ICBC is pleased to enclose its inaugural Rate Design Application respecting universal compulsory automobile insurance (Basic insurance).

Transcription

1 Insurance 151 W. Esplanade Corporation North Vancouver BC V7M 3H9 of British Phone: (604) Columbia B-1-1 March 29,2007 British Columbia Utilities Commission Sixth Floor 900 Howe Street Vancouver, BC V6Z 2N3 Attention: Robert J. Pellat, Commission Secretary Dear Mr. Pellat: Re: ICBC's Rate Desiqn Ap~lication ICBC is pleased to enclose its inaugural Rate Design Application respecting universal compulsory automobile insurance (Basic insurance). ICBC's Rate Design Application is being made available on ICBC is advising the intervenors who participated in ICBC's 2006 Revenue Requirements regulatory proceeding as well as participants in ICBC's fall rate design workshop and working sessions that the materials are now available on the website. As stated in Commission Order No. G-32-07, ICBC has requested that the Rate Design Application and the 2007 Revenue Requirements Application be reviewed in a combined process. A combined process will permit an efficient and timely review of both applications. ICBC will lead a workshop on the applications on April 23, 2007 at 9:00 a.m., in the Commission's Hearing Room on the 12'~ Floor, 1125 Howe Street, Vancouver, BC. A Prehearing conference will follow at 1 :30 p.m. on the same day and at the same location. We look forward to the Commission's review of this Application. Yours truly, Donnie Wing, CA Senior Vice President, Insurance, Marketing and Underwriting attachment

2 ICBC Filing with the BC Utilities Commission Volume I of II - Table of Contents CHAPTER 12 APPLICATION CHAPTER 13 INTRODUCTION AND EXECUTIVE SUMMARY A Introduction A.1 Background A.2 ICBC S First Rate Design Application B Executive Summary B.1 History of ICBC s Rate Design and Current Rate Structure B.2 Rate Design Principles B.3 Rate Design Planning and Implementation B.4 Specific Plans B.5 General Appendices CHAPTER 14 HISTORY OF ICBC S RATE DESIGN AND CURRENT RATE STRUCTURE A Introduction A.1 Underlying Concepts B History of ICBC s Rate Design B.1 Early Years B.2 Fundamental Automobile Insurance Rating Program B.3 Claim-Rated Scale (CRS) B.4 Changes to Territory Rating B.5 Principal Operator B.6 Driver-Based Components of ICBC s Rate Structure B.7 ICBC s Basic Rate Design Changes, 1996 to C ICBC s Current Rate Structure C.1 Plate Owner Basic Policies C.2 Fleetplan C.3 Manual Basic Policies D Conclusion TOC-i

3 CHAPTER 15 ICBC Filing with the BC Utilities Commission RATE DESIGN PRINCIPLES A Introduction B Criteria for Selection of Insurance Rating Variables B.1 Statistical Criteria B.2 Operational Criteria B.3 Social Criteria B.4 Legal Criteria B.5 Conclusion C The Legal Framework for Basic Insurance Rate Design C.1 Insurance Corporation Act C.2 Utilities Commission Act C.3 Conclusion D ICBC s Basic Insurance Rate Design Principles D.1 Fair, Just, and Reasonable D.2 Rate Stability and Rate Predictability D.3 Administrative Simplicity E Conclusion Appendix 15 A Order in Council No A CHAPTER 16.1 ICBC BASIC INSURANCE RATE DESIGN MULTI-YEAR PLAN A Introduction B Vision and Overall Goal and Objectives for Future Basic Insurance Rate Structure C Strategy Going Forward D Plan Development E The Plan E.1 Process for Managing Rate Design Change E.2 Short-term Plans E.3 Long-term Plans E.4 Conclusion CHAPTER 16.2 MANAGING RATE DESIGN CHANGE A Introduction B Complexity of ICBC s Application Systems B.1 Autoplan Data Capture C Impact on Customers, Brokers, and ICBC Employees C.1 Customer Service C.2 Other Impacts on Employees D Alternate Claim-Rated Scale Project D.1 Application Systems D.2 Customers, Brokers, and ICBC Employees D.3 Summary E Conclusion TOC-ii

