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This paper is a puzzle because it bears little resemblance to the types of questions of the exam. It is heavily tested, but the best way to learn about FA is to go the FAQ section of the FA website, and to study old exam questions. (The computational question, #7 from Fall 2015, would be very difficult to answer based on the reading. You would probably need to be familiar with those computations as part of your work.)   Forum

Pop Quiz

The whole idea behind insurance is to spread (or share) risk. An auto insurance company spreads the risk among everyone who buys a policy from them. But auto insurance companies may also be insurance customers as well as providers.

Question: What type of company treats an insurer as a customer?


Based on past exams, the main things you need to know (in rough order of importance) are:

  • FARM v RSP: operational differences
  • details of RSP (Risk-Sharing Pool) operations, especially Ontario
  • general description of FA (Facility Association)
  • application of RSP concepts to other types of insurance such as flood
  • calculations of loss ratios related to RSPs
reference part (a) part (b) part (c) part (d)
E (2018.Spring #12) FA:
- general description of FA
- operational differences
- eligibility
- ON transfer limits
E (2017.Fall #13) FARM v RSP:
- operational differences
E (2017.Spring #7) FARM v RSP:
- purpose
- operational differences
- 5 classes of business
E (2016.Fall #10) FARM v RSP:
- operational differences
- eligibility
- transfer of premium
- ON transfer limits
E (2016.Spring #9) FA:
- general description of FA
- 3 types of mechanisms
- operational differences
E (2015.Fall #7) calculate:
- company LR on RSP
- total company LR
- company LR (no ceding)
- effect on company LR
E (2015.Spring #12) RSP:
- profitability
E (2014.Fall #13) FARM v RSP:
- operational differences
- ON transfer limits
- apply RSP concepts
E (2014.Spring #9) rate freeze:
- impact on availability
rate freeze:
- solution to part (a)
E (2013.Fall #7) scenario:
- justify ROE
E (2012.Fall #18) can risk be ceded:
- ON RSP...
can risk be ceded:
- QC RSP...
can risk be ceded:
- QC RSP...
can risk be ceded:
- (d&e) ON RSP...

In Plain English!

Source Readings: BattleActs covers all material from past exams. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend at least little time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be much more efficient.
This is the last time I'm going to remind you about the source readings. My intuition tells me you could probably pass the exam without ever looking at the source readings. Still, Alice the Actuary thinks it gives you around 10-20% extra on your chances of passing. In other words, it could turn 50-50 odds of passing into 60-40 in your favour. (The specific increase is really just a guess, but you get the idea.)


The #1 fact to memorize about FA (Facility Organization) is:

Goal of FA: to ensure (auto insurance availability) for (all owners & licensed drivers) unable (to obtain coverage through the voluntary market)

Note my use of parentheses above. These are not really parenthetical statements - I sometimes use parentheses to separate and highlight phrases. If you can break a long sentence into chunks, it will be easier to grasp the meaning, and also to remember it.

A couple of other cute little factoids about FA are:

  • FA was created by the insurance industry
  • FA is an unincorporated non-profit of all auto insurers

Now, there are 3 types of risk-sharing mechanisms administered by FA:

FARM (Facility Association Residual Market)
RSPs (Risk-Sharing Pools)
UAF (Uninsured Automobile Fund)

If you want a good overview of what Facility Association (FA) is all about, look at E (2016.Spring #9abc).

The answer to part (a), the origin, role, and goal of FA is given in the first 3 BattleCards. Part (b) asks for two risk-sharing mechanisms that are part of FA. There are three, of course, but the exam clearly wanted you list FARM & RSPs.

Participation Ratios and Sharing

The bullet point list at the top of page 4 in the Dutil paper is a little confusing. It was asked on E (2017.Spring #7c).

