Automobile Insurance Reform
Is public auto inevitable?
Baron
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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Baron
Loss ratios
90%
2001
2002
2003
70%
50%
Auto
Liability
2003 data represent 12 months ending June 30, 2003
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Personal
Property
Commercial
Property
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 Adequacy
Including only Reforms that have been
Implemented
Alberta
Ontario
New
Brunswick
-4%
0%
+3%
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Nova
Scotia
Newfound
-land
-15%
+14%
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
$4,000
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
103.5%
89.7%
117.2%
86.1%
Newfoundland
84.1%
76.7%
PEI
102.5%
78.2%
Atlantics
103.8%
85.2%
New
Brunswick
Nova Scotia
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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) 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 – 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 P&S 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 P&S 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 PAF’s – eff dol 30/09/03
 Fast 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 nonpecuniary 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 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 crosssubsidization 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%
All Principal Operators
0.0%
Males Only
Females Only
-20.0%
-40.0%
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Total
66+
56-65
46-55
36-45
25-35
23-24
21-22
19-20
15-18
-60.0%
Nova Scotia Dislocation
Removal of Age/Gender
Impact on Average Premium for Prinicipal Operators Licensed
Less Than 6 Years
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%
-60.0%
Prinicipal Operators Licensed Less than 6 years
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
+
To
tal
Males - PO Licensed Less
than 6 Years
Age
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Females - PO Licensed Less
than 6 Years
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 underrated 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 ecommerce 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!
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