4 CHAPTER 17.1 ICBC Filing with the BC Utilities Commission DRIVER RISK PREMIUM A Introduction B The Current Driver Penalty Point Program C The Case for Change D Driver Risk Premium Program D.1 The New Model D.2 Evidence to Support Change D.3 The Three Year Assessment Period D.4 Conviction Categories E Implementation E.1 Surrendering Licences E.2 Number of Drivers Included in DRP and DPP Programs E.3 Revenue Projection E.4 Implementation Schedule F Conclusion APPENDIX 17.1 A SCHEDULE OF CURRENT PENALTY POINT PREMIUM AND REFUND OF THE PREMIUM A APPENDIX 17.1 B CRIMINAL CODE OF CANADA AND 10 POINT MOTOR VEHICLE ACT OFFENCES USED TO CALCULATE DRP B APPENDIX 17.1 C DRIVER RISK PREMIUM BILLING STRUCTURE C APPENDIX 17.1 D DRIVER ACCIDENT RISK IN RELATION TO THE PENALTY POINT SYSTEM IN BRITISH COLUMBIA D APPENDIX 17.1 E THE RELATIONSHIP BETWEEN SPEEDING BEHAVIOUR (AS MEASURED BY VIOLATION CONVICTIONS) AND CRASH INVOLVEMENT E APPENDIX 17.1 F USE OF CONVICTIONS IN INDUSTRY PRACTICE F CHAPTER 17.2 OTHER OPERATOR A Introduction B Other Operator Defined C Case for Change C.1 Quantitative Evidence C.2 Other Jurisdictions D Plan E Implementation of Other Operator as a Rating Variable E.1 Phase One Data and Premium collection E.2 Phase Two Data Analysis and use of the Other Operator Rating Variable F Impact on Customers G Conclusion TOC-iii

5 CHAPTER 17.3 ICBC Filing with the BC Utilities Commission RATE ADJUSTMENTS A Introduction B Background C Methodology D Proposal D.1 Plate Owner Basic Indicated Base Rate Adjustments D.2 Manual Basic Indicated Rate Adjustments D.3 Proposed Phase-in of the Indicated Rate Adjustments E Summary of Impact on Customers F Conclusion TOC-iv

6 ICBC Filing with the BC Utilities Commission Volume I of II - Table of Figures CHAPTER 14 HISTORY OF ICBC S RATE DESIGN AND CURRENT RATE STRUCTURE Figure 14.1 Timeline: History of ICBC s Rate Design, 1973 to Figure 14.2 Alternate Claim-Rated Scale (ACRS) Currently Used in ICBC s Rate Structure Figure 14.3 ICBC s Territorial Boundaries, BC Figure 14.4 ICBC s Territorial Boundaries, Lower Mainland CHAPTER 16.2 MANAGING RATE DESIGN CHANGE Figure Autoplan Data Capture- Business Functions Supported CHAPTER 17.1 DRIVER RISK PREMIUM Figure Correlation of Contraventions to Crash Risk Figure High Liability Crash Frequency Comparison Figure Comparison of Five Different Assessment Periods Figure Numbers of Drivers in DPP Program and DRP Program 2005 Data CHAPTER 17.2 OTHER OPERATOR Figure Other Operator in other Canadian Jurisdictions Figure Average Premiums with/without Other Operator with less Driving Experience Figure Average Premiums with/without Other Operator with At-fault Claims Figure Transition Period for Implementation of Other Operators CHAPTER 17.3 RATE ADJUSTMENTS Figure Personal Rate Classes Distribution of Indicated Base Rate Adjustments Figure Personal Rate Classes Distribution of Proposed Year 1 Base Rate Adjustments (reflecting the six percent cap) Figure Commercial Rate Classes Distribution of Indicated Base Rate Adjustments Figure Commercial Rate Classes Distribution of Proposed Year 1 Base Rate Adjustments (reflecting the six percent cap) Figure Personal Rate Classes Average Indicated Base Rate Adjustments by Rate Class Group Figure Personal Rate Classes Average Proposed Year 1 Base Rate Adjustments by Rate Class Group (reflecting the six percent cap) Figure Personal Rate Classes Average Indicated Base Rate Adjustments by Territory Figure Personal Rate Classes Average Proposed Year 1 Base Rate Adjustments by Territory (reflecting the six percent cap) Figure Commercial Rate Classes Average Indicated Base Rate Adjustments by Rate Class Group Figure Commercial Rate Classes Average Proposed Year 1 Base Rate Adjustments by Rate Class Group (reflecting the six percent cap) TOF-i

