Reform or the Road to
Government Insurance?
Reforms Across The Country
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All province except Quebec have
initiated reforms in response to the
hard market
All were designed to lower rates,
some voluntarily, some by decree
All promised some claims relief in
return for lower rates
Some were tweaks, other complete
re-writes
Have they been successful?
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Depends on your point of view and
your timeframe
Consumers have seen lower rates –
both governments and clients would
see this as success
There should be a reduction in BI
costs – if the caps are effective –
success from an insurer’s perspective
Have they been successful?
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Over long term, success – healthy,
competitive market where product is
available and affordable – everybody
wins
Current set of reforms may lead
away from this goal – everybody
loses
Most Likely to End Up with
Government Run Insurance
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Alberta
Newfoundland & Labrador
Nova Scotia
New Brunswick
PEI
Ontario
Quebec
Alberta
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Product Reform
October 1, 2004
• Cap on pain and suffering for minor injuries of
$4,000
• Increase limit for med/rehab benefits from
$10,000 to $50,000
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January 1, 2005
• Consideration of collateral sources
• Determination of wage losses using net rather
than gross income
Alberta
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Premium Reform
October 30, 2003
• Premiums frozen
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October 30, 2004
• Grid rates introduced as cap on premiums that
could be charged for TPL & AB
• 5% reduction in premium for the remainder of
the policy term for non-grid risks
• Take-all comers rule
• Two risk sharing pools – one for grid risks, the
other for non-grid risks
Alberta
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July 1, 2005
• 6% mandated premium reduction for
TPL & AB
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November 1, 2005
• Further premium reductions for TPL &
AB, hearings to be held at the end of
June, MOW report recommends a
further 8.2% decrease in addition to the
6% noted above
Alberta
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Have the reforms been effective?
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NO IDEA. IT IS TOO EARLY TO TELL.
Alberta
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Is the system sustainable?
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NO IDEA. TOO EARLY TO TELL.
Alberta
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What we do know:
• The premiums collected by the industry will
decrease due to capping effect of grid –
estimated impact – 7.8% to 8.3%.
• The premiums collected by the industry will
decrease due to mandatory 5% reduction for
non-grid risks – estimated impact 4.1% to
3.6%
• Loss costs will decrease due to product reform
– estimated impact -12.9% to -16.3%
Alberta
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What we do know:
• Non-grid risks will have to subsidize grid
risks – estimated subsidy 10.1% to
10.8% per non-grid risk
• Likely understates as does not include
the impact of bad actors re-entering
system now that they can afford
insurance again
Alberta
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Auto insurance market was $2.5
billion in 2004
68 insurers actively write Alberta
auto
Top 5 have 46% of the market
Top 10 have 65% of the market
Alberta
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Strategy 1 – Become a niche writer
• Sub-standard – There is no more substandard
market
• Group – groups have not historically been
profitable in Alberta – groups are most
profitable with there are significant premiums
in first party coverages - will be forced to write
non-group risks using group rates
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Strategy 2 – Write everything
• Will give insurer large share of sharing pool
losses without sufficient control over rates to
generate sufficient profit to cover losses
Alberta
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Strategy 3: Creaming
• Write with a loyal broker force in more
adequately rated risk areas
• To the extent it is possible, write only
full coverage – all mandatory coverage
only risks in the pool
Alberta
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Strategy 3 – Likely outcome
• Brokers with historically higher loss ratios or
high percentage of insureds with mandatory
coverages only will have great difficulty
keeping markets
• Pool for non-grid risks will grow - subsidy
required from non-grid risks outside pools will
increase
• Insurers who can not cream or for whom
Alberta is not an important market will leave
increasing availability problems
• Government reacts – sees no solutions and
sets up Government owned insurer
Alberta
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Factors For Government Insurance
• Auto Insurers have poor image with both the
Government and the public
• Government has excess cash that can be used
for establishing a government run insurer
• Are surrounded by relatively successful
Government-run insurance companies
• The industry is not a significant employer
outside of brokerages – could still use brokers
as the distribution network.
Alberta
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Factors Against
• Sends wrong message to industry about
Alberta being ‘open for business’
• Uncertain of costs under NAFTA – re
confiscation of business more than $300
million written by companies with US
parents
Importance of Alberta Auto Market
to Individual Insurers
# of
Companies
Premium
>12%
28%
47%
>25%
4%
4%
>50%
2%
3%
Newfoundland & Labrador
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Product Reform
• All injuries have a $2,500 deductible on
pain and suffering
• Other minor tort reforms
Newfoundland & Labrador
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Price Reform
• Varied by coverage & territory – as per Bill 30
• Goal was 15% overall decrease – loss reforms
worth less than 5%
• Effective August 1, 2005 insurers must reduce
their approved rates by 5% (including FA)
• Elimination of rating by age, sex, marital
status – must refund difference for those
whose rates are less
• Group insurance ban to be repealed
• Move from benchmark to full prior approval
Newfoundland & Labrador
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Market had written premiums of
$246 million in 2004
52 active writers
Top 10 – 83% of market
Top 5 – 59% of market
Importance of N&L Auto Market to
Individual Insurers
# of
Companies
Premium
>12%
6%
39%
>25%
4%
18%
>50%
4%
18%
Factors in Favour of Establishing
Government Insurance
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Government and public are very unhappy
with P&C insurers
Political issue
May be facing significant availability issues
of insurers who have declared they are
pulling out actually do – 23% of market
has declared that they will leave – more
may leave if they carry through with the
regulation of homeowner’s rates
Factors Against
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N&L government has no money –
establishing a new insurer would be
expensive
There are no nearby precedence for
moving to government run insurance
Are in negotiation with other Atlantic
provinces to unify regulatory structures
Have writers with a significant stake in the
market that may be willing to suffer short
term losses to gain market control
Conclusion
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Insurers in Alberta and N&L are largely in
a lose- lose situation – there are few
strategies for success
Loss of the Alberta automobile insurance
market is a real possibility
Alberta auto represents 14.5% of the
Canadian auto market, 6.9% of the total
market
Loss of the N&L also possible but less
likely – less than 2% of the auto market,
0.7% of total market
Conclusion
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Governments can not treat an
industry with 50+ players like a
monopoly and not expect availability
issues
What strategy would you recommend
to your company?