The Financial Services Commission of Ontario (FSCO) has received automobile insurance rate and risk classification applications proposing the establishment of a large number of territories in urban areas. The purpose of this bulletin is to advise insurers that FSCO will be developing guidelines for territorial rating to ensure that consumers are protected and that the statutory standards within the Insurance Act (the Act) are satisfied.
The statutory standards under the Act for risk classification systems are that the risk classification system must be just and reasonable, be reasonably predictive of risk and distinguish fairly between risks. Rates must be just and reasonable, and not be excessive in the financial circumstances of the insurer, or impair the solvency of the insurer.
The current Statistical Plan requires that statistical information be provided on 19 territories in Ontario. While most insurers continue to use these statistical territory definitions for rating purposes, there has been a trend by some insurers to have more finely defined territories, especially in urban areas. There has been an increased emphasis on defining territories by postal code and capturing data on that basis for rating purposes. As there is no industry data at the postal code level and for non-traditional territories, this makes it more difficult to determine appropriate territorial rates.
Traditionally insurers use the location where the vehicle is garaged as the basis for determining territorial rating. While it would be more predictive of risk, there are practical considerations in determining where the vehicle is used in order to assign a territorial rating. Apart from these difficulties, particularly in urban areas, the current use of territory may have a less logical connection to the actual loss exposure.
There are also concerns about the effects of increasing the number of territories. As the number of territories increase and territories become smaller in size, there is the potential for premium instability in the smaller territories. In addition, there may be significant disparities in rates between adjoining territories. Any increase in the potential for unfair rate discrimination would not only be problematic but unacceptable.
In certain cases, insurers have attempted to group various geographical areas based on the commonality in loss costs despite the areas being non-contiguous. Where the geographical areas do not adjoin one another in a territory and cannot individually generate actuarially sound rates, there appears to be no legitimate reason to group the areas to form one territory.
As a result of these issues, FSCO has engaged a consulting firm to review the issue of territorial rating and provide recommendations on appropriate guidelines to assist FSCO in making its determination on rate and risk classification applications. Stakeholders will be given the opportunity to comment on the recommendations of the consulting firm.
Until the consultant’s report is received and the consultation process is complete, FSCO will be looking to insurers to keep within the following parameters:
- no more than 49 territories in the province (the maximum number approved to date);
- no more than 10 territories in the City of Toronto (the maximum number approved to date);
- no territories which are comprised of non-contiguous areas unless there is adequate data generated for each individual area to support a distinct territorial classification; and
- rates between adjoining territories within urban areas should not vary more than 10%.
As always, FSCO expects insurers to continue to abide by the rate and risk classification system approval process. Any proposed segmentation of existing territories or the proposed creation of new territories must be appropriately supported and filed with FSCO for approval.
Should you have any inquiries regarding this Bulletin, please contact your rate analyst in the Automobile Insurance Analysis Division at FSCO.
Chief Executive Officer and
Superintendent of Financial Services
March 17, 2000