MANITOBA PUBLIC INSURANCE

Transcription

1 MANITOBA PUBLIC INSURANCE SM.1 THE BASIC INSURANCE RATE SETTING FRAMEWORK SM.1.1 Corporate Goals The Corporation s goals, as outlined in Manitoba Public Insurance s Corporate Strategic Plan, A1.7 Part 2, are: 1. Universally available mandatory protection against the cost of automobile accidents. Rates, on average, will be lower than those charged by private insurance companies for comparable coverage and service. 2. The Basic plan will return at least 85 per cent of premium revenue to Manitobans in the form of claims benefits. 3. Manitoba Public Insurance will be a leader in automobile insurance and vehicle and driver licensing, providing Manitobans with superior products, coverage and service. The Corporation will utilize technology to provide products and services that will enhance the value it delivers to Manitobans. 4. Manitoba Public Insurance will provide service that is responsive, fair, courteous and convenient. Manitoba Public Insurance will meet corporate customer service standards that are based on customer expectations. 5. Retained earnings and the Rate Stabilization Reserve will be maintained within established target levels. 6. Manitoba Public Insurance will offer an environment and career opportunities that will encourage employees to strive for excellence. Our people will be treated with respect and fairness and their contributions will be recognized. 7. Manitoba Public Insurance will lead driver and vehicle safety initiatives that reduce risk and protect Manitobans, their streets and their Page 1

2 neighbourhoods. Manitobans will recognize the Corporation is living its mission. Some examples of how these guide the Corporation are: Claims service and cost saving initiatives that not only improve customer service, but also result in lower average rates for the coverage provided. Efficient operations that ensure goals relating to the return of premium dollars in the form of claim payments are achieved. Products, as outlined in Section AI.1 of the application, that are better or equal to those offered in most jurisdictions. Active, effective loss prevention programs. These goals also provide the framework in which the Basic Autopac rates are established. Particularly important to this process are the first and fifth goals. Having stable overall rates and using rating approaches that are based on actuarial principles, following accepted industry practice for risk classification and applying these in a consistent fashion ensures these goals, from a rate setting perspective, are met. The measures and strategies for achieving these goals are located in AI.7 Part 2 Corporate Strategic Plan. SM.1.2 Rating Approaches SM.1.2.A Actuarial Principles The Corporation s rating approach is based on actuarial principles. It ties rates directly to costs, assuring equity. It minimizes cross subsidization between customers and provides for rates that are responsive to changes in claim patterns. It ensures complete enumeration of all expected costs, allowing for assurance that the break-even target is achieved. Page 2

3 SM.1.2.B Risk Classification The Corporation s rating approach uses four easy to apply categories that are consistent with normal industry practices. The categories are: location, type of use, type of vehicle, and driving record. These categories simplify the requirements for the customer. All components of risk classification, except the use of the vehicle, are enumerated directly by the Corporation. For example, the Corporation links directly to the driving record information, in lieu of the customer reporting the information. The customer s requirement is to simply describe the vehicle use and any changes to their address. Balancing this simplicity and ease of understanding is the need to ensure equity of rates paid. By utilizing different dimensions unique to the risk arising from location, type of use, type of vehicle and driving record, the Corporation is able to assure different risks pay different rates and similar risks pay similar rates. SM.1.2.C Consistent Techniques and Approaches To ensure stability of rates at the classification detail level (insurance use and territory), improvements are adopted on an incremental basis to the rate setting rules as necessary. Substantive changes would yield a substantial fluctuation in the year of the change. Complementing this is the approach to using the underlying statistical data. The Corporation uses the data as reported in its claims database in a structured, consistent manner each year. Collision and comprehensive claims are applied on a first paid basis, with the exception of motorcycles. For motorcycle collision claims, 100% of motorcycle costs from single vehicle claims and 50% of motorcycle costs from multi-vehicle claims were attributed to motorcycles. The balance of the motorcycle collision costs were allocated to all other Highway Traffic Act power units. There is no special allocation for motorcycle comprehensive claims because this coverage is not included in the basic plan. The Personal Injury Protection Plan costs are allocated in accordance with PUB order Page 3