7 ICBC Filing with the BC Utilities Commission Figure Commercial Rate Classes Average Indicated Base Rate Adjustments by Territory Figure Commercial Rate Classes Average Proposed Year 1 Base Rate Adjustments by Territory (reflecting the six percent cap) TOF-ii

8 ICBC Filing with the BC Utilities Commission IN THE MATTER OF THE UTILITIES COMMISSION ACT R.S.B.C. 1996, Chapter 473, as amended and the INSURANCE CORPORATION ACT R.S.B.C. 1996, Chapter 228, as amended and AN APPLICATION BY THE INSURANCE CORPORATION OF BRITISH COLUMBIA ( ICBC ) RESPECTING RATE DESIGN FOR UNIVERSAL COMPULSORY AUTOMOBILE INSURANCE To: British Columbia Utilities Commission Sixth Floor, 900 Howe Street Vancouver, B.C. V6Z 2N3 Application 1. Regulation of ICBC s universal compulsory automobile insurance ( Basic insurance ) by the British Columbia Utilities Commission (the Commission ) commenced in This Application is ICBC s first application to the Commission respecting rate design for Basic insurance. 2. ICBC is a provincial Crown corporation established in 1973 to provide Basic insurance to BC motorists. The existing Basic insurance rate structure has its origins in ICBC s creation and has evolved over the years with changes approved by the Provincial government. Until 2003 the rate structure for Basic insurance was established through provincial legislation, regulations and policy, and through the approval of ICBC s insurance rates by the Provincial Cabinet. 3. A government directive was issued to ICBC with respect to rate design. The government directive dated January 31, 2007 (approved by Order in Council (OIC) No. 39/07 dated February 2, 2007) directs ICBC to prepare and implement a Basic insurance rate design plan that must retain certain key components of the existing rate design structure, address the issue of high-risk drivers and retain until at least 2011 certain existing elements of the Basic insurance rate structure. The government directive says i

9 ICBC Filing with the BC Utilities Commission that the Basic insurance rate design plan should reflect the government s intention to preserve rate stability for the majority of Basic insurance policyholders and to limit the impacts of rate design changes primarily to high-risk drivers, with changes affecting high-risk drivers to be applied to driver actions occurring in 2008 and subsequent years. The government directive noted that this approach to rate design positions ICBC to introduce changes required for a more driver-based system in a gradual and systematic manner without undermining the historical stability and predictability. The government directive also said that ICBC must submit the Basic insurance rate design plan to the Commission for its approval prior to its implementation. 4. This Application presents ICBC s Basic insurance rate design multi-year plan, (the Plan ), that sets out the vision for the future Basic insurance rate structure and the strategy to achieve that vision. ICBC s overall goal with respect to Basic insurance rate design is to have Basic insurance premiums reflect the risk of causing crashes and the associated financial implications. The Plan presented in this Application complies with the government directive of January 31, 2007 with respect to rate design and ICBC hereby seeks Commission approval of the Plan. 5. Drivers who commit a driving offence under the Motor Vehicle Act or its regulations, or are convicted under certain sections of the Criminal Code of Canada accumulate point penalties on their driving record. Under the current Basic insurance rate design, drivers with a BC driver s licence are billed a penalty premium if they have accumulated four or more points over a 12 month period ending five months before the driver s birthday. This premium is commonly referred to as the driver penalty point ( DPP ) premium. 6. In this Application ICBC is presenting its plan to replace the current DPP program with the Driver Risk Premium ( DRP ) program. The DRP will be based on a scan of a driver s driving record over a three-year period and will involve a different approach to driving convictions than the DPP program. ICBC s plan is that the new DRP program commence in January 2008, in parallel with the existing DPP program. In January 2011, when a full three years of data, 2008 and subsequent driving record data, is available, the DPP program will be terminated and the DRP program will be fully implemented. As part of the Commission s approval of ICBC s Plan, ICBC seeks to implement the DRP program. ii