The concept behind everything in FA is that losses are shared by everyone. But it isn't one big pool. There are 5 separate categories of pools that all operate independently. In the BattleCards, I've put these categories in my own words as follows:


(1) PPA (Non-Fleet, Non-Pool)
(2) all auto EXCLUDING (1) and RSPs


(3) RSP in Ontario (except cat claim funds for ON accident benefits from insolvent insurer)
(4) RSPs in AB, NB, NS

UAF: (Uninsured Automobile Fund)

(5) UM claims + the ON cat claim fund excluded from (3)

Points (1) and (2) refer to FARM pools. I think of (1) as being "normal" private passenger except with really bad drivers. (Not a fleet of taxis with bad drivers, for example.) Point (2) would then include commercial auto, which I suppose could be a fleet of taxis.

Point (3) refers to the Ontario RSP. (It specifically excludes catastrophic claim funds for Ontario accident benefits from an insolvent insurer.) Point (4) refers to the RSPs in AB (both grid & non-grid), NB, and NS

Point (5) refers to the UAF (Uninsured Automobile Fund) and also tosses in the ON cat claim fund that was excluded from point (3).

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FARM versus RSP

Part (c) of (2016.Spring #9abc) (see above) is a favorite, and has appeared on 3 previous exams. You're asked to compare and contrast the mechanisms in your answer to part (b), FARM & RSP, with respect to:

  • risks insured
  • U/W and pricing practices

The answers are given in the mini BattleQuiz. Just memorize them. But you should know that there are actually seven, now six different areas where FARM and RSP can be compared. My memory trick to remember those areas is: RA(CC)(P.clms) (I hear this in my head as: rack-p dot claims)

R - Rates
A - Admission (or risks insured)
C - Customer knowledge
C - # of Customers placed
C - Coverage requirements 1
P - Participation ratio
clms - U/W and claims administration

1 Note that the answer in the BattleCards was based on the examiner's report answer to E (2014.Fall #13a). (See below for more about this.)

After you memorize what these 6 areas of comparison are, you then have to learn what the actual differences in mechanisms are between FARM and RSP. It's not hard - just a lot of memorization - but this is one of the more important readings because anyone working for an auto insurance company will have to deal with FA.

About (2014.Fall #13a):
Note that the examiner's report for (2014.Fall #13a) seems to contain an error regarding the coverage requirement difference. The official answer is that FARM must have the minimum auto coverage whereas the RSP can cede any coverage. This is unclear, and may even contradict the text near the top of page 5, which states that risks transferred to the RSP must have the minimum third party liability statutory limit. I have to assume the examiner's report is in error. Unfortunately, errors in examiner's reports are rarely corrected. (I've also noticed that there haven't been any questions since 2014.Fall regarding differences in coverage requirements.) The text states:
FARM requires statutory minimum auto coverage in that jurisdiction (page 2, paragraph 2)
RSP: requires minimum TPL (Third Party Liability) statutory limit in the applicable province (bullet point 3 near the top of page 5)
Now, a policy ceded to the RSP must have already passed the ceding insurer's U/W standards, which means it must have the minimum statutory requirements in that jurisdiction. The descriptions above are really the same, just different wording. So it seems there is no difference between FARM & RSP regarding coverage requirements, at least based on the Dutil reading. (If on the exam you're asked to list differences between FARM & RSP, focus on the others and avoid saying anything about coverage requirements.)

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A Game Insurers Play

If you are an auto insurer, there is a way you can get other auto insurers to subsidize your losses!

  • The trick is to realize that losses in the risk-sharing pool (RSP) are shared among all participating insurers. The sharing is in proportion to the market share of non-ceded business, as measured by (T.V.PPA.NF.TPL) direct EE. (Total, Voluntary, PPA, Non-Fleet, Third-Party-Liability direct Earned Exposures)
  • To win at this game, you have to cede policies to the RSP that have a higher loss ratio than the RSP average.

That's it! But it's a zero-sum game because if you win, someone else loses. Are you smarter than the competition??!! There are some rules, however, that must be followed. For example:

  • There are transfer limits on sending risks to the pool (Example: For Ontario the transfer limit is 5% of voluntary, PPA, non-fleet written exposures.) This prevents insurers from simply ceding all new business to the pool then cherry-picking the profitable renewal business in the following year.
  • The cession ratio may be set at less than 100% (Example: 85% in Ontario). This prevents insurers from simply off-loading the consequences of poor U/W practices - they have to keep 15% of the risk.

