Unintended M&A consequence: A shrinking carrier residual market

The number of carriers supporting Canada’s residual market for high-risk auto insureds is shrinking thanks to a combination of player withdrawal and mergers and acquisition activity.

Tackling this issue is one of a number of priorities for the Facility Association as it embarks on a new five-year strategic plan. The Facility Association Residual Market (FARM) is going to need some immediate attention, Saskia Matheson, president and CEO of Facility Association, told Canadian Underwriter.

The FARM provides a residual automobile insurance market for owners and operators of motor vehicles who are required by law to have insurance, but who may be having difficulty obtaining it. The market covers risks in Alberta, Ontario, Nova Scotia, Prince Edward Island, New Brunswick, Newfoundland and Labrador, Yukon, Northwest Territories, and Nunavut.

Member insurers of FARM share the results of the residual pool according to their participation ratio, which reflects their share of the market by jurisdiction, business segment, and accident year.

Currently, three players are in the residual pool: The Co-Operators, Intact and RSA Canada. However, The Co-Operators is withdrawing as a service carrier at the end of the year. Intact has a deal pending to buy RSA. Assuming the Intact-RSA deal is approved, that would leave just one — albeit large — participant left.

The FARM will need a redesign, Matheson said.

“Obviously this is an area where we’re focusing first to ensure that we have that long term resilience,” she said in an interview. “That single servicing carrier is Intact, which is a very solid provider. But, obviously, we need to manage the risk and we need to look at this and be on top of this issue. We need to look at both the benefits and the risks and make sure that we have plans in place.”

FA is the group responsible for finding auto coverage for those who can’t get it anywhere else due to being deemed a high risk.

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“Our approach is to look at the operating model [and] make sure we understand how the product is being delivered to the customers so that we can have a control in place for every risk that comes about because of this,” she said.

A working group will explore options to make sure FA can fulfill its obligations. “And you can imagine that item is very high on our list of to-dos for the year,” Matheson said.

Another priority is around data governance and collecting only the most necessary of data. In this area, FA uses the term MVP, for minimum viable product, to highlight the importance of getting only what is needed.

“Everybody wants more data,” Matheson explained. “But data also has obligations and risks around it. And so what we want to do is collect the data that is absolutely necessary to do the job that we need to do, and we don’t collect any more data than that unless there’s a good business case to be made for the industry.”

It’s a different point of view than you may hear from most P&C insurance professionals, she said. “I think those of us in the industry love data. So there’s always this temptation to want to get more.”

As for leveraging that data, FA is focused on outsourcing a platform and bringing in experts to manage those platforms. A common debate in the insurance industry is whether or not to build from within or source from a third party. The group made the decision to go to a third party.

That’s because FA knows what it’s good at (governance), and what it’s not (technological innovation), as Matheson pointed out.

“We’re a governance organization, we’re not a technology innovation organization. The best way we can ensure what we do is delivered through the best technology is to make sure we’re dealing with people who are providing the best technology, and not try to do it ourselves when that’s not our strength,” she said.

FA also wants to focus on outreach and raising its visibility with regulators and sister organizations such as the General Insurance Statistical Agency (GISA). The group wants it known that they have information that can help the industry and stakeholders.

Another area of focus is to provide insight to industry and regulators. FA wants to be in a position to flag upcoming risks, Matheson said.

Feature image by iStock.com/akinbostanci