The latest province to approve Facility Association’s profit provision
Facility Association (FA) announced the Newfoundland and Labrador rate board has approved the use of a profit provision for members’ capital. It is the last province to do so, said FA President and CEO Saskia Matheson.
“FA member companies support the FARM [facility association residual market] and the guarantee of market availability through capital, and now every FARM rating jurisdiction recognizes the need to provide a fair return to the members for that support,” Matheson said during FA’s annual general meeting earlier this month.
In an interview with Canadian Underwriter, Matheson explained how the profit-provision structure works, and why Newfoundland’s rate board has now approved it.
“That premium that we write through FARM is supported by capital that is provided by the industry members. It is part of the way FA is structured.
“What we do in order to compensate members for that capital — so just like in their own business — we put a provision for return on that capital within our rates, just like a company would on their own [rate]. We use 12% as the target,” Matheson explained.
Newfoundland and Labrador was the last province to approve FA’s profit provision structure after recently amending their legislation around automobile insurance rating.
“There used to be a specific part of their legislation that said Facility Association was not allowed to include profit provision…when the legislation changed in 2019, they removed that provision,” Matheson said.
Based on FA’s institutional knowledge, Ontario was the first province to approve this structure in 2013. Other provinces followed in subsequent years.
“We have been working hard and collaboratively with the Newfoundland rate board to try and have this implemented. It’s reflective of what’s happening in other jurisdictions throughout Canada, so it’s been a work in progress for a number of years,” added Derek Tupling, VP of government relations and communications.
Matheson said this profit provision works in concert with FA’s goal to be ‘cost neutral.’
“The Facility Association writes that [high-risk] business and we want its impact to be small, and we also want it to be neutral. It shouldn’t cost the industry,” she explained. “In order for it to be neutral, it needs to return that base level of profit on the capital behind it.”
“We are doing that so the industry is not subsidizing this nonstandard business in Newfoundland and/or other provinces aren’t subsidizing [it],” Matheson said. “Each province is carrying its own weight for its own business.”
Somebody is always picking up that price, she said. But the profit provision makes it so that it doesn’t fall on Newfoundland drivers. “Part of the truth of insurance is, if one person isn’t paying their weight, somebody else is always picking up the cost.”
Feature image by iStock.com/FedevPhoto
