MANITOBA PUBLIC INSURANCE

Transcription

1 MANITOBA PUBLIC INSURANCE SM.5 MATTERS ARISING FROM PUB HEARINGS AND CORRESPONDENCE SM.5.1 IT Optimization In Order 162/11, the Public Utilities Board ordered that: For rate-setting purposes, the IT Optimization Project shall not be funded from Basic Retained Earnings; MPI file with the Board the project charters for the IT Optimization projects as the same become available; and MPI file with the Board at the next year's GRA ongoing IT Optimization project expenses, as tracked to baseline budgets. The Corporation confirms that IT Optimization projects are not being funded from Basic Retained Earnings. The project charter and expenses for the IT Optimization projects can be found in AI.12. SM.5.2 Rate Stabilization Reserve In Order 162/11, the Public Utilities Board ordered that: MPI file with the Board together with next year's GRA an updated DCAT, MCT and RA/VAR, together with the pros and cons of each approach and MPI's position on what methodology would best develop an appropriate RSR target range. Page 1

2 The information requested and the Corporation s recommendations are located in AI.11. SM.5.3 Road Safety Technical Conference In Order 162/11, the Public Utilities Board ordered that: A technical conference to be planned jointly by the Board and MPI, be convened by the summer of 2012 to discuss road safety and loss prevention matters, with stakeholders to include the parties to the GRA proceedings and, as well, other agencies and associations within the Province with an interest in road safety and accident reduction. At time of filing, only brief discussions on this matter have taken place between the Board and the Corporation. SM.5.4 Capital Expenditures In Order 162/11, the Public Utilities Board ordered that: MPI file with the Board the details of its plans for capital expenditures for 2012/13, including a list of planned and potential capital projects. Capital Expenditure information has been provided in TI.10. SM 5.5 Inter-Provincial Truck PIPP Costs In PUB Order 162/11, the Public Utilities Board ordered that MPI continue to track PIPP costs incurred in connection with claims by inter-provincial truckers. The Corporation will not respond as per Board Order 62/12. Page 2

3 SM.5.6 Health Cost Payment Agreement In Order 162/11, the Public Utilities Board ordered that: MPI file with next year's GRA the Health Cost Payment Agreement reached with Government, together with supporting documentation. The Health Cost Payment Agreement was filed last year in response to PUB(MPI) A copy of the agreement can be found in AI.14. Page 3

4 SM.5.7 Recommendations SM Demerits for Communication Devices In Order 162/11, the Public Utilities Board recommended that: MPI develop an option for the review by Government pursuant to which demerits are assigned for convictions arising from the use of handheld communication devices while driving, and consider the merits of extending the ban, and the assignment of demerits, for hands-free communication devices as well. The Board s mandate is to review and approve Manitoba Public Insurance s rate bases and premiums charged with respect to compulsory driver and vehicle insurance as stated in The Crown Corporations Public Review and Accountability Act and by the Court of Appeal. It is not within the mandate of the Board to recommend the Corporation develop options for government review on the issuance of demerits under the Driver Safety Rating Program. The Driver Safety Rating Program is contained in Regulation13/2009, Driver Safety Rating System Regulation under The Manitoba Public Insurance Corporation Act and the Government has the legislative authority to amend this. For these reasons the Corporation will not respond to this recommendation. SM Public Utilities Board Jurisdiction In Order 162/11, the Public Utilities Board recommended that: The Board's jurisdiction be extended to include non-basic lines of business, including rates and retained earnings. The Court of Appeal addressed this specific recommendation in paragraph 32 of the Stated Case (PUB v MPIC): Notwithstanding the fact that the PUB has made its concerns known to the government on an annual basis since 1989, the government has not made any changes to the PUB's legislated mandate to expand its jurisdiction. Page 4

5 Clearly, the government must be aware of the PUB's concerns and, notwithstanding, is either satisfied with the PUB's existing limited mandate or, at least to date, has chosen not to act on those concerns. For the reason stated by the Court of Appeal, the Corporation will not respond to this recommendation. SM Real Estate and Infrastructure Investments In Order 162/11, the Public Utilities Board recommended that: MPI engage only in those real estate and infrastructure investments that involve commercial terms, meaning commercially reasonable and arm's length transactions. The Board s mandate is to review and approve Manitoba Public Insurance s rate bases and premiums charged with respect to compulsory driver and vehicle insurance as stated in The Crown Corporations Public Review and Accountability Act and by the Court of Appeal. The Minister of Finance manages the Corporation s investments as per Section 12 of The Manitoba Public Insurance Corporation Act. As the Court of Appeal stated in paragraph 34 of its decision, [The government], therefore, has the ultimate responsibility for the financial health of the MPIC. For these reasons, the Corporation will not respond to this recommendation. SM Red Light Camera and Photo Radar In Order 162/11, the Public Utilities Board recommended that: MPI gather information from other jurisdictions with respect to Red Light Cameras and Photo Radar, as to how demerits are handled in those jurisdictions and provide the information to the Board in next year's GRA filing. The Board s mandate is to review and approve Manitoba Public Insurance s rate Page 5

