April 8, 2010 by Canadian Underwriter
The New Brunswick Insurance Board has allowed the inclusion of a cost of capital provision in Facility Association (FA) rates, the second province in Canada to do so, following the lead of Prince Edward Island.
Buoyed by the decision of the New Brunswick Insurance Board, FA is now continuing to pursue the inclusion of a cost of capital provision in other jurisdictions.
The Nova Scotia Utility and Review Board held a similar hearing on this issue on Mar. 11, and FA says it is “hopeful of a similar rational outcome from that board.”
Including all cost elements — including a cost of capital provision — in FA rates is an important part of making sure FA rates are not competitive with those of the voluntary insurance market.
The facility market is designed to be a type of “market of last resort,” making auto insurance available to all drivers, including those considered to be high-risk.
Drivers placed in the facility market are typically there because they cannot find insurance in the voluntary market. Consequently, low FA rates mean higher-risk drivers in the facility market are effectively enjoying subsidized rates that aren’t commensurate with the risk they represent.
“Virtually all stakeholders know that it is essential for market stability and consumer choice for Facility Association rates to be, in a general way, at the top of the market,” FA chairman Martin Beaulieu said in a speech at FA’s 2010 annual general meeting in Toronto.
“It is difficult, however, to achieve that appropriate market position when the rate indication is not permitted to include all of the elements of the risk transfer.
“The NBIB recognized that not including a cost of capital provision in the Facility Association rates was in fact providing a subsidy to the higher-risk driving element insured through the Facility Association and rendered a decision allowing the inclusion of a cost of capital provision in Facility Association rates.”