Regulator defends use of territories for rating auto insurance

Ontario’s auto insurance regulator is allowing insurers to explore different ways to rate for territories other than the standard — and rigid — postal code method, but the regulator won’t be banning territorial rates, the regulator’s top exec confirmed Monday.

Mark White, CEO of Ontario’s Financial Services Regulatory Authority (FSRA), addressed a question about the much-maligned use of territorial rating for auto insurance in the 2024 FSRA Exchange Monday.

The discussion moderator, Globe and Mail financial affairs journalist Clare O’Hara, alluded to the use of postal codes as an auto insurance rating factor in one of her questions to White. “FSRA recently opened a test-and-learn environment that allows insurers to examine ideas and innovate around the topic of territory rating, but why not just ban territory rating altogether?” she asked White. “Like, isn’t it just unfair?”

“Well, actually, it’s not unfair,” White replied. “Location is one of the primary determinants of your risk as an insured driver. Your risk of theft, where you drive most frequently, the density of the traffic, how good the roads are — that is all determined by where you live. And so, to take geography out [as a rating factor] would mean that we would actually increase cross-subsidization, and we’d have [auto insurance] rates that are less fair for many consumers.”

A political brouhaha developed over territorial rating in Ontario back in 2018, when the provincial Conservative government took power from the Liberals, who had governed since 2003. Shortly after the Conservatives took over, MPPs introduced two private member’s bills — a Conservative backbencher sought to ban the use of use of postal codes for rating territories, while an NDP private member’s bill sought to eliminate the use of territories for rating altogether.

In its 2022 budget, the province, with the backing of the Insurance Bureau of Canada (IBC), said it would give the province’s auto insurance regulator ‘guidance’ on how to handle rating for territories. At issue, White said Monday, is that insurers had customarily been using postal codes to define territories.

“The problem is, the way territories were constructed, based on our predecessor many years ago, in 2005, they just took postal codes,” White said. “And what happened is, now people move literally across the street from one postal code territory to another, and they can see a significant increase in rates.

“The [Finance] Minister asked us to look at this and we have determined that postal code based system is outdated. It needs to be changed. The problem is not that people use territory, it’s that territory is not allowed to be refined based upon how the risks actually transpire in the marketplace.”

And so, enter FSRA’s recently introduced ‘sandbox’ method to examine the impact of innovative approaches to insurance. This is allowing insurers to experiment with rating territories using new and different methods, without fear of causing unintended harm to consumers.

“We’re allowing [insurers] to use our innovation framework, initially focused on the GTA [Greater Toronto Area],” as White explained. “All insurers can come in and say, ‘We want to change the territories to something else that we think our database says is actually sound.’

“It could be many more territories, or it’s possible it’s fewer territories, or there’s some type of flexibility between territories. So it’s not all black-and-white when you move across the street. We’re open to any suggestions.