6 bases and premiums charged with respect to compulsory driver and vehicle insurance as stated in The Crown Corporations Public Review and Accountability Act and by the Court of Appeal. How other provinces use Red Light Cameras and Photo Radar is irrelevant to the Board s mandate of reviewing and approving the rates and premiums charged with respect to compulsory driver and vehicle insurance. The use of Red Light Cameras and Photo Radar in Manitoba is a policy issue for the Government of Manitoba and the City of Winnipeg and not the Public Utilities Board. For these reasons, Manitoba Public Insurance will not incur additional operating expenses associated with gathering information for a matter that is not within the Board s mandate to consider and, accordingly, will not respond to this recommendation. SM Operating Expense and Staffing Level Benchmark Study In Order 162/11, the Public Utilities Board recommended that: MPI conduct a benchmarking study with respect to operating expenses and staffing levels, and file the results in next year's GRA. The benchmarking report can be found in AI.15. SM Family Transfers In Order 162/11, the Public Utilities Board recommended that: MPI file, with next year's GRA, a discussion of the pros and cons of permitting Family Transfers together with options on how Family Transfers can be better managed. The Board s mandate is to review and approve Manitoba Public Insurance s rate bases and premiums charged with respect to compulsory driver and vehicle insurance as stated in The Crown Corporations Public Review and Accountability Act and by the Court of Appeal. Section 6(1)(b) of The Manitoba Public Insurance Corporation Act grants Manitoba Public Insurance the legislative mandate to operate and administer such plans of universal compulsory automobile insurance as may be Page 6

7 set out in this Act and regulations. Family Transfers is an operational matter for the Corporation within its legislated authority and mandate. Reviewing and providing direction on operational matters is not included in the Board s mandate to review and approve the MPIC s rate bases and premiums charged with respect to compulsory driver and vehicle insurance as stated by the Court of Appeal. For this reason, Manitoba Public Insurance will not incur additional operating expenses associated with preparing a discussions and options paper for a matter that is not within the Board s mandate to consider, and, accordingly, the Corporation will not respond to this recommendation. SM Automobile Insurance Coverage Comparison In Order 162/11, the Public Utilities Board recommended that: MPI perform a benchmarking study on auto insurance coverages within other provinces and conduct a comparison between those coverages and Basic coverage. The Board s mandate is to review and approve Manitoba Public Insurance s rate bases and premiums charged with respect to compulsory driver and vehicle insurance as stated in The Crown Corporations Public Review and Accountability Act and by the Court of Appeal. Coverage that is available in Manitoba is a decision of the Government and is legislated in The Manitoba Public Insurance Corporation Act and the regulations thereunder. The coverage that is available in other provinces is irrelevant to the Board s mandate of reviewing and approving the rates and premiums charged for Manitoba coverage. For this reason, Manitoba Public Insurance will not incur additional operating expenses associated with preparing a benchmarking study for a matter that is not within the Board s mandate to consider, and, accordingly, the Corporation will not respond to this recommendation. Page 7

8 SM PIPP and Workers Compensation Benefit (WCB) Comparison In Order 162/11, the Public Utilities Board recommended that: MPI conduct a comparison between PIPP benefits and WCB coverage and file the results at next year's GRA. The Board s mandate is to review and approve Manitoba Public Insurance s rate bases and premiums charged with respect to compulsory driver and vehicle insurance as stated in The Crown Corporations Public Review and Accountability Act and by the Court of Appeal. Differences in PIPP benefits and WCB coverage is a decision of Government and is legislated in The Manitoba Public Insurance Corporation Act and The Workers Compensation Act. A comparison of PIPP benefits to WCB coverage is not relevant to the Board s mandate of reviewing and approving the rates and premiums charged with respect to compulsory driver and vehicle insurance. For this reason, Manitoba Public Insurance will not incur additional operating expenses associated with preparing a comparison that is not within the Board s mandate to consider, and, accordingly, the Corporation will not respond to this recommendation. SM Claim Buy Backs In Order 162/11, the Public Utilities Board recommended that: MPI consider the effect of claim buy backs upon the accuracy of the DSR scale and report the results to the Board at next year's GRA. The Driver Safety Rating (DSR) scale is contained in Regulation 13/2009, Driver Safety Rating System Regulation, under The Manitoba Public Insurance Corporation Act. The DSR scale is what it is in the Driver Safety Rating System Regulation; there is no element of inaccuracy to what the DSR scale is. And even if there were an element of inaccuracy, that is for the Government to amend the regulation within its legislative authority, not the Board. Page 8

9 Paragraph 6(1)(b) of The Manitoba Public Insurance Corporation Act gives Manitoba Public Insurance the legislative mandate to operate and administer such plans of universal compulsory automobile insurance as may be set out in this Act and regulations. Claims buy backs is an operational matter for the Corporation. Reviewing operational matters is not included in the Board s mandate to review and approve Manitoba Public Insurance s rate bases and premiums charged with respect to compulsory driver and vehicle insurance as stated in The Crown Corporations Public Review and Accountability Act and by the Court of Appeal. Manitoba Public Insurance will not incur the additional operating expenses associated with preparing a report on a matter that is not within the Board s mandate to consider, and, accordingly, the Corporation will not respond to this recommendation. SM Pay as You Drive (PAYD) Insurance In Order 162/11, the Public Utilities Board recommended that MPI provide an updated report with respect to PAYD. The issue of whether to adopt the concept of Pay As You Drive (PAYD) as a rating factor is a policy decision to be made by the Government and would necessitate a legislative amendment to implement. This is not an issue for the Public Utilities Board. The Board s right to comment on plans of the Government was addressed by the Court of Appeal in paragraph 43 of its decision. 43. As regards the failure to advise the PUB of any plans, plans do not affect the rates that are subject to review in a particular year. While plans, if implemented, may well affect the rates for basic insurance in future years, those rates will be subject to review by the PUB if and when the plans are realized and put into effect. Until then, the mandate to review and comment on long-term plans has been left to the Crown Corporations Council and the government, and the PUB has not demonstrated how they are relevant to, or affect, its ability to carry out its mandate in any particular year. The fact is that the government has the right to change legislation and to require that the MPIC make changes to its business, and neither the government nor the MPIC are required to give the PUB any advance notice. This is an issue for the Page 9