10 ICBC Filing with the BC Utilities Commission 7. Approximately 22% of crash-related claims involve a vehicle operator who is not the principal operator, registered owner or lessee of the vehicle. At the current time ICBC does not collect information about other operators of vehicles, and the Basic insurance rate structure does not take into account the use of vehicles by other operators. Other Operator is a rating variable that is used in most other Canadian jurisdictions to reflect the additional risk associated with the use of a vehicle by Other Operators. 8. In this Application ICBC is presenting its plan to implement a new rating variable, commencing May 1, 2008 for renewal and new Basic insurance policies, that will require that Other Operator information be provided and will include an amendment to Basic insurance rates to allow an additional premium of $25 to be charged if an Other Operator will be operating the vehicle and if the Claim-Rated Scale level of the Other Operator is worse than that of the registered owner or principal operator of the vehicle. As part of the Commission s approval of ICBC s multi-year plan for Basic insurance rate design ICBC seeks to implement its plan respecting Other Operators. 9. ICBC s Basic insurance rating structure has a base rate (before discounts or surcharges) for each rate class / territory combination ( customer group ). As part of this Application ICBC seeks a Commission order approving the implementation of the actuarially indicated adjustments to the base rates of customer groups without further order of the Commission, with the implementation of the adjustments commencing May 1, In order to maintain rate stability and predictability of rates for customers, ICBC proposes an annual cap on these rate adjustments of 6% per year as a means of phasing in the actuarially indicated base rate adjustments. 10. In Appendix 18 B of this Application is ICBC s Basic Insurance Tariff. Effective June 1, 2007 most sections of the Insurance (Motor Vehicle) Amendment Act, 2003 are in force. As a result the name of the Insurance (Motor Vehicle) Act will be changed to the Insurance (Vehicle) Act. Also effective June 1, 2007 the Revised Regulation (1984) under the Insurance (Motor Vehicle) Act is amended and becomes the Insurance (Vehicle) Regulation under the Insurance (Vehicle) Act. Certain regulatory provisions that were included in the Revised Regulation (1984) under the Insurance (Motor Vehicle) Act and that are a necessary part of the rate structure of Basic insurance are not included in the Insurance (Vehicle) Regulation under the Insurance (Vehicle) Act. The iii

11 A ICBC March 29,2007 Filing with the BC Utilities Commission provisions that are a necessary part of the rate structure of Basic insurance but are not in the lnsurance (Vehicle) Regulation under the lnsurance (Vehicle) Act, together with business practices relating to Basic insurance, are now included in ICBC's Basic lnsurance Tariff [for example, the determination of the premium payable for a vehicle insured under ICBC's Fleetplan was is in the Revised Regulation (1984) but is not in the lnsurance (Vehicle) Regulation]. Without Commission approval of the Basic lnsurance Tariff there will be gaps in the framework for the Basic insurance rate structure. 11. ICBC hereby seeks Commission approval, effective June 1, 2007, of the Basic lnsurance Tariff in Appendix 18 B of this Application. Schedule C of the Basic lnsurance Tariff sets out the Basic insurance base rate premiums (before discounts and surcharges) for each rate class / territory, including the 3.3% interim increase approved by Commission Order No. G The interim increase portion of the premiums set out in Schedule C is subject to refund pursuant to Commission Order No. G In this Application ICBC is providing information respecting the history of ICBC's rate design and current Basic insurance rate structure, applicable rate design principles, its Plan for Basic insurance rate design, discussion of its DRP and Other Operator plans, discussion of the rate adjustments for which it seeks approval, and actuarial analysis respecting its rate structure. All of which is respectf~~lly submitted. March 29,2007 INSURANCE CORPORATION OF BRITISH COLUMBIA Donnie Wing, CW Senior Vice President, Insurance, Marketing and Underwriting March 29,2007 iv

