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Auto Product Reform. Back to the Future. Historical Results. Historical Results. Results from 2000 to 2003 were unsustainable poor
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Auto Product Reform Back to the Future
Historical Results • Results from 2000 to 2003 were unsustainable poor • Reforms were clearly effective – must remember that reforms are the most effective initially and lose effectiveness as claimants and their advocates adjust to the new reality • Each province is evolving differently - results and trends are quite varied
Alberta • October 1, 2004 – Major tort reform • $4,000 indexed cap on non-pecuniary damages • Maximum payment under AB – Med/ Rehab increased from $10,000 to $50,000 • Outcomes • Significant drop in BI frequency (unexpected) and severity (expected) • Med/rehab loss costs increased much less than expected • Disability income frequency down significantly (unexpected)
Alberta • As actuaries we: • Missed the drop in frequency for BI and AB –DI • Likely we underestimate the impact that lawyers have in their role as advice givers when costing potential reforms – might want to consider this in future costing • Overestimated the impact of the Med/ Rehab – more likely we underestimated the impact of not increasing the timeframe upward from 2 years at the same time as increasing the limits
Alberta • February 8, 2008: Charter judgment rendered stating that Minor Injury Regulation unconstitutional • Immediate Impacts: • Every company had to determine if their was a material impact on their December 31, 2007 outstanding claim reserves/ premium liabilities, should the decision be upheld • Every company had to determine how they would handle claims going forward
Alberta • Next Steps: • September 12, 2008 – Appeal heard before the Court of Appeal • Decision by year-end? • Supreme Court of Canada? • Auto Insurance Rate Board • Final Actuarial Statement from OW • Minus 5% for experience, +20% for removal of cap or +14% • Rate board +5%
Alberta • Issues Arising out of this Ruling • Estimated impact of removing the Cap assumes that there was no frequency effect – not supported by the data – increases likely future claims by about 10% • In 2006, AIRB ignored calls to consider impact of potential charter challenge • In 2008, AIRB gave substantial weight to the possibility of the current ruling being overturned • No consideration of the substantial liability that will be incurred for claims in the system if charter challenge is upheld
Alberta • AB government had stated that they had contingency plans if this was struck down – will these see the light of day? • Stakes are very high for the insurers for whom Alberta auto is their main market • How will insureds/ politicians react to 25%+ increase in premiums for mandatory premiums?
Alberta – Actuarial Implications • Need to understand how the claims department is handling the situation • Some have left their handling unchanged and are keeping the excess in an actuarial reserve • Others have increased their case reserves on the assumption that the MIR will not be restored • Others are somewhere in between • Given the importance, should consider doing a sampling of actual case files to see how the issue is being handled
Alberta – Actuarial Implications • Industry data after 31/12/2007 will be of limited usefulness • Should consider what changes will need to be made to ratemaking procedures given the sketchiness of the industry data • DCAT: May want to consider running a scenario wherein auto insurance is nationalized
Alberta – Actuarial Implications • DCAT: Will need to consider the impact of the uncertainty in the high loss ratio scenario (if Alberta is material to the insurer) • Will need to carefully review the reserves for the FA RSPs and Farm – ensure that the assumptions on which the reserves are set are in line with your expectations • We need a better and faster way of determining what are material events during the Jan/ Feb timeframe – should align more closely with the accountants
Ontario • Latest reforms: Fall 2003 • Restore deductibility of CPP • Revise cat definition for those under the age of 16 • Implement WAD I and II paf’s • Tighten definition of serious and permanent • Increase ded for non-pecuniary from $15k to $30k (FLA $7,500 to $15,000) • Allow tort for health care for permanent and serious • Reduce Med/ Rehab hourly fee • Limit fees for completion of forms • Regulation of paralegals, prohibition of early lump sum settlement
Ontario • Impact of reforms was greater than originally estimated – AB frequency dropped 25% • But AB loss ratio now greater than 100% and underlying trends in excess of 12% • More reforms in the pipeline – currently undergoing the mandatory 5 year review of Part VI of the Insurance Act by FSCO • Indeterminate timetable
Ontario • Absent reform, current PP all coverage average street premium is likely inadequate by 10% • If the verbal threshold and deductible were eliminated with no change to accident benefits – loss costs are likely to increase substantially – • Is the verbal threshold unconstitutional? • Is the non-pecuniary deductible unconstitutional?