10 government and not the PUB. For this reason, Manitoba Public Insurance will not incur the additional operating expenses associated with updating a report on a matter that is not within the Board s mandate to consider, and, accordingly, the Corporation will not respond to this recommendation. Page 10

11 SM.5.8 Undertakings SM Undertaking #32 Road Safety Consultations During the 2012 General Rate Application Hearing, the Public Utilities Board requested that Manitoba Public Insurance provide a report on the consultations regarding road safety. Throughout the summer of 2011, Manitobans were invited to share their views on Manitoba Public Insurance s role in the area of road safety. The Corporation hoped to obtain a better sense of the areas of greatest interest and determine what strategies Manitobans would broadly support. Manitobans were made aware of the consultation through a news release and newspaper advertisements, and were asked to review a road safety discussion paper; copies of which were provided to the Board in last year s Rate Application. Manitobans were also asked to speak one-on-one with senior staff and management of the Corporation at displays in shopping malls throughout the province. Manitoba Public Insurance executives also met with representatives from 16 road safety stakeholder groups. Approximately 1,100 Manitobans provided input during the consultation process and a report about the findings is posted on the Manitoba Public Insurance website. A link to the full consultation report is attached. pdf Further information on the Corporation s Road Safety efforts can be found in AI.13. Page 11

12 SM.5.9 Final Arguments of CAC at 2012 GRA At the 2012 GRA, in its final arguments the CAC made the following comments on the DCAT, Stochastic Modeling and a Joint Technical Conference with Manitoba Hydro: the Board asked, "What do we do with the DCAT?" And our clients' conclusion is that little weight can be given to the DCAT analysis in the proceeding. The easy answers -- this is at page 199, Madam Chair. It was filed late, not tested to any degree. The deeper answers though are, from our clients' perspective, this is not a tool that -- that we put at the top of the list in recommending to the Board. It's not stochastic in the true sense of the word in that certain variables the stress tests are fixed. It's vulnerable as our clients believe they've demonstrated in prior hearings, to influence by unrealistic or, in fact, counterintuitive stress test assumptions. And it is strongly arguable that this Board has moved past that. Certainly on the Hydro side it's moving past a stress test to a much more modern risk analysis based on more sophisticated sto stochastic tools. Our clients agree, at page 120, that it is open to this Board to revis -- revisit the issue of an appropriate target for the RSR. If it does so, our clients' view is that all -- everything should be on the table, including -- this is at page whether or not modern rate setting truly requires an RSR. That's actually not my clients' views. That's just me talking. I think that my clients might have a different view. So that might have been the one (1) thing I say without instruction. But any such discussion should should look at what -- what are retained earnings for. There's been pressures put on them, immobilizer funds, perhaps road safety funds, IT optimization funds. Is that the way to go? Because our clients are concerned that the purity of the RSR is -- is being challenged. A key point our clients would suggest is that we've got these old tools, somewhat dated. Let's look forward. Let's look to more modern risk setting risk analysis tools, and that we should build on what is really a parallel experience with Manitoba Hydro. And there were some learning opportunities. Our clients are convinced based upon their participation in both proceedings, that there are some learning opportunities that could be shared between academics, the Board, Hydro, and -- and MPI perhaps in a voluntary technical conference. Goodness knows there's been a bit of stress between the Board Page 12

13 and MPI and Hydro over the years. Maybe it's -- it's time we did something that's a little less adversarial, a little -- and that might be a -- a useful exercise. The Corporation s responses to the issues presented above are as follows. Issue 1: little weight can be given to the DCAT analysis because it was filed late. For the 2013 Rate Application, the Corporation has filed the DCAT as part of the Application. Issue 2: little weight can be given to the DCAT analysis because it is not stochastic in the true sense of the word in that certain variables in the stress tests are fixed. It is true that not all variables in the Corporation s stochastic model are stochastic. However, it is not necessary for every variable to be stochastic in order to produce a good model. For example, it is appropriate for the Corporation to run a stochastic model of equity returns and leave all other modeling variables fixed because: - We have no evidence to suggest that equity returns are correlated with other variables such as claims costs or hail storms - For interest rates (which may be correlated with equity returns), we have a separate asset and liability management program to offset interest rate impacts (i.e. there is no impact) The DCAT report was brought in-house several years ago in order to improve the transparency of the models, which in previous reports were proprietary, and to create more realistic modeling assumptions. (For example, the 2008 DCAT report recommended a minimum RSR of over $300 million.) The models and assumptions used in the internal DCAT report are clearly defined and are supported by historical evidence, where available. If sufficient evidence is not available, this information is clearly stated in the report. A stochastic model is only as good as the assumptions used to create it. To make all variables stochastic, even when the Corporation knows Page 13

