FSCO.PPA

This paper is painful to study. It is specific to Ontario auto insurance and is bascially just a detailed list of filing requirements. Ugh! But it comes up on the exam fairly often. In terms of rank, this is the first of four FSCO papers. The other important one is FSCO.UBI. Then well down the list in terms of rank are FSCO.664 and FSCO.Covgs. Rounding out this Ontario grouping is one of the new papers, Marshall.Benefits, but it's an easy one.   Forum

Pop Quiz

Describe UDAP (Unfair or Deceptive Acts or Practice.)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• risk classification elements (rating variables) that are prohibited in Ontario [Hint: C-CONES]
• requirements to file using simplified guidelines
• regulatory approval processes used in Ontario
• treatment of loss data when ceding to RSP, FARM, or a reinsurer
• requirements regarding changes in territory factors in Ontario

Top Questions ← Questions you absolutely need to know!

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #4)	regulatory requirements: - territorial changes	simplified guidelines: - requirements	prohibited variables: - C-CONES	(d) & (e): FSCO.UBI
E (2018.Fall #6)	prohibited variables: - C-CONES	FSCO.UBI	FSCO.UBI	prohibited variables: - C-CONES
E (2018.Spring #2)	loss trend period: - length	filing data: - internal/external	regulatory requirements: - territorial changes	certificate of the actuary: - when required
E (2017.Spring #7)	see Dutil.FA	(iv) ceding (RSP/FARM): - loss data treatment	see Dutil.FA
E (2016.Fall #2)	prohibited variables: - C-CONES	prohibited variables: - C-CONES	prohibited variables: - C-CONES	prohibited variables (d)&(e): - C-CONES
E (2016.Fall #4)	see KPMG.RegOv	simplified guidelines: - requirements
E (2015.Fall #1)	ceding (re/RSP/FARM): - loss data treatment	regulatory requirements: - territorial changes	OUTDATED: - group discount	(d) winter tire discount (e) monthly payment plan1
E (2014.Fall #3)	ON approval processes: - types (2) & subtypes (2)	simplified guidelines: - ok or not ok	FSCO approval: - reasons for non-approval
E (2013.Fall #8)	prohibited variables: - C-CONES	prohibited variables: - C-CONES	prohibited variables: - C-CONES

¹ see FSCO.664 for a link to the FSCO webpage with the answer to this question. Note, however, that the answer in the examiner's report is outdated.

In Plain English!

Intro

This reading is very detailed (ugh!!!), but is indispensable if you're submitting an auto filing in Ontario. (Luckily, you're only responsible for about half of it: p1-5, p11-20, appendix B2) Obviously, you can't memorize this whole reading - you have to ask yourself why the reading is on the syllabus/

Question: what is the broad idea that this reading is trying to communicate

FSCO's own website explicitly states that its mandate is to...

...provide regulatory services that protect the public interest and enhance public confidence in the regulated sectors

If I were creating exam questions, I would ask questions that specifically relate to this idea of protecting the public interest. (I might touch on the technical details of submitting a filing, but those are things you can always look up when you need them.)

Anyway, let's put this paper in context relative to the rest of the syllabus. In the summary at the top of the page, I mentioned the other Ontario related papers:

• FSCO.UBI on usage-based insurance
• FSCO.664 on...um...there doesn't seem to be a clearly defined purpose here (other than 1 very detailed question on monthly payment plans from 2015.Fall)
• FSCO.Covgs which is just s dictionary of coverage definitions and basic insurance terminology
• Marshall.Benefits which discusses current challenges in the Ontario auto product (its benefits, and the delivery mechanism for those benefits)

Note that these are part of a larger grouping on the topic of auto insurance. Also included in that grouping are:

• AB.TNC on ride-sharing (Uber, Lyft), but specifically for Alberta
• ICBC.Affordable on the current challenges facing BC's public auto insurance system

Note that in contrast, Ontario has a private auto insurance system, although it's heavily regulated.

Prohibited Risk Classification Elements

• This strikes me as a crucial element in regulation. This is the first BattleCard for this reading, and it lists the following examples of prohibited risk classification elements: [Hint: C-CONES] (shout-out to xQEDx for this yummy hint!)

Claims where fault ≤ 25%

  –

Credit history

Occupation (some exceptions)

Net worth

Employment

Salary

See E (2016.Fall #2)

• It would be extremely unfair if insurers were permitted to use net worth as a risk classification element. They could skim the rich applicants, then charge them high rates because they know it may not make much difference to them whether they're charged $1,000 or $2,000 for their policies. In other words, the insurers could skim applicants with a low elasticity of demand, then jack up renewal rates without fear of losing the customer.
• A company I know of in the U.S. did exactly this, although in a more under-handed way. Using analytics, they identified a group of customers with low elasticity of demand, then targeted them for relatively high increases on renewal, knowing that most of them wouldn't question the increase. It worked. Good for the stockholders. Bad for the customers. So you see, it's all a game, and the regulators are generally on the side of the public.
• Memorize these prohibited risk classification elements!

