Facilities Association asks Ontario regulator to include cost of capital in rate-setting process

Ontario bumped up rates for its private passenger auto insurance by 2% at last filing, but the rate change did not include a “cost of capital” provision that Facilities Association wants the provincial regulator to include.
In a report to the Insurance Brokers Association of Canada (IBAC), Facilities Association (FA) maintained its position that a cost of capital be included in the actuarial process to determine the province’s auto insurance rates.
Ontario’s insurance regulator, the Financial Services Commission of Ontario (FSCO), does not currently recognize the inclusion of the cost of capital in the rate-setting process.
“Cost of capital has always been a bone of contention for stakeholders and legislators alike,” FA noted in its annual report to IBAC. “The argument for the acceptance of this process will be ongoing and certainly one that will not be solved in the immediate future.”
FA says the cost of capital is necessary to ensure that rates set for the residual market are higher than those set for the voluntary market, so that the two markets don’t compete with one another on pricing.
Based on its cost of capital model, FA says Ontario auto rates for the residual market should have been set higher than 2%.
“We have developed our rates including a cost of capital provision,” Facilities Association noted in a paper submitted as part of FSCO’s mandatory five-year auto insurance review.
“However, despite the compelling logic of including such a provision (it is an actual cost so sound actuarial practice dictates its inclusion), FSCO continues to disallow its inclusion.
The disallowance of a cost of capital provision in our rates underlines the reality that we are in the hands of the rate regulator in terms of the prices that we charge.”
FA strongly recommended that it be part of FSCO’s mandate to ensure Facility Association prices are above those of voluntary companies particularly those that focus their marketing efforts on ‘non-standard’ risk profiles.
“If including a cost of capital provision in Facility Association rates is not seen to be a viable way of ensuring our rates are appropriately above those of member companies, then we suggest a mechanism be developed so that our rates are set with specific reference to the voluntary market,” FA says in its paper to FSCO.