14 little or nothing about the true properties of certain variables, would result in a poor model with potentially misleading conclusions. Issue 3: The DCAT results are vulnerable as our clients believe they've demonstrated in prior hearings, to influence by unrealistic or, in fact, counterintuitive stress test assumptions. The Corporation cannot find any evidence presented by the CAC to support this statement. None of the adverse scenarios modeled in Section 5 of the 2011 or 2012 Basic DCAT reports are stress tests. The underlying models for all of the modeled scenarios are clearly defined and the assumptions are clearly stated in the DCAT report. These same assumptions are open for questioning and are strongly supported by historical evidence. The one exception being the hail adverse scenario, for which there is relatively limited historical data. The DCAT section titled Analysis of All Property and Casualty Insurer Risk Categories does incorporate stress tests for risk variables where the probability of occurrence is extremely difficult to estimate (e.g. change in the mortality rate of seriously injured claimants, IFRS impacts, etc). These other risk categories are provided for completeness, but are currently not used to establish the recommended RSR target. Issue 4: In regards to the weakness of the Corporation s DCAT approach: Certainly on the Hydro side it's moving past a stress test to a much more modern risk analysis based on more sophisticated sto stochastic tools A key point our clients would suggest is that we've got these old tools, somewhat dated. Let's look forward. Let's look to more modern risk setting risk analysis tools, and that we should build on what is really a parallel experience with Manitoba Hydro. The issue of the RSR target has been discussed in great detail at prior hearings. The DCAT is a modern risk analysis tool that incorporates extensive use of stochastic modeling and is presented in a practical, easy to understand format. The DCAT procedures are also subject to the professional standards of the Canadian Institute of Page 14

15 Actuaries. Issue 5: Our clients agree, at page 120, that it is open to this Board to revis -- revisit the issue of an appropriate target for the RSR. If it does so, our clients' view is that all -- everything should be on the table. The 2012 DCAT report presents an analysis of all key risks to the financial condition of Manitoba Public Insurance Basic and is the Corporation s recommended method for determining the appropriate RSR target. In response to PUB Order 162/11, the Corporation has provided an updated DCAT, MCT [Minimum Capital Test] and RA/VAR [Operational Risk Analysis and Value at Risk Analysis]. See section AI.11. Issue 6: Our clients are convinced, based upon their participation in both proceedings, that there are some learning opportunities that could be shared between academics, the Board, Hydro, and -- and MPI perhaps in a voluntary technical conference on stochastic modeling / risk management. Manitoba Public Insurance employs professionals with expertise in actuarial mathematics, accounting, investments, economics and risk management. These professionals are held to high professional standards, stay current in their respective fields and share ideas with other similar organizations (e.g. SGI). The Corporation does not see any benefit to holding a joint technical conference on any of these topics. The Public Utilities Board and interveners can submit information requests and cross examine witnesses on these topics during the regular Rate Application process. In regards to a joint technical conference with Manitoba Hydro, the Corporation sees very little overlap between the stochastic modeling and risk management requirements of Manitoba Hydro and Manitoba Public Insurance. In their 2010 Annual Report, page 62, Manitoba Hydro lists their major financial and operational risks. These are as follows: Page 15

16 Risk Infrastructure Drought Loss of Export Markets Interest Rates Foreign Exchange Rates Potential Impact >$2 billion for a major facility long term outage $2.4 billion reduction in net export revenue for a 5 year drought Up to 30% of electricity revenues $250 million for a 1% change over a 10 year period $280 million for a $.10 U.S. change over a 10 year period The major risks of Manitoba Hydro are either not applicable (export markets) or of a completely different magnitude (infrastructure) to those of Manitoba Public Insurance. Compared to Manitoba Hydro: - Manitoba Public Insurance s Basic compulsory program has virtually no risk of a significant decline in revenue. - Manitoba Public Insurance is not concerned with drought, but rather hail, flood, and winter storms. - Manitoba Public Insurance has an asset and liability management program that largely offsets changes in market interest rates. - Manitoba Public Insurance has minimal exposure to foreign exchange risk in its investment program. The key financial risks for the Corporation s Basic program are clearly stated and described in the 2012 DCAT report. These include: decline in equity markets, increases in claims costs, major hail storm and any combination of the above events. All key risk factors for a property and casualty insurer, major or minor, are also discussed in the report for completeness. In terms of similarities, Manitoba Hydro and Manitoba Public Insurance are both impacted by changes in the economic environment (e.g. inflation, interest rates, etc), although the types of impacts for each Corporation are very different. Both organizations also have the same regulator. In terms of comparisons, it is much more appropriate to compare the Corporation to similar sized organizations in the same industry, which is a function the Corporation Page 16

17 already performs. The Corporation sees no value in holding a joint technical conference with Manitoba Hydro. Page 17