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Approval Process

It's reasonable for the exam to ask a high-level question on the approval process, although this would still be specific to Ontario. Note that Ontario offers 2 main types of regulatory approval:

• prior approval (Ex: PPA, FA)
• file & use (Ex: other than PPA, commercial)

If the insurer makes significant changes to rates or the risk classification system, they must do a full filing. But if changes are relatively minor, they may only have to do a simplified filing. This seems perfectly reasonable. It saves the both the insurer and regulator time and money, and that's good for the customer too. Win-win-win!

Question: when is it acceptable in Ontario to use simplified guidelines (as opposed to a full filing)

descriptive rules:

• new discounts are ok (except UBIP) IF identical to another insurer
• can't change rating algorithm EXCEPT for new discounts

numerical rules:

• changes to all coverages combined ≤ 0%
• changes to territorial base rate & relativities between (-15%, 5%)
• all individual changes < 15%

The take-away from this is that there is a distinction between major changes and minor changes, and that these distinctions are important when an insurer is submitting a filing. See:

E (2014.Fall #3) - part(b)

There was an interesting question in the forum regarding a comparison between the simplified filing rules and the regular filing rules:

• simplified rules permit territorial changes within (-15%, 5%)
• regular filing rules permit territorial changes within (-10%, 10%)

So, a regular filing would not be approved if there were a territory with a -12% change. But a simplified filing would get approval. Seems wrong, doesn't it? There was a question in the forum about this. See the question and my answer here.

There was another more detailed question on the approval process that dealt with changes in territory factors. I think this was a hard question because you had to know to rebase the relativities. The examiner's report stated that nobody received full credit. (It actually feels more like a question from exam 5 than exam 6)

Question: what are the requirements for regulatory approval of territorial changes

3 conditions:

• direction of [proposed change] must be the same as direction of [indicated change] (both up or both down)
• magnitude of [proposed change] must be less than magnitude of [indicated change]
• magnitude of [proposed change] must be in the interval (-10%, 10%)

My judgment is that a question like this (where you have to know to rebase the relativities) would not be asked again. It's specific to Ontario, which is not necessarily a problem, but it's just too detailed. This problem appeared here:

E (2015.Fall #1) - part (b)

Now, a much easier version of this problem (where they rebased the relativities for you) is here (see part c):

E (2018.Spring #2)

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Appendix B2

This appendix shows you what the Certificate of the Actuary looks like. A good exam question would be to ask what items the actuary needs to certify. (There are also certain certifications that an officer of the company may have to provide.) This is covered in the BattleCards below.

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The Rest of the Reading

I don't have a lot more to say about the rest of the reading. I've gone through it and put what I thought was important into the BattleCards. I don't claim that the BattleCards have everything that might appear on future exams, but unless you're willing to essentially memorize 15-20 pages of regulations, you'll have to use your judgment on what to learn.

• I'll add items to the BattleCards based on future exams, but I think it's likely that future questions will be similar to past questions.
• If not, you'll have to take an educated guess based on your general knowledge. Taking educated guesses is a very useful skill to develop!

Here is a quiz on a few things on the topic of actuarial support:

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And here are few old exam questions. They're from 2013 & 2014, but I think they're pretty good questions. (Note that one of them is OUTDATED, however, since it asks about group discounts, which have since been removed from the syllabus.)

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BattleCodes

Memorize:

• prohibited risk classification elements
• requirements to use the simplified guidelines
• ...and unfortunately all the other BattleCards as well. (Sorry, it's hard to predict what those darn examiners will ask from this reading, but for at least some of the old exam questions, you can take an educated guess. It is simply not possible to memorize all the little filing details.)

Conceptual:

• Do you understand the purpose of this reading?
  • Obviously, you need it if you're submitting a filing in Ontario.
  • Also, you should understand that its overall purpose is to protect policyholders (this is FSCO's stated mandate)

Calculational:

• (2015.Fall #1b) was a pretty darn tough calculational question.
  • You had to know to rebase the relativities before calculating the changes. This feels more like a pricing question from Exam 5.
  • I don't think they'd ask it again, because the scores on that question were so abysmal, but you if you have some extra time, it can't hurt to review the solution in the examiner's report.
  • What they might ask is a more general question on the approval requirements for territorial changes. (This is covered in the BattleCards.)

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  Forum

POP QUIZ ANSWERS

UDAP: (Unfair or Deceptive Acts or Practices)

• In the context of FSCO, it refers to Ontario Regulation 7/00 of the Insurance Act.

If you google UDAP, you will see that many jurisdictions in the U.S. also have something called UDAP. An important function of government is to regulate the private sector so that the profit motive doesn't overpower the public good.