Baron 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?

Baron

Loss ratios 2003 data represent 12 months ending June 30, 2003

Baron 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

Baron Estimated 2004 Rate Level Adequacy Including only Reforms that have been Implemented AlbertaOntario New Brunswick Nova Scotia Newfound -land -4%0%+3%-15%+14%

Baron 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

Baron 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

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

Baron Alberta – Estimate Impact on AY 2002 Loss Costs ReformImpact Bill % Threshold-1.1% AB M/R Increase+2.3% Overall-2.0%

Baron Atlantic Loss Ratio Results AY 2002 TPLOverall 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%

Baron 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

Baron New Brunswick  Regulation 2003 – 15  Effective 01/05/03 restricts underwriting and depopulates FA  Estimate Impact of Reforms -15%

Baron 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

Baron 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

Baron 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

Baron 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)

Baron 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

Baron Newfoundland & Labrador  Product reform similar to NB Regulation  Strong verbal threshold (permanent and serious) capping P&S at $2,500 below the threshold

Baron 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

Baron 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

Baron 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

Baron 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!

Baron Ontario BI Run-off Incurred to 12/31/02 Expected Inc first 6 months Actual Inc first 6 months Difference

Baron 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

Baron Alberta Dislocation

Baron Nova Scotia Dislocation Removal of Age/Gender

Baron 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

Baron 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

Baron 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

Baron 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)

Baron 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)

Baron 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

Baron 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

Baron What can we do?  Communicate!