Ontario • Ontario auto represents 56% of the non-government auto writings across the country, 25% of the total industry • Implications of either no changes to product (given current trends) or changes that further enhance product likely to lead to a significant consumer/ political push back
Ontario – Actuarial Implications • For some companies, results are poor enough that may lead to the dpac needing to be written down or setting up a premium deficiency • DPAC: A scenario where the verbal threshold/ deductible are ruled unconstitutional should be considered, if Ontario auto is a significant exposure • DPAC: A scenario wherein the industry in nationalized should be considered, if Ontario is a significant exposure – political fall-out of significant rate increases should not be taken lightly • Should a contingent liability be established? If it was, on what basis and using what assumptions? • Trends in AB high enough that should consider adjusting historical data to reflect current inflation
Quebec • Few reforms being considered • Most concentrated auto market in Canada • Results continue to be excellent although premiums have been flat for the last 4 years • Maybe an hybrid system not so bad!
New Brunswick • On July 1, 2003 implemented $2,500 cap on non-pecuniary losses for minor injuries • Mandatory filing of rates with 20% default reduction in rates • Experience has been excellent since – currently upward trend in all coverages
New Brunswick • BI frequency dropped – not anticipated in the original costing • AB – MR and AB –DI frequency also dropped – not anticipated in original costing • Despite expectations, no test cases selected or trial dates set for a charter challenge
New Brunswick • Current private passenger premiums for compulsory coverages are adequate but only if cap in place – would need significant increases for both BI and AB if cap removed • Impact could be around greater than Alberta ($160 per car) as cap is lower – a significant increase with major political fall-out
New Brunswick – Actuarial Implications • DCAT: If the cap is removed, would the political fall-out be big enough to push into government insurance? • DCAT: If cap is removed, what are the loss ratio / reserve implications? • Should a contingent liability be set up particularly given that there is no current legal action? Would this acceptable under IFRS?
Nova Scotia • November 1, 2003 • $2,500 cap on non-pecuniary damages for Minor Injuries • October 6, 2008 – trial begins before Supreme Court of Nova Scotia • Seeks to strike down as outside the power of regulation part of NS Reg 182/2003 which defines ‘resolves within 12 months’ • Seeks to strike down cap as unconstitutional
Nova Scotia • Like NB, unanticipated drop in BI frequency • Like NB, unanticipated drop in AB – MR • Current rates are adequate IF cap stays in place • Rates now have to be filed every 2 years – what impact will this have? • Expected costs if cap is struck down – as per NB • What happens if cap is found constitutional but Regulation is ultra vires? What would “resolves within 12 months” mean?
Nova Scotia – Actuarial Implications • Should a separate contingent liability be established? How should this be determined? • What probability should be used? Should there be view put forward by the CIA or should each actuary come to their own conclusions? Do we need more guidance on issues such as this? • DCAT implications similar to NB
Prince Edward Island • Issues similar to New Brunswick • April 1, 2004 - $2,500 cap on non-pecuniary losses for Minor injuries • No test cases selected or trial dates set
Newfoundland & Labrador • August 1, 2004 • $2,500 straight non-pecuniary deductible for all injuries and some minor reforms • At most, a modest decrease in loss costs • No charter challenge at this time
N &L – Actuarial Implications • Likely very few – impact of the reforms was so small that even if they were somehow undone, would have little impact
Summary • Ontario auto results are not sustainable both in absolute terms and in terms of underlying trends – this will have to be considered in both the setting of reserves and the running of adverse scenarios for DCAT • Charter challenges in Alberta will have to be considered in setting reserves at 12/31/2008. • How should the charter challenge issue in NS be considered in setting reserves at 12/31/2008?
Summary • Can we make improvements to our costing methodologies to better consider claimant behaviour? • For companies for whom auto is a significant line, may want to consider running adverse scenarios that include nationalization in response to consumer/ political reaction to significant rate increases.
