Automobile Insurance Reform

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Automobile Insurance Reform

• Is public auto inevitable?

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Agenda

• Where are we now?
• Current results
• Adequacy
• Reforms
• Can the industry handle social pricing?
• What is it?
• Impact by Channel
• Coping Strategies
• What should we as actuaries be doing?

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(No Transcript)
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Loss ratios
2003 data represent 12 months ending June 30, 2003
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Reliances and Caveats

• Estimates are from a number of sources and are
  subject to substantial error
• Estimates relate to industry level experience
  only and not to any specific insurer
• Many of the reforms announced are sketchy in
  detail, change before they become finalized
• All estimates are based on Private Passenger
  (excluding Farmers)
• Special thanks to Ron Miller for his help and
  efforts on pricing of many of the reforms

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Estimated 2004 Rate Level AdequacyIncluding only
Reforms that have been Implemented
Alberta Ontario New Brunswick Nova Scotia Newfound-land
-4 0 3 -15 14
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Alberta

• Bill 53 first reading November 03
• Awards are to be net of income tax, CPP and EI
  premiums Impact past wage loss only as no
  prohibition on gross-up
• Awards are to be reduced for monies collected
  from collateral sources but Bill is unclear
  exactly when this will be allowed

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Alberta

• Automobile Insurance Reform Framework
• Weak verbal threshold capping PS at 4,000
• AB Med/Rehab increased from 10,000 to 50,000
  per claimant
• Equal rates in Calgary and Edmonton
• Bonus/ malus similar to BC with removal of age,
  sex and marital status as rating variables

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Alberta

• Rates Frozen effective 30/10/2003 for up to 18
  months
• Applies to all coverages and all classes of
  business

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Alberta Estimate Impact on AY 2002 Loss Costs
Reform Impact
Bill 53 -3.0
Threshold -1.1
AB M/R Increase 2.3
Overall -2.0
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Atlantic Loss Ratio Results
AY 2002 TPL Overall
New Brunswick 103.5 89.7
Nova Scotia 117.2 86.1
Newfoundland 84.1 76.7
PEI 102.5 78.2
Atlantics 103.8 85.2
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New Brunswick

• Bill 1 Insurance Act Amendment on July 29,
  2003
• Effective 01/07/03 strong verbal threshold
  (serious and permanent) PS capped at 2500 below
  threshold
• Regulation 2003 17
• Effective 01/05/03 deems that rates are excessive
  until approved by PUB

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New Brunswick

• Regulation 2003 15
• Effective 01/05/03 restricts underwriting and
  depopulates FA
• Estimate Impact of Reforms -15

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Nova Scotia

• Product Reform under Bill 45, Bill 1 and related
  regulations
• Effective 01/11/03
• Weak verbal threshold with PS capped at 2500
  below threshold
• Rate freeze from 01/05/03 with mandatory 20 rate
  reduction for all classes of business and uniform
  for all coverages
• Policyholder rebates

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Nova Scotia

• New board to approve rates and examine other
  lines of business
• Net rather than gross on past wage loss under
  Tort BI
• Offset of past collateral sources recoveries
  under Tort BI but only if no right of subrogation
  (minimal savings)
• Optional buy-up to NB AB levels

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Nova Scotia

• Minimum TPL limits increased from 200,000 to
  500,000
• Withdrawal restrictions
• Underwriting restrictions/ depopulation of FA
• Risk classification restrictions starting
  01/11/04 (age and marital status, gender to be
  researched)
• Group marketing allowed from 01/11/2004

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Nova Scotia

• Estimated impact of changes -15
• Possible further product reform, trying via
  regulation to strengthen verbal threshold and
  restore some of the savings
• Estimated Inadequacy 0 (if the change via the
  regulations stands up in court)

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P.E.I.

• Proposed under Bill 8 (1st reading 18/11/03)
• Introduce a 2,500 Cap on non-economic losses
  using strong verbal threshold (NB)
• Underwriting restrictions
• Risk classification restrictions
• Withdrawal restrictions
• Policyholder rebates
• Reduce limitation periods for bringing a claim
• Promote and enhance driver safety measures

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Newfoundland Labrador

• Product reform similar to NB Regulation 2003-20
• Strong verbal threshold (permanent and serious)
  capping PS at 2,500 below the threshold

