Is More Rate Regulation Really the Solution?

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Adam Smith
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1 Is More Rate Regulation Really the Solution? Barb Addie Baron Insurance Services Inc. Why is Auto Insurance a topic at every Insurance Conference? Line of Business % of Total Market Direct Earned Premium 2013 Ontario Auto 26% $12.0 Billion All other Auto 19% $8.7 Billion Everything else 55% $25.6 Billion Total $46.5 Billion 1

2 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% Should Ontario be used as the model for rate regulation? Ontario Calendar Year Autombile Insurance Loss Ratio Should Ontario be used as a model for rate regulation? Average Calendar Year Loss Ratio 5 Year Average 10 Year Average 15 Year Average Ontario Auto 84% 80% 83% All Other Auto 63% 64% 68% Not Auto 60% 59% 61% Overall 67% 65% 68% 2

3 Should Ontario be used as a model for rate regulation? Number of years that the Ontario Auto Loss Ratio as been less than 75% since 2000: 2 Other buyers of insurance have been subsidizing the Ontario auto consumer for many years Regulators have been slow to recognize trends and have actively supressed rate increases Should Ontario be used as a model for rate regulation? Insurers, for their part, are unwilling to recognized improved experience in part due to the lag in recognizing trends, the rate suppression and the historical inability to increase rates when the experience inevitably sours there is a lack of trust between the regulators and the regulated The rate suppression tends to slow down governments reacting to problems developing in the market such as the huge increases in AB claims from 2006 to 2010 causing problems both for consumers and insurers 3

4 Number of Years Since 2000 that the Ontario Auto Loss Ratio has been Less Than the Auto Loss Ratios in the other provinces and the Non-Auto Loss Ratios Auto Loss Ratio excluding Ontario Auto Non Auto Loss Ratio Number of Years Ontario has had a lower loss ratio 0 0 Average Difference 15 points 23 points 5 Largest Underwriters Have Been Reducing Their Exposure to Ontario Auto (Ontario Auto Premiums / Total Premiums) Group Intact 26.1% 30.1% 28.1% TD 55.3% 47.1% 47.1% Aviva 38.8% 31.0% 32.5% State Farm 66.7% 67.0% 63.0% RSA 29.2% 31.2% 24.3% 4

5 But it is a difficult market Most complex, costly product in the country Product attracts fraud Trends from 2006 to 2010 for Accident Benefits were very high! Need not only less optimistic rate regulation but ultimately, product reform if the market is to be healthier going forward Certainly could consider moving to a system more like Alberta, New Brunswick and Nova Scotia but there are likely too many stakeholders determined to keep the costly system in place Average Premium Comparison Private Passenger Ontario Alberta Atlantics 2009 $1,344 $1,080 $ $1,545 $1,100 $833 5

6 But Alberta is also going offside % Auto Calendar Year Loss Ratios 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% Ontario Alberta Alberta Problem is Bodily Injury 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Alberta Calendar Year Loss Ratios TPL AB Other 6

Actuaries have been slow to react to the change in reserve development Comparison of Ultimate Private Passenger Loss Costs per Car as per the Actuarial

$236 AY 2013 2013 $249 $255 $271 $295 $280 Claims Cost Experience 1.20 BI Claims Frequency for Different Reporting Periods 2009 2010 2011 2012 2013 1.00 0.

7 Actuaries have been slow to react to the change in reserve development Comparison of Ultimate Private Passenger Loss Costs per Car as per the Actuarial Analysis presented to the AIRB in progressive calendar years AY $183 AY $171 $180 AY $205 $210 $208 AY $233 $231 $233 $236 AY $249 $255 $271 $295 $280 Claims Cost Experience 1.20 BI Claims Frequency for Different Reporting Periods AY 2009 AY 2010 AY 2011 AY 2012 AY 2013 Source: IBC with data from Baron Insurance Services. 14 7

BI Claims Cost Experience $60,000 BI Claims Severity for Different Reporting Periods 2009 2010 2011 2012 2013 $50,000 $40,000 $41,663 $42,635 $45,647 $50,487 $39,894 $48,650 $30,000 $30,538 $27,350