4 97/05 and modifications in PUB order 122/10. SM.1.3 Rate Setting Process The rate setting process is a combination of claims and revenue forecasting, budgeting, financial modeling, ratemaking and rate modeling. To determine the required rates for the upcoming insurance year, the Corporation: - Forecasts the expected costs and revenues from all sources (claims and revenue forecasting, budgeting) - Creates pro forma financial statements (financial modeling) - Determines the change in revenue that results in break-even Basic net income over the rating period (financial modeling) - Allocates the budgeted and forecasted operating expenses to each line of business and expense type (financial modeling) - Allocates the forecasted claims costs to each rating classification based on historical loss costs (ratemaking) - Allocates the forecasted expenses and revenue items equitably to each rating classification (ratemaking) - Determines rate changes for each rating classification such that the overall rate change target is achieved and rating rules are followed (ratemaking and rate modelling) The Claims Forecasting Committee forecasts the expected costs associated with settling claims that will occur in the rating period. Key indicators used to forecast claims costs include: Historical claims costs on an at 12 month and ultimate basis Projected changes in claims frequency (e.g. increases in hail frequency, reductions in theft frequency) Projected changes in claim severities (e.g. inflation, average cost or number of parts, industrial average wage) Projected growth in the overall fleet Projected changes in the average number of injuries per collision Page 4

5 Detailed information on the Claims Forecasting procedures can be found in TI.17 Claims Forecast Book. The Revenue Forecasting Committee forecasts expected revenue over the ratesetting period. The forecasts are based on historical information, field information and external economic information including: Vehicle premium o Vehicle volume change in number of vehicles o Vehicle upgrade changes in the average premium that are generated from customers buying newer vehicles or moving to different rating classifications Driver premium Driver volume changes in the number of drivers Movement of drivers on the Driver Safety Rating scale Asset returns Inflation rate Service fees Fleet rebates and surcharges Reinsurance premiums Anti-theft discounts A detailed explanation of the revenue forecasting procedure can be found in TI.18 Revenue Forecast Book. The budgeting process provides the expected costs of: - Claims expenses - Operating expenses - Road safety expenditures - Regulatory expenditures - Improvement Initiative expenditures, including capital A summary of Basic expenses can be found in TI.7 and budgeted capital Page 5

6 expenditures can be found in TI.10. The Financial Model combines the outputs from the claims forecasting commitee, revenue forecasting committee and the budgeting process. Through the utilization of various techniques and assumptions, pro forma income statements are subsequently generated from this information. The Basic pro-forma financial statements can be found in TI.11 to TI.15. Using the pro forma financial statements, the Corporation determines the overall rate requirement by calculating the change in revenue required such that Basic net income is equal to zero over the rate setting period. For the 2013/14 Rate Application, the proposed rates are for policies with effective dates from March 1, 2013 to February 28, Due to staggered renewals, about half of the 2013/14 policies are earned in the 2013/14 fiscal year and half in the 2014/15 fiscal year. The Corporation determines break even net income by taking the average net income of the 2013/14 and 2014/15 fiscal years. The determination of the overall required rate and the major classification required rates are done using the pure premium approach. The vehicle fleet is divided into six major classifications: Private passenger vehicles Commercial vehicles Public service vehicles Motorcycles Trailers Off road vehicles The composition of vehicles in each major class is further subdivided using the following rating variables: Territory Insurance use Rate groups Page 6

7 Gross vehicle weight (GVW) Commercial and Public major classes Body style and engine displacement Motorcycles major class Further information on the Corporations vehicle classification system can be found in AI.5. The historical claims costs (for rate setting purposes) are determined for each of the rating classifications listed above. These claims costs are then converted to relativities (i.e. claims costs per unit relative to average claims cost per unit) for each rating variable. The relativities are then used to allocate the expected losses for the 2013/14 rating year (from the pro forma financial statements) to each rating classification producing the indicated pure premium. All other expense and revenue items from the pro forma statements are then allocated to each classification producing the required rate. The required rates are then compared to the current rates, which produces the indicated experience adjustments. Further details on the ratemaking methodology can be found in TI.19, required rate changes by Major Classifications can be found in TI.2, and experience adjustments can be found in AP.3. A Rate Model is used to determine the impact of rating changes on the vehicle and driver population and to ensure that classification changes are applied in a consistent and incremental manner. The classification changes include rate group and rate line, as well as other rating variable changes. Vehicle rate group information can be found in AI.6, rate line relativities in TI.1 and information on classification changes and their impact can be found in AI.5. Overall rate model results and impact on the vehicle population can be found in SM.3, TI.3 and TI.16. Page 7