FARM Losses - Fall 2015 Q1 a)
In preparing the loss data for the Overall Rate Level Indication, the answer key states that FARM losses incurred should be excluded. I was wondering why FARM losses are in the Insurer's loss data? I thought FARM is administered by servicing carriers under FA, which is separate entity than the insurer. I was wondering if someone could elaborate more on FARM and why insurers will incur those losses if they don't even write the business...
Comments
You've brought up a good point and you are right - FARM is indeed administered by servicing carriers under FA. However, in the Dutil paper, it is mentioned that FARM losses are pooled and allocated back to all companies writing Auto insurance in that province based on their participation ratio. I think this is the FARM losses that are being referred to.
Hmmm what you're describing seem seems quite similar to what an RSP does. How do they they figure out an equitable participation ratio for FARM? Especially since insurers aren't writing FARM business themselves. And why not just establish an RSP since FARM appears to behave exactly the same way.
It is similar. The key difference is that FARM is for uninsurable risks whereas the RSP is for risks that meet the UW criteria for a company, but are at a higher risk of losses. I think it's because if you have completely uninsurable risk - Say a risk with a guaranteed loss of 1M. You wouldn't take him in even if you had an RSP because in ON for example, you have to keep 15% of the risk on the book. I know the other RSP pools cover 100% of the risk but expand it to a large number of insureds and you get the gist of it
I think the participation ratio is based on the total proportion of auto business written in the province for each company. (It doesn't explicitly say it in the text but that's what I gather)