18 SM.5.10 Minimum Filing Requirements By letter, dated January 17, 2012, the Public Utilities Board provided Manitoba Public Insurance with the following series of questions. These questions were intended to be additional Minimum Filing Requirements or Pre-Asks to be answered and the responses filed as part of the 2013/14 General Rate Application. SM PUB/MPI Pre-Ask 1 Topic: MPI s Investments Context: The Board in Order 145/10 recommended that MPI both: Research and provide an opinion on increasing the equities component of its investment portfolio to a 40% allocation, including a cost-benefit analysis of its current approach to investing policyholder derived funds and Engage only in. real estate and infrastructure investments that involve commercial terms, meaning commercially reasonable and arms-length investments. Furthermore, the Board has asked for MPI s position with respect to the types of real estate and infrastructure investments in which it should be engaged. In response, MPI indicated that (a) the Minister of Finance has jurisdiction over MPI s investments and that the current asset mix is based on the Asset Allocation study that was completed in 2008, (b) MPI does not take public positions on matters that are within the jurisdiction of the Minister of Finance, and, (c) MPI does not take public positions on matters of government jurisdiction or policy. The Corporation s investment portfolio and the portfolio s actual historical and potential future contributions to the Corporation s overall revenue and Basic premium levels are significant. An increase in average annual yield of 1% would generate Page 18

19 additional annual revenue in excess of $20 million per year, allowing for a reduction in overall average annual premiums of 3%. MPI has an investment department, participates in an Investment Working Committee with the Department of Finance, and its Board of Directors has a subcommittee concerned with investment policy and performance. Pre-Ask: Please provide the Board with an update with respect to the Board s recommendation to MPI to research and provide an opinion on increasing the equities component of its investment portfolio to a 40% allocation, including a cost/benefit and analysis of its current approach to investing policyholder derived funds. This is not within the jurisdiction of the Public Utilities Board or Manitoba Public Insurance. All investment decisions are made by the Minister of Finance, as set out in s. 12 of The Manitoba Public Insurance Corporation Act. Operational decisions on investment portfolio management are irrelevant for rate-setting purposes. SM PUB/MPI Pre-Ask 2 Topic: Red Light Cameras and Photo Radar Context: The Board in Order 145/10 recommended that MPI: Provide an analysis of options involving red light camera and photo radar infractions being assigned DSR demerits upon conviction; and Conduct research into the relationship between red light camera and photo radar infractions and at-fault accidents. The Board has also requested that MPI provide MPI s position with respect to whether red light camera and photo radar infractions should result in DSR demerits. Page 19

20 MPI, citing that MPI does not take public positions on matters of government jurisdiction or policy, has indicated that it has no record of which vehicles have received red light camera and photo radar offences, nor does it have the statutory authority to get this data. Furthermore, MPI has indicated that it is not in a position to conduct any analysis regarding the relationship between these infractions and atfault accidents, and that the offences that draw demerits and the number of demerits for the different types of offences are the responsibility of the Government of Manitoba, not MPI. The Board notes that road safety has been cited as the reason for the employment of red light cameras and photo radar, and that reduced accidents, injuries and fatalities would reduce Basic premiums. Pre-Ask: Please: (a) provide the Board with research, either conducted by MPI or from external sources relied on by MPI, regarding the relationship between red light camera and photo radar infractions and accidents. (b) provide the Board with MPI s position as to whether red light camera and photo radar infractions should result in Driver Safety Rating (DSR) demerits; and (c) report to the Board on the process by which red light camera and photo radar infractions could be taken into account in the DSR program and affect an insurance holder s demerit points. (a), (b) and (c) All decisions on red-light cameras and photo radar are made by the Government of Manitoba and Legislature under The Highway Traffic Act and The Drivers and Vehicles Act. Neither the Public Utilities Board nor Manitoba Public Insurance has any jurisdiction on these two topics. These matters are not relevant for rate setting. Page 20

21 SM PUB/MPI Pre-Ask 3 Topic: Graduated Licensing for Motorcyclists Context: The Board in Order 145/10 recommended that: A graduated licensing system be implemented with respect to new motorcycle riders, and as well a prohibition with respect to the ownership of sport bikes within the first five years of riding. The Board has also sought MPI s position with respect to the introduction of a prohibition of the ownership of a sport bike by a licensed driver within the first five years of owning a motorcycle. MPI has indicated that the implementation of a graduated licensing system for motorcycle riders is the exclusive purview of the Legislature of Manitoba, and that graduated driver licensing rules are established by government and MPI does not take public positions on matters of government jurisdiction or policy. The Board notes that MPI has held that the implementation of graduated licensing for the drivers of passenger vehicles has reduced accidents, injuries and fatalities. Accordingly, the successful enhancement of road safety by implementing graduating licensing for motorcyclists would also be expected to reduce accidents, injuries and fatalities. This in turn could reduce incurred claims, thus allowing for reduced Basic premiums. Pre-Ask: Please: (a) advise whether MPI agrees with the premise that graduated licensing for motorcycles would have a similar impact on road safety as the existing graduated licensing program for cars; and (b) describe what steps and costs would be required to implement such a program for motorcyclists. Page 21