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A Bloom's Taxonomy Question

E (2014.Fall #13c) is a question about flood coverage that applies the concepts of FA's RSP. It was only 0.5 pts, but it was actually a pretty good question. I can see them asking this sort of question again. The idea of applying these concepts to flooding is particularly relevant given climate change and the increasing risk of severe flooding.

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Explanation of (2015.Fall #7)

E (2015.Fall #7) was a really hard calculational problem. I have mixed feelings about this question: It's good question, but there was nothing in the reading to prepare you for it. Given enough time, you could figure it out. Indeed, if you work with FA pricing as part of your job, you may already be familiar with this sort of calculation But if you had to figure it out from scratch, having no knowledge of FA other than Dutil's reading, you would be unlikely to finish it.

My judgment is that they will not ask such a question again, or if they do, it would likely be an easier version. Nonetheless, here is the full solution:

Given Info

  • You are given the following data for the Nova Scotia RSP:
    • Provincial Expense Allowance (PEA) = 25%
item Company A (notation) value Province Total (notation) value
Direct EE NOT ceded to pool Co.EE(not ceded) = 150 Prov.EE(not ceded) = 1,000
Direct EE CEDED to pool Co.EE(ceded) = 20 Prov.EE(ceded) = not needed
Direct EE total Tot.EE = 170 Tot.EE = 1,500
---- ---- ---- ---- ----
Premium NOT ceded Co.EP(not ceded) = 500 Prov.EP(not ceded) = not needed
Premium CEDED Co.EP(ceded) = 50 Prov.EP(ceded) = 750
Premium Total Tot.EE = 550 Tot.EP = 1,750
---- ---- ---- ---- ----
Losses NOT ceded Co.IL(not ceded) = 300 Prov.IL(not ceded) = not needed
Losses CEDED Co.IL(ceded) = 40 Prov.IL(ceded) = 1,000
Losses Total Tot.IL = 340 Tot.IL = 2,000

Part (a)

  • Question: Calculate the LR for company A on their share of the pool.
  • Their share of the pool refers to their participation ratio or PR. This is essentially company A's market share.
PR = Co.EE(not ceded) / Prov.EE(not ceded)
  • So PR = 150 / 1,000 = 15%
  • Now, since LR = losses / premiums, we need the appropriate losses (for the numerator) and appropriate premiums (for the denominator)
losses = Prov.IL(ceded) x PR
  • So, the appropriate losses are a proportion of the the losses that the province suffered (total losses ceded by all companies to the province.)
  • losses = 1,000 x 15% = 150
  • But the premiums are a combination of 2 items:
premiums = Prov.EP(ceded) x PR + Co.EP(ceded) x PEA
  • The first item is calculated the same way as the losses - but as proportion of the premiums ceded to the province: 750 x 15% = 112.50
  • The second item, however, is an expense allowance paid to the insurer for servicing the ceded policies: 50 x 25% = 12.50
Putting this altogether gives: LR = 150 / (112.50 + 12.50) = 120%
  • Personally, I found it hard to wrap my head around all the data and what you need to do with it: company versus provincial data, ceded and non-ceded amounts, what needs to be multiplied by what, and so on. You need to practice this problem several times to understand it thoroughly - especially if the given information is organized differently.
  • Exam tip: Memorize the PR formula and the LR formula. Then if they give you another problem like this, just do the best you can. At least you'll get partial credit for knowing the formulas and getting part-way through.