8 BI Claims Cost Experience $60,000 BI Claims Severity for Different Reporting Periods $50,000 $40,000 $41,663 $42,635 $45,647 $50,487 $39,894 $48,650 $30,000 $30,538 $27,350 $32,106 $20,000 $10,000 $0 AY 2009 AY 2010 AY 2011 AY 2012 AY 2013 Source: IBC with data from Baron Insurance Services. 15 Alberta moving down the road of Ontario model of rate regulation July 1 st began regulation of both compulsory and optional coverages Are looking at product changes that would INCREASE not decrease BI loss costs Annual industry wide hearing gone In the more recent hearings, have supressed the rate changes in spite of the evidence leading to the higher loss ratios another example of rate regulation slowing down governments responding to product issues Hopefully, the regulation will be more even-handed going forward 8

9 Compulsory vs Optional Average Calendar Year Loss Ratio 1995 to 2013 Compulsory Coverages: 79% Optional Coverages: 64% Only there only 2 years out of 19 that the loss ratio for Compulsory Coverages was lower than the loss ratio for Optional Coverages Worthy of note that Optional Coverages are easier to price much shorter tail An then there is Quebec 75.0% Quebec Auto Insurance Calendar Year Loss Ratio 70.0% 65.0% 60.0% 55.0% 50.0%

10 Quebec Most concentrated market in Canada Top 3 61% Top 5 74% Least regulated and most profitable but Profitability is driven as much by product as the regulatory environment 80.0% Product Really Does Make a Difference! Auto Other Calendar Year Loss Ratios 75.0% 70.0% 65.0% 60.0% 55.0% Ontario Alberta Quebec Atlantics 50.0%

11 East Coast % of 2013 Earned Province Market Premium Ontario 60% 12,047,695 Alberta 18% 3,631,092 Quebec 15% 2,915,060 Nova Scotia 3% 518,989 New Brunswick 2% 463,691 Newfoundland 2% 373,519 PEI 0% 80,354 Total 20,030,400 East Coast Tale of 2 eras, 1995 to 2002 followed by 2003 onward Newfoundland & Labrador only province that did not introduce a minor injury cap went with deductible approach instead 11

12 Two Eras Average Calendar Year Auto Loss Ratio 1995 to to 2013 All New Brunswick 91% 55% 71% Nova Scotia 90% 56% 71% PEI 84% 50% 64% Newfoundland &Labrador 80% 69% 74% Reforms Have Been Successful Although rate regulation is quite onerous (other than PEI), the results have been very different than Ontario Rate regulation has been more even handed Results in Newfoundland & Labrador clearly worse than the other provinces likely a combination of product and regulation Will have to see what the ultimate impact of increasing the cap is on the experience 12

13 Newfoundland & Labrador experience is clearly worsening 120.0% Auto Calendar Year Loss Ratios 100.0% 80.0% 60.0% 40.0% 20.0% New Brunswick Nova Scotia PEI Newfoundland 0.0% Impact of Heavy Handed Rate Regulation Reduces Innovation Canada is way behind the US and the UK with respect to the complexity of the rating structures Poorer matching of risk and rate Leads to cross subsidization take all comer rules, risk sharing pools, non-actuarial rating variable limitations (e.g. 10% rate difference between contiguous territories in Ontario) Reduces shopping in the UK 57% of customers are thinking of changing Canada 23% 13

14 Conclusions The Ontario rate regulation model has been a failure and yet almost everybody else has moved to this rate regulation model Success is determined by both product and rate regulation Companies should continue to immunize themselves by writing less automobile insurance relative to the other lines of business (particularly Ontario) 14

AIRB 2017 Annual Review Bill Adams, Vice-President, Western Ryan Stein, Director of Policy August 15, 2017

AIRB 2017 Annual Review Bill Adams, Vice-President, Western Ryan Stein, Director of Policy August 15, 2017 Annual Review 2017 Agenda Overview of Alberta s auto insurance market Analysis of bodily injury