22 (a) and (b) A graduated licensing program for motorcyclists, similar to that for class five driver licences, would require implementation by legislative changes to The Drivers and Vehicles Act and regulations. This is a decision for Government and the Legislature. This matter is irrelevant for rate setting. SM PUB/MPI Pre-Ask 4 Topic: PIPP and WCB for Interprovincial Commercial Vehicles Context: The Board, in Order 145/10, recommended that MPI conduct a comparison between PIPP benefits and WCB coverage and has asked MPI why it has no position on whether inter-provincial truckers should be permitted to elect benefits under either MPI s PIPP or Workers Compensation. In response, MPI provided the URL of the website outlining the Personal Injury Protection Plan (PIPP) and Workers Compensation Benefits (WCB) regulations, but did not provide a comparison between PIPP benefits and WCB coverage. MPI further indicated that MPI does not take public positions on matters of government jurisdiction or policy. The Board notes that when a trucker injured in a motor vehicle accident involving a Basic-exempt truck or bus elects MPI s PIPP benefits rather than WCB benefits the result is (1) higher costs for MPI, which are reflected in the premiums of vehicles not exempted from Basic insurance, and (2) lower claims for the owner of the truck involved in the accident. This results in lower costs and lower WCB assessments for the owner, thus reducing the effectiveness of the assessment model which is in place to provide incentives for good driving behavior. Pre-Ask: Please: (a) provide a comparison between PIPP benefits and WCB coverage; and (b) outline the pros and cons of allowing inter-provincial truckers to elect PIPP benefits instead of WCB without paying any MPI premiums; including a Page 22

23 discussion of cost consequences to MPI s Basic Insurance program. (a) and (b) The Board s mandate is to review and approve the Manitoba Public Insurance s rate bases and premiums charged with respect to compulsory driver and vehicle insurance as stated in The Crown Corporations Public Review and Accountability Act and by the Court of Appeal. Differences in PIPP benefits and WCB coverage is a decision of Government and is legislated in The Manitoba Public Insurance Corporation Act and The Workers Compensation Act. A comparison of PIPP benefits to WCB coverage is not relevant to the Board s mandate of reviewing and approving the rates and premiums charged with respect to compulsory driver and vehicle insurance. For this reason, Manitoba Public Insurance will not incur additional operating expenses associated with preparing a comparison that is not within the Board s mandate to consider, and, accordingly, the Corporation will not respond to this recommendation. SM PUB/MPI Pre-Ask 5 Topic: Planned for Implemented Material Financial and/or Operational Changes Context: MPI has put on the public record that the overall financial wellness of the Corporation is not germane to the PUB s Basic rate-setting mandate. The Board is of the view that its awareness of material changes is in the public interest and germane to the establishment of Basic Autopac premiums. MPI s revenues, expenses, assets and liabilities are assigned to Basic and non-basic operations by MPI through allocation formulae which do not provide the PUB with the underlying information required to allow it to determine if MPI has acted prudently, with prudent action being a necessary condition for the setting of just and reasonable rates. Pre-Ask: Please advise the Board about all material financial or operational changes within MPI that either have occurred since March 1, 2011, or are expected to occur in either the current or a future fiscal year, which are expected to have a Page 23

24 material impact on either the overall financial position and results of MPI in the immediate term, or MPI s forecasts for future years. As stated in the Pre-Filed Testimony of Heather Reichert, the only material financial or operational changes are: the onetime net impact on the Rate Stabilization Reserve of $12.6 million arising from the Corporations designation of all Available-For-Sale bonds as Held-For-Trading under IFRS. The transfer of the $65 million in the Basic IT Optimization Fund back to retained earnings. No other material financial or operational changes have occurred or are planned. Any material changes that would impact forecasted revenue or claims would be disclosed in TI.17 or TI.18, the Claims and Revenue forecasting books. SM PUB/MPI Pre-Ask 6 Topic: Broker Arrangements Context: The Board in Order 145/10 recommended that MPI: Review the costs and benefits of the current arrangement with brokers on an annual basis, both with respect to Basic and other lines of business, and file the analysis with the Board within the annual GRA. MPI has, to-date, has not filed support for the current commission arrangement, other than its report that brokers are paid in accordance with the Agent Commissions Regulation 93/2009. MPI holds a virtual monopoly on Extension coverage (holding 96% of the Extension market). Nonetheless, under the new 5-year renewal approach, the broker of record is to receive a commission regardless of whether they process a customer s renewal in the interim period. The new arrangement also includes reduced commissions paid for Basic policies. Page 24

25 Pre-Ask: Please: (a) provide a review of the costs and benefits of the current broker arrangement, both with respect to Basic Insurance and with respect to other lines of business (b) provide MPI s overall forecast of the financial implications for brokers of: (i) The current reduction in commissions paid for Basic Insurance policies (ii) The most recent increase in Extension commissions (iii) The payment of commissions to brokers, even in the case that a customer has not attended at the broker s office; and (c) provide MPI s business case with respect to the current broker commission arrangement. (a), (b), and (c) The commissions for brokers are set by regulation, and hence is a matter for the Government. Extension commissions are completely beyond the jurisdiction of the Board. SM PUB/MPI Pre-Ask 7 Topic: Growth in Operating and Claims Expenses Context: The Board notes that despite the Board s directions over a succession of GRA proceedings that MPI benchmark its operating expenses and personnel complement levels against the experience of ICBC and SGI, this has not been done to date. Without such benchmarking, the Board is left with inadequate information to support Basic operating costs as reported and forecast by MPI. A review of the changes in corporate-wide costs will allow the Board to assess the reasonableness of operating costs when compared to the level of expenditures assessed against Basic. The testing of the reasonableness of the underlying expenses, which form the basis Page 25