Part (b)

  • Question: Calculate the total LR for Company A. (This includes their non-ceded business AND their share of the RSP from part a)
  • If you fully understand part (a), then part (b) is much easier. Again, we start with the general formula for loss ratio: LR = losses / premiums. We just have to figure out the appropriate losses and premiums.
    • losses: Obviously, this must include the Company A's non-ceded losses. But we must also include Company A's share of the RSP losses that we calc'd in part (a).
total losses = Co.IL(not ceded) + losses from part (a)
  • So, losses = 300 + 150 = 450
  • premiums: Same reasoning as for losses - we must include Company A's non-ceded premium. But we must also include Company A's share of the RSP premium that we calc'd in part (a).
total premiums = Co.EP(not ceded) + premiums from part (a)
  • So, premiums = 500 + (112.50 + 12.50) = 625
The final answer is: Company A's total loss ratio = 450 / 625 = 72.0%

Part (c)

  • Question: Calculate the revised total LR for Company A assuming they chose NOT to cede any risks.
    • Ok, this is a really interesting question! You would certainly want to know this if you were in charge of pricing strategy of your company!
  • I'm sure you can guess the first step. Write down the formula for loss ratio: LR = losses / premiums.
  • TRICK: You have to recalculate some of the entries in the given table to reflect that Company A is no longer ceding any risks.
    1. New Company A ceded losses = 0 (obvious). New Company A non-ceded losses = 300 + 40 = 340
    2. New Company A ceded prems  = 0 (obvious). New Company A non-ceded prems  = 500 + 50 = 550
  • We will use each of these quantities in the LR formula. But, you also have to realize that even though Company A is no longer ceding risks to the pool, they still have to pay a share of the pool losses. That means you have recalculate the PR (participation ratio) for Company A.
    1. New Company A non-ceded exposures = 170
    2. New Province non-ceded exposures = old value (1,000) + exposures that Company A is taking OUT of the pool (20) = 1,020
So, the new PR = 170 / 1,020 = 16.67%
  • But, we're still not done. We still have to recalculate the new Province ceded premiums and losses. (This is what gets multiplied by the PR.)
    1. New Province ceded losses = old value (1,000) - losses that Company A is taking out of the pool (40) = 960
    2. New Province ceded prems   = old value (750) - prems  that Company A is taking out of the pool (50) = 700
  • Finally, we can calculate Company A's share of the pool losses and premiums (just like in part a):
    • Company A's share of losses = 960 x PR = 960 x 16.67% = 160
    • Company A's share of prems  = 700 x PR = 700 x 16.67% = 116.67
  • We now have all the pieces we need. (Use the 4 values in red font.)
revised LR for Company A assuming no ceding = ( 340 + 160 ) / ( 550 + 116.67 ) = 75.0%

Final Comment

Now that you've seen the solution, you can make your own judgment regarding the difficulty of this question and it's appropriateness as an exam question. But, I stand by my claim that it was just too hard!! At 3.5 points (out of 71.75) you have only 12 minutes to solve it.

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Here are some practice problems in PDF format. The first file is just a PDF of 2015.Fall #7. The others are similar but with random numbers as inputs.

2015 Fall #7

FA Practice 1 FA Practice 2 FA Practice 3 FA Practice 4



  • origin, role, goal of FA
  • 3 risk-sharing mechanisms that FA uses
  • operational differences between FARM & RSP: general areas of difference RA(CCC)(p.clms) as well as the specific differences within these areas
  • Note that the reading contains specific information about the 4 provinces where RSPs operate (ON, AB, NB, NS). There have been specific questions about ON, but those questions could have been answered from general knowledge. The AB pool is also discussed briefly in a separate reading: AB.TNC. The pools for NB and NS are relatively small and those BattleCards have been assigned a lower probability of appearing on an exam.


  • Can you apply the goal of FA (to ensure coverage auto insurance coverage to those unable to obtain it through the voluntary market) to other difficult-to-insure perils such as flood?


  • Calculate a loss ratio for:
    • company's share of pool
    • total company (including pool and non-pool business)
    • revised total assuming the company does NOT cede any risks to the pool

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A company that treats an insurer as a customer is a reinsurer. This is essentially what Facility Association is - a non-profit reinsurer for auto insurance companies.