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Ontario

• Measures Implemented to-date
• Restore pd ded for constructive total losses eff
  dol 30/09/03
• Expedite use of non-original parts eff dol
  30/09/03
• Restore deductibility of CPP disability benefits
  eff dol 30/09/03
• Eliminate pre-inspection of vehicles eff
  19/12/2002
• Revision of catastrophic definition for claimants
  under the age of 16 eff dol 30/09/03
• Implement WAD I and II PAFs eff dol 30/09/03
• Fast track DAC fees re WAD I and II PAFs eff
  dol 30/09/03

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Ontario

• Measures implemented to-date continued
• Increase deductible per claimant on Tort BI
  non-pecuniary damages from 15,000 (7,500 FLA)
  to 30,000 (15,000 FLA) eff dol 30/09/03
• Waive per claimant deductible on Tort BI when
  non-pecuniary damages exceed 100,000 (50,000
  FLA) eff dol 30/09/03
• Implement Tort for Health Care for permanent and
  serious eff dol 31/10/2003
• Reduce M/R provider maximum hourly rates as per
  Superintendents Guideline 05/03eff 31/10/03

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Ontario

• Measures implemented to-date continued
• Reduce AB DI maximum IRB weekly payment -
  rescinded
• Tighten definition of serious and permanent eff
  dol 30/09/03
• Regulation of paralegals, prohibition of early
  lump sum payments and new provincial offenses
  eff 31/10/03
• Limit fees for completion of OCF forms eff
  31/10/03

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Ontario

• Estimated impact of changes -5
• Estimated inadequacy 0
• This situation will only get worse as the
  underlying trends and politicized nature of the
  product will not allow the rates to stay near
  adequacy!

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Ontario BI Run-off
Incurred to 12/31/02 Expected Inc first 6 months Actual Inc first 6 months Difference
2001-1 303 46 60 14
2001-2 328 39 57 18
2002-1 261 31 40 9
2002-2 213 83 138 55
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Social Pricing

• Government dictates that certain classification
  or rating variables can not be used in spite of
  proven ability of variables to predict loss
• Works in a monopoly as cross-subsidization is
  possible
• Examples Forced removal of age as a rating
  variable, forced territorial rating

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Alberta Dislocation
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Nova Scotia DislocationRemoval of Age/Gender
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Impact by Channel of Removal of Age/ Gender

• Assumptions
• There are no reasonable substitutes for age /
  gender
• Government will have to enact some form of a
  take all comers rule or under-rated risks will be
  unable to get coverage
• Direct writers will be hit hardest as there is no
  filter between them and their clients
• Brokered companies will have to have strict
  controls and monitoring on the number of
  under-rated risks that they will accept from a
  given broker

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Impact by Channel of Removal of Age and Gender

• Group writers are best served as they can
  effectively reduce their exposure to underage
  drivers via their selection of groups
• Sub-standard writers will likely do better than
  other writers as their rates reflect poor claims
  record of clients and thereby include some of the
  impact of age, more clients buying only mandatory
  coverage where reforms will have impact
• There will be a reluctance to sell via e-commerce
  channels

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Coping Strategies

• Withdraw from market
• Move into the group market
• Write under-rated risks in their own company so
  that company experience will support a higher
  rate level
• Ensure that appropriate controls are in place so
  that as policies are written, you know what
  percentage of under-rated risks you are writing
  by broker/ channel

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Coping Strategies

• Do not rely on good student or driver training
  discounts, have been shown to be ineffective
  (experience is actually worse)
• Ensure that under-rated risks are flagged so that
  should they run into payment problems, you cancel
  
• Start collecting mileage information and use in
  rating (will partially compensate for loss of
  gender)

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Coping Strategies

• Move to writing joint homeowners/ auto policies
  only
• Avoid areas with high numbers of underage drivers
  (universities, colleges, etc.)
• Separate years of experience from claims
  experience (driving records generally cover both)

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What should we do?

• Get CIA involved, make presentations to
  governments, regulators, legislators, Consumer
  Associations, CARP on the issues that results
  from cross subsidization and the importance of
  appropriate classification systems and rating
  variables
• Explain that actuaries are neutral with respect
  to the product, the trade-off between benefits
  and premiums is a matter of public policy but
  that we are concerned that the risk and premium
  be matched

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What can we do?

• Get involved in reviews such as the Nova Scotia
  review of other than auto lines
• Be more innovative, continue to improve rating
  structures, look for ways to better serve the
  customer
• Ensure that you explain to your various publics
  how claims and premiums are interconnected
• Push for risk sharing pools for under-rated risks

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What can we do?

• Communicate!
• Communicate!
• Communicate!