Reform or the Road to Government Insurance?

Reforms Across The Country All province except Quebec have initiated reforms in response to the hard market 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 were designed to lower rates, some voluntarily, some by decree All promised some claims relief in return for lower rates All promised some claims relief in return for lower rates Some were tweaks, other complete re-writes Some were tweaks, other complete re-writes

Have they been successful? Depends on your point of view and your timeframe Depends on your point of view and your timeframe Consumers have seen lower rates – both governments and clients would see this as success 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 There should be a reduction in BI costs – if the caps are effective – success from an insurer’s perspective

Have they been successful? Over long term, success – healthy, competitive market where product is available and affordable – everybody wins 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 Current set of reforms may lead away from this goal – everybody loses

Most Likely to End Up with Government Run Insurance Alberta Alberta Newfoundland & Labrador Newfoundland & Labrador Nova Scotia Nova Scotia New Brunswick New Brunswick PEI PEI Ontario Ontario Quebec Quebec

Alberta Product Reform Product Reform October 1, 2004 October 1, 2004 Cap on pain and suffering for minor injuries of $4,000Cap on pain and suffering for minor injuries of $4,000 Increase limit for med/rehab benefits from $10,000 to $50,000Increase limit for med/rehab benefits from $10,000 to $50,000 January 1, 2005 January 1, 2005 Consideration of collateral sourcesConsideration of collateral sources Determination of wage losses using net rather than gross incomeDetermination of wage losses using net rather than gross income

Alberta Premium Reform Premium Reform October 30, 2003 October 30, 2003 Premiums frozenPremiums frozen October 30, 2004 October 30, 2004 Grid rates introduced as cap on premiums that could be charged for TPL & ABGrid 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 risks5% reduction in premium for the remainder of the policy term for non-grid risks Take-all comers ruleTake-all comers rule Two risk sharing pools – one for grid risks, the other for non-grid risksTwo risk sharing pools – one for grid risks, the other for non-grid risks

Alberta July 1, 2005 July 1, % mandated premium reduction for TPL & AB6% mandated premium reduction for TPL & AB November 1, 2005 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 aboveFurther 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 Have the reforms been effective? Have the reforms been effective? NO IDEA. IT IS TOO EARLY TO TELL. NO IDEA. IT IS TOO EARLY TO TELL.

Alberta Is the system sustainable? Is the system sustainable? NO IDEA. TOO EARLY TO TELL. NO IDEA. TOO EARLY TO TELL.

Alberta What we do know: 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 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%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%Loss costs will decrease due to product reform – estimated impact -12.9% to -16.3%

Alberta What we do know: What we do know: Non-grid risks will have to subsidize grid risks – estimated subsidy 10.1% to 10.8% per non-grid riskNon-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 againLikely understates as does not include the impact of bad actors re-entering system now that they can afford insurance again

Alberta Auto insurance market was $2.5 billion in 2004 Auto insurance market was $2.5 billion in insurers actively write Alberta auto 68 insurers actively write Alberta auto Top 5 have 46% of the market Top 5 have 46% of the market Top 10 have 65% of the market Top 10 have 65% of the market

Alberta Strategy 1 – Become a niche writer Strategy 1 – Become a niche writer Sub-standard – There is no more substandard marketSub-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 ratesGroup – 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 Strategy 2 – Write everything Strategy 2 – Write everything Will give insurer large share of sharing pool losses without sufficient control over rates to generate sufficient profit to cover lossesWill give insurer large share of sharing pool losses without sufficient control over rates to generate sufficient profit to cover losses

Alberta Strategy 3: Creaming Strategy 3: Creaming Write with a loyal broker force in more adequately rated risk areasWrite 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 poolTo the extent it is possible, write only full coverage – all mandatory coverage only risks in the pool

Alberta Strategy 3 – Likely outcome Strategy 3 – Likely outcome Brokers with historically higher loss ratios or high percentage of insureds with mandatory coverages only will have great difficulty keeping marketsBrokers 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 increasePool 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 problemsInsurers 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 insurerGovernment reacts – sees no solutions and sets up Government owned insurer

Alberta Factors For Government Insurance Factors For Government Insurance Auto Insurers have poor image with both the Government and the publicAuto Insurers have poor image with both the Government and the public Government has excess cash that can be used for establishing a government run insurerGovernment has excess cash that can be used for establishing a government run insurer Are surrounded by relatively successful Government-run insurance companiesAre 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.The industry is not a significant employer outside of brokerages – could still use brokers as the distribution network.

Alberta Factors Against Factors Against Sends wrong message to industry about Alberta being ‘open for business’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 parentsUncertain 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 Product Reform Product Reform All injuries have a $2,500 deductible on pain and sufferingAll injuries have a $2,500 deductible on pain and suffering Other minor tort reformsOther minor tort reforms

Newfoundland & Labrador Price Reform Price Reform Varied by coverage & territory – as per Bill 30Varied by coverage & territory – as per Bill 30 Goal was 15% overall decrease – loss reforms worth less than 5%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)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 lessElimination of rating by age, sex, marital status – must refund difference for those whose rates are less Group insurance ban to be repealedGroup insurance ban to be repealed Move from benchmark to full prior approvalMove from benchmark to full prior approval

Newfoundland & Labrador Market had written premiums of $246 million in 2004 Market had written premiums of $246 million in active writers 52 active writers Top 10 – 83% of market Top 10 – 83% of market Top 5 – 59% 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 Government and public are very unhappy with P&C insurers Government and public are very unhappy with P&C insurers Political issue 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 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 N&L government has no money – establishing a new insurer would be expensive N&L government has no money – establishing a new insurer would be expensive There are no nearby precedence for moving to government run insurance There are no nearby precedence for moving to government run insurance Are in negotiation with other Atlantic provinces to unify regulatory structures 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 Have writers with a significant stake in the market that may be willing to suffer short term losses to gain market control

Conclusion Insurers in Alberta and N&L are largely in a lose- lose situation – there are few strategies for success 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 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 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 Loss of the N&L also possible but less likely – less than 2% of the auto market, 0.7% of total market

Conclusion Governments can not treat an industry with 50+ players like a monopoly and not expect availability issues 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? What strategy would you recommend to your company?