FSCO now using 11% return on equity benchmark for auto insurance rate filings

The Financial Services Commission of Ontario has lowered its return on equity benchmark for auto insurers’ rate filings in the province to 11%, from the previous 12%.

The move comes following a review by two consultants, Dr. Fred Lazar and Dr. Eli Prisman, both part of the Shulich School of Business at York University.

That 75-page review, which used the capital asset pricing model to make several recommendations, was completed in June and FSCO posted a notice on its website of the new benchmark on Aug. 23.

Based on the report’s analysis and recommendations, FSCO has settled on the 11% benchmark. 

The ROE benchmark, first introduced in 1988, hadn’t been updated since 1996. The 2011 annual report from the auditor general of Ontario recommended that the benchmark be reviewing, and the Ontario government endorsed that idea in its 2012 budget.

“The ROE benchmark is one of many variables used in the rate review process. Hence, it is important to understand that, a change of 100 basis points in the ROE benchmark (e.g. from 12% to 11%) could result in less than a 1% change in average premiums,” the consultants’ report notes.

FSCO has also updated filing guidelines for auto insurance rate and risk classification system filings to reflect amendments made to the Automobile Insurance Rate Stabilization Act, 2003 (AIRSA), which went into effect Aug. 16.

Part of those amendments sets out the government’s goal of a 15% average rate reduction for Ontario drivers within two years, which it formally announced last week. Based on the government’s plan, rates should be reduced an average of 7% by August 2014.

“Section 2.1 (4) of AIRSA requires every insurer when filing an application to propose rates and a risk classification system that contribute adequately to the achievement of the 15% industry-wide target,” according to FSCO.

“Under section 2.1 (6), an insurer’s rates and risk classification system are presumed not to be just and reasonable if they do not contribute adequately to the achievement of the target.”