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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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Loss ratios

50%

70%

90%

Auto Liability PersonalProperty

CommercialProperty

2001 2002 2003

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 OntarioNew

BrunswickNova 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 P&S at

$4,000AB Med/Rehab increased from $10,000 to

$50,000 per claimantEqual rates in Calgary and EdmontonBonus/ 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 ResultsAY 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, 2003Effective 01/07/03 strong verbal threshold

(serious and permanent) P&S 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 – 15Effective 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 regulationsEffective 01/11/03 Weak verbal threshold with P&S capped at

$2500 below thresholdRate 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 restrictionsUnderwriting restrictions/ depopulation of

FARisk 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 P&S at $2,500 below the threshold

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Ontario

Measures Implemented to-dateRestore pd ded for constructive total losses –eff dol

30/09/03Expedite use of non-original parts – eff dol 30/09/03Restore deductibility of CPP disability benefits – eff

dol 30/09/03Eliminate pre-inspection of vehicles eff 19/12/2002Revision of catastrophic definition for claimants under

the age of 16 – eff dol 30/09/03 Implement WAD I and II PAF’s – eff dol 30/09/03Fast track DAC fees re WAD I and II PAF’s – 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 05/03–eff 31/10/03

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Ontario

Measures implemented to-date continuedReduce AB – DI maximum IRB weekly

payment - rescindedTighten definition of serious and permanent –

eff dol 30/09/03Regulation 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

Impact on Average Premium Due to Removal of Age/ Gender for All Prinicipal Operators

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

15-1

8

19-2

0

21-2

2

23-2

4

25-3

5

36-4

5

46-5

5

56-6

5

66+

Tot

al

All Principal Operators

Males Only

Females Only

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Nova Scotia DislocationRemoval of Age/Gender

Impact on Average Premium for Prinicipal Operators Licensed Less Than 6 Years

-60.0%-40.0%-20.0%

0.0%20.0%40.0%60.0%80.0%

Age

Prinicipal Operators -Licensed Less than 6 years

Males - PO Licensed Lessthan 6 Years

Females - PO Licensed Lessthan 6 Years

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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 marketMove into the group marketWrite 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!