26 for the allocation of costs, is germane to the establishment of Basic premiums. Pre-Ask: Please file schedule TI.7B for MPI as a whole, as may be or was employed for 2012/13 rates, including the compounded annual growth rate by expense category for the years 2004/05 through 2010/11, and for the forecast period from 2010/11 to 2013/14. The analysis should incorporate merchant fees as an operating expense for each year. The request would require the Corporation to share more information about its competitive lines than it is obligated to do so and is irrelevant for Basic rate setting. Operating and Claims Expenses for Basic are relevant and can be found in TI.7B. SM PUB/MPI Pre-Ask 8 Topic: Business Process Review (BPR) Context: The testing of the prudency of MPI s underlying expenses, which form the basis for the allocation of costs, is germane to the establishment of Basic premiums. Pre-Ask: Please: (a) provide a schedule detailing the annual expenses for all Business Process Review (BPR) projects since the inception of the BPR in 2005/06, forecast to 2014/15 (expenditures to be broken down into those paid to internal versus those paid to external resources) (b) for each corporate BPR initiative, please indicate how and to which extent the expenditures are to be recovered from each line of business; and (c) describe the method for allocating BPR costs among the lines of business. (a), (b) and (c) Financial information on BPR initiatives that are partially or wholly Page 26

27 funded by Basic have always been provided to the Board for Basic rate setting. Financial information on BPR initiatives that are not part of Basic are not provided to the Board. The PUB has been provided with the allocation methodologies (old and Deloitte) and employs the old methodology for rate setting. Current information on Basic s share of the following BPR initiatives follows: Annual Implementation Expense by BPR Project Annual Expense BASIC Actual Forecast 2005/ / / / / / / / / /15 Project Management Driver Safety Rating Enterprise Data Warehouse PIPP Infrastructure Phase Streamlined Renewal , ,856 1,185,682 1,109,635 48, , , , ,047 69, , ,199 2,311,295 1,779,597 1,319, , ,551 22, TOTAL - 566, ,188 3,317,353 4,055,137 2,521,943 48, Page 27

28 Total Internal and External Project Costs for BPR Projects 2005/ / /08 Internal External Total Internal External Total Internal External Total Basic Costs Costs Costs Costs Costs Costs Costs Costs Costs Project Management Driver Safety Rating Enterprise Data Warehouse PIPP Infrastructure Streamlined Renewal , , , ,871 1,376,722 1,469, ,028 2,222,097 2,554, , , , , , TOTAL ,871 1,376,722 1,469, ,422 3,587,223 4,089, / /10 Internal External Total Internal External Total Basic Costs Costs Costs Costs Costs Costs Project Management Driver Safety Rating Enterprise Data Warehouse PIPP Infrastructure Streamlined Renewal 650,294 1,993,879 2,644, ,328 2,544,254 3,519,582 38, ,886 1,009,926 67,810 1,547,869 1,615, , ,960-61,180 61, ,796 6,457,011 7,246,807 1,277,352 9,705,931 10,983,283 71, , , ,688 3,217,258 3,375,946 TOTAL 1,549,511 9,982,547 11,532,058 2,479,178 17,076,492 19,555,670 Page 28

29 2010/ /12 Internal External Total Internal External Total Basic Costs Costs Costs Costs Costs Costs Project Management Driver Safety Rating Enterprise Data Warehouse PIPP Infrastructure Streamlined Renewal 766,325 1,689,544 2,455,869 17,585 29,071 46,656 15, , , ,410 4, ,839 5,839,258 6,661, , , , TOTAL 1,622,304 7,936,622 9,558,926 17,585 29,071 46,656 *The above total costs include deferred development, capital (data processing, building, etc) and expenses. SM PUB/MPI Pre-Ask 9 Topic: Basic Insurance Context: The Board requires MPI s understanding with respect to a number of premises regarding the compulsory Basic insurance program. These premises are set out below. Pre-Ask: Please: (a) Confirm whether MPI agrees with each of the following statements. To the extent that MPI does not agree, please elaborate: (i) 95% or more of Extension policyholders are also Basic Insurance policyholders (ii) Non-Basic policyholders that comprise the Extension policyholder base are largely companies that also operate in provinces other than Manitoba and have fleets of vehicles that include vehicles in Manitoba. (If MPI disagrees, please provide the actual composition of the Page 29

30 Extension policyholder base). (iii) MPI s on-line connections with brokers, connections with autobody shops, integration of Basic and Extension underwriting, ready access to Driver and Vehicle Licensing (DVL) records and new commission rates make it unlikely that a single competitor would be able to develop a book of Extension business that would amount to 20% or more of the overall Extension policy base, or all competitors would be able to develop a book of Extension business that would amount to 25% or more of the overall Extension base. (iv) The ratio of Extension claims incurred to Extension premiums has fallen sharply since DVL was assigned to the Extension line of business, as represented in MPI s annual financial statements. (b) advise as to MPI s current competitive position with respect to Extension insurance and the percentage of business held by MPI in Extension insurance. (c) provide a listing of the current competitors MPI faces in the Extension insurance market and the relative share of the Extension market in Manitoba of each of these competitors. (a), (b) and (c) Extension insurance is not within the jurisdiction of the Public Utilities Board. The Corporation declines to answer as the questions are not relevant to rate setting for Basic. SM PUB/MPI Pre-Ask 10 Topic: DVL, Cumulative Operating Loss Context: The Board requires an update with respect to MPI s DVL losses, which are currently placed in the Extension line of business despite being inextricably linked to Basic insurance (as the drivers of insured vehicles must be licensed) Page 30

