ TPL - bodily injury

→ TPL - property damage

→ TPL - direct compensation - property damage

etc...

(Valuation data for loss reserving purposes may not satisfy this requirement.)

Section 4: How long a period must be used in estimating the large loss provision and why?

• No specific numbers of years but it should be long enough to minimize statistical variations.

Section 6: Do rate filings have to show Automobile Insurance Reform Adjustment Factors?

• Yes, must explain how loss data has been adjusted for insurance reforms for the effective period of the rates.

Premium-Related Information

Section 7: Do rate filings have to use on-level premiums?

• Yes, of course!

(An exam question may try to trick you by giving you both raw premiums and rate changes so you would have to calculate on-level premiums before using the premiums in your calculations.)

Other Standard Components of Rate Changes

Section 9: Do finance fees collected through premium instalment plans have to be included in premiums?

• Yes

Important Types of Changes within a Filing

Section 17: What conditions must be met if an Ontario insurer is proposing to make territorial definition changes?

• Ontario ≤ 55 territories, City of Toronto ≤ 10 territories
• all territories must be contiguous (you can't have a territory that isn't touching the others)
• new territories require 3 years of insurer data and 2,500 annualized average vehicles over the period
• new adjoining territories do not vary by more than ±10%
• territory definitions are the same for all coverages
• large claims should be capped in establishing territorial rates

There is 1 more requirement but it is not really explained in the source text. Here it is:

• When territorial definitions are changed due to the movement of Forward Sorting Areas (FSAs), the +/-10% for the proposed territory is measured based on the weighted average of the insurer’s current territorial differentials for each coverage as well as overall.

A possible exam question would be to give you the details of a rate filing with proposed territory changes then ask whether the filing meets FSCO's requirements. For example, if the rate filing contained 58 territories, you could say right away that FSCO's requirements are not met because the maximum number of territories in Ontario is 55.

Miscellaneous Information

At one time there was a syllabus reading on UBIP (Usage-Based Insurance Pricing) but it has been removed from the syllabus so I'm assuming the exam committee decided it wasn't an important topic. The article has been archived but you can still access it using the link FSCO.UBI. It might even help to take 2 minutes to read the Study Tips for that old FSCO.UBI article. Anyway, take a quick look at the UBIP information below.

Section 20(a) - UBIP: What items must be included in an initial UBIP filing? (Usage-Based Insurance Pricing)

• what driving behaviours are being measured (Ex: acceleration or deceleration rates, speed, distance travelled)
• how this data is measured (Ex: frequency, occurrence, relevant thresholds)
• how this data is normalized and categorized for rating purposes (Ex: total occurrences, averaged)
• loss data to support proposed UBI discount (Ex: claim severity, claim frequency and loss costs)

Section 20(d) - UBIP: Identify UBIP program costs in a rate filing.

• start-up costs for the UBIP program
• ongoing expenses such as:

→ data transfer and analysis

→ marketing

→ third party provider contracts

Section 21(c): Once a new discount is approved, how long must the insurer continue to offer the discount and why?

• 3 years - to ensure stability in the market before the insurer can withdraw it from its risk classification system.

Section 22: When is rate capping not permitted?

• base rate changes only
• broker portfolio transfers or acquisitions
• premium decreases (negative capping)

Section F: Rate Filing Checklist for Major Filings (not on syllabus)

• These checklists come after page 14 and are therefore not covered within the syllabus for this reading.

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