FARM

olidude3121olidude3121
in Dutil.FA

How does FA assign a policyholder, unable to obtain coverage, to a specific insurer/service carrier?
After one is assigned, and losses are reported, is the private insurer (service carrier) only job to determine the claim amount and then notify FA to pay that amount? If so, do the service carriers get reimbursed for the expenses (like in a RSP) or is this the cost of being part of a Residual Market?
Why would one not want to be insured under FA? (I assume that's part of the reason the policyholder has knowledge of their participation)

Comments

  • grahamgraham

    How does FA assign a policyholder, unable to obtain coverage, to a specific insurer/service carrier?

    • This is not discussed in the reading.

    After one is assigned, and losses are reported, is the private insurer (service carrier) only job to determine the claim amount and then notify FA to pay that amount?

    • The servicing carriers issue and administer policies, and adjust claims.

    If so, do the service carriers get reimbursed for the expenses (like in a RSP) or is this the cost of being part of a Residual Market?

    • Expense reimbursement would be part of the contract between a servicing carrier and FA. Details of such a contract are not discussed in the reading.
    • The financial results of vehicles insured through FARM are pooled among all licensed auto insurance companies in a province based on their participation ratios.

    Why would one not want to be insured under FA?

    • The premiums are very high. Customers insured through FARM generally could not find auto insurance in the normal private market, often due to a poor driving record.
  • olidude3121olidude3121

    If the financial results are pooled, how is the residual market different then a risk sharing pool? Is it just that in a RSP the private insurer has the option while in a residual market he is assigned an inusrer?

  • grahamgraham

    For RSPs, the policy is written through individual insurers using their own policy forms and rates, and like you said, it is the insurer's choice to cede a policy to the pool.

    But there could be cases where an insurer doesn't want to underwrite a particular customer at all (maybe because they could not get high enough rates approved) so the customer gets rejected and has no option except FARM. Note that FARM sets uses its own rates and presumably they would be approved for higher rates than a regular auto insurer because of the nature of FARM business.

    I suppose it all washes out in the end because all of these undesirable policies get pooled anyway. Insurers are trying to push the losses from these high-risk policies elsewhere and if they have a good enough analytics department, they will probably come out better than their competitors.

  • olidude3121olidude3121

    Yes that's my understanding as well, it is greater for everyone in the industry if the consensus "bad risks" are pooled together, making them more predictable. (Instead of keeping bad risks, the company pays FARM/RSP losses and those are less volatile then keeping the book of bad risks and having no pool).

    IF RSP's benefit everyone, why aren't there more RSPs? For example: Property coverages, Marine, Surety etc.

  • grahamgraham

    Yes, good point. There is less volatility.

    RSPs are complex to administer. They are also not as necessary for specialty coverages because insurance probably isn't mandatory for those like it is for driving a car.

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