31 Pre-Ask: Please: (a) confirm that, on a cumulative basis and without interest, MPI has incurred an operating shortfall due to its administration of DVL in the order to $110.8 million as of February 28, 2011 or, if MPI disagrees with this calculation, provide MPI s calculation together with explanatory notes. (b) provide an update of MPI s accumulated deficit to February 28, 2011, and a forecast of the accumulated deficit from DVL operations, without interest, throughout MPI s forecast period as of the 2012/13 GRA. (c) provide a forecast, on a year by year basis, of future annual deficits expected to be incurred due to MPI s administration of DVL, without interest. (a), (b) and (c) DVL is not within the jurisdiction of the Public Utilities Board rate setting of Basic. SM PUB/MPI Pre-Ask 11 Topic: Projections for Annual Net Income and Retained Earnings (Non-Basic) Context: In a previous GRA hearing, MPI testified that MPI had transferred excess Extension and SRE retained earnings to Basic RSR because the Basic RSR was below the range then established for the RSR. Also, in a previous GRA hearing, MPI testified that if Basic RSR was within the range established for the RSR and excess retained earnings developed for Extension and/or SRE, then Extension and/or SRE premium levels would be reduced. Pre-Ask: Please: (a) provide a complete continuity schedule detailing the change in MPI s retained earnings (historical and forecast) for all lines of business including Basic Page 31

32 Insurance, Extension and Special Risk Extension (SRE), with Extension broken down into DVL and non-dvl, for the actual fiscal years 1999/00 through to and including the outlook for 2015/16. (b) advise whether, if MPI were to develop a large accumulated deficit in its non- Basic lines of business, it would it be wise, in MPI s opinion, for the PUB to reduce Basic Insurance premiums (assuming the Basic line of business had developed a Rate Stabilization Reserve (RSR) above the maximum of the PUB s range and the forecast for Basic net income for the next two years and for the overall outlook period was for positive net earnings)? (c) Advise whether, if MPI were to develop a large retained earnings position for non-basic operations in excess of the range established by MPI s Board of Directors, and the projections for MPI s outlook period were the net income to further develop, MPI should: (i) transfer excess retained earnings to Basic s RSR if Basic RSR s balance was below the PUB s range for the RSR; or (ii) reduce Extension premiums? (a), (b) and (c) Extension and SRE are not within the jurisdiction of the Public Utilities Board. SM PUB/MPI Pre-Ask 12 Topic: MPI Staff Context: MPI s perspective with respect to its staff contingent would assist the PUB in concluding whether the costs allocated to Basic arising out of MPI s staff costs represent reasonable and prudent expenses. Pre-Ask: Please provide a summary of the most recent employee opinion survey, and a summary of the projects undertaken and costs incurred as a result of Page 32

33 the most recent employee opinion survey. Employee opinion surveys are part of the internal management of the Corporation and are irrelevant for rate setting Basic rates. SM PUB/MPI Pre-Ask 13 Topic: DVL Recovery from the Province Context: On page 40 of MPI s 2010 Annual Report, MPI indicates that: Beginning April 1, 2011 the government will increase its payments to Manitoba Public Insurance to $28 million per year. The Corporation expects that this will fully cover the costs of the DVL administrative operation and also allow for some annual contribution to repayment of the start-up costs for the Manitoba Enhanced Identification Card, Manitoba Enhanced Driver s Licence and Manitoba Identification Card. Pre-Ask: Please: (a) indicate the aggregate costs for the development, production and issuance of the Manitoba Enhanced Identification Card, Manitoba Enhanced Driver s Licence and Manitoba Identification Card, and report and the amount recorded as an accounts receivable from the Province in MPI s financial statements as of February 28, 2011; and (b) detail the repayment arrangements made for each initiative, including the amount sought and to be repaid, and provide the repayment schedule. (a) and (b) Enhanced Driver Licence and Enhanced Identification Card are not part of Basic, and therefore irrelevant for Basic rate setting. Page 33

34 SM PUB/MPI Pre-Ask 14 Topic: Overall MPI Statement of Operations Context: The financial exercise outlined below will assist the PUB in assessing the overall financial health of MPI as of the end of MPI s fiscal year 2010/11 and as of the forecast end of MPI s fiscal years 2011/12 and 2012/13. Pre-Ask: Please file a Statement of Operations (similar to TI.11) for MPI s fiscal years 2010/11, 2011/12 and 2012/13, on a business line contribution margin basis, reflecting the following adjustments: Allocate all corporate direct earned revenues to each line of business (Basic Insurance, Extension Insurance, Special Risk Extension Insurance and DVL); Allocate all corporate direct costs/expenses to each line of business (Basic Insurance, Extension Insurance, Special Risk Extension Insurance and DVL); Calculate the contribution margin by line of business; Allocate all indirect costs/expenses to Basic Insurance; Add the contribution margin of Extension Insurance, Special Risk Extension Insurance and DVL to Basic Insurance. Add indirect corporate earned revenues to Basic Insurance; Add corporate investment income to Basic Insurance; and Calculate Basic Net Income for the year. The request would require the Corporation to share more information about its competitive lines than it is obligated to do so and is irrelevant for Basic rates. SM PUB/MPI Pre-Ask 15 Topic: Human Capital Management Solutions (HRMS) and DVL Replacement Project Context: Prior to its transfer, by government edict, to MPI, DVL and its expenses were the responsibility of the Province. The Province initially provided MPI with $21 million per year as compensation for the operating costs of DVL, with the Page 34