12 CHAPTER 13 INTRODUCTION AND EXECUTIVE SUMMARY

13 ICBC Filing with the BC Utilities Commission Table of Contents A Introduction A.1 Background A.2 ICBC S First Rate Design Application B Executive Summary B.1 History of ICBC s Rate Design and Current Rate Structure B.2 Rate Design Principles B.3 Rate Design Planning and Implementation B.4 Specific Plans B.5 General Appendices i

14 ICBC Filing with the BC Utilities Commission A INTRODUCTION 1. This chapter provides an introduction to, and executive summary of, the Insurance Corporation of British Columbia s Rate Design Application. A.1 BACKGROUND 2. ICBC is a provincial Crown corporation established in 1973 to provide universal compulsory automobile insurance (Basic insurance) to BC motorists. ICBC is the sole provider of Basic insurance in the province. Since 2003, Basic insurance rates have been regulated by the British Columbia Utilities Commission (the Commission ). In addition, ICBC competes with other insurance companies in the sale of optional automobile insurance coverages (Optional insurance). 3. In addition to its Basic insurance and Optional insurance lines of business, ICBC provides vehicle and driver licensing services, vehicle registration services, and fines collection on behalf of the provincial government. ICBC refers to the provision of these services as its Non-insurance line of business. 4. ICBC operates its three lines of business on a fully integrated basis. The economies of scope and scale resulting from ICBC s integrated operations benefit BC motorists. 5. ICBC is one of Canada s largest property and casualty insurers with annual premiums of approximately $3.3 billion and approximately $9.0 billion in assets. ICBC employs approximately 5,000 people. ICBC offers insurance products to more than three million policyholders through a network of over 900 brokers, government agents, and appointed agents. ICBC s claims handling services process approximately 947,000 claims per year through a 24-hour telephone claims handling facility that operates seven days a week, a province-wide network of more than 39 claims service locations, and ICBC s corporate website (icbc.com) Similar to other provinces, owners of vehicles in BC are legally required to purchase a Basic package of insurance. For the Basic (compulsory) product, private passenger and 1 ICBC Service Plan , January 2007, page

15 ICBC Filing with the BC Utilities Commission commercial vehicle owners are provided with $200,000 in third party legal liability protection, $150,000 in no-fault accident benefits, and $1 million of underinsured motorist protection. Buses, taxis, limousines, and extra-provincial trucking and transport vehicles have higher mandatory third party legal liability limits. A.2 ICBC S FIRST RATE DESIGN APPLICATION 7. This is ICBC s first rate design application. This Application relates only to Basic (compulsory) insurance; this Application does not relate to Optional insurance. ICBC s existing Basic insurance rate structure has its origins with the corporation s creation in 1973 and has evolved over the years with changes approved by the provincial government. 8. ICBC s Basic rate structure exists within the public policy and legal framework set out by the provincial government. In this Application, ICBC sets out the principles that ICBC believes are appropriate for the design of Basic insurance rates. These principles further guide Basic insurance rate design. They are aligned with and informed by the legal framework. 9. Government direction with respect to rate design, in the form of an Order in Council dated February 2, 2007, was issued while ICBC was preparing this Rate Design Application. 2 ICBC s overall goal and multi-year rate design plan set out in this Application are consistent with that directive as well as Special Direction IC2 to the BC Utilities Commission with respect to the Commission s regulation of ICBC, BC Regulation 307/2004 ( Special Direction IC2 ). 10. ICBC held a workshop and two working sessions 3 in October 2006 on Basic insurance rate design with interested stakeholders, intervenors from past ICBC regulatory proceedings and Commission staff. The sessions provided participants with an overview on the fundamentals and key concepts of Basic insurance rate design and the regulatory process. ICBC also asked for comments and feedback on what participants felt the issues were with the 2 Government directive of January 31, 2007 with respect to Rate Design approved by Order in Council (OIC) No. 39/07, February 2, 2007 (the "government directive of January 31, 2007 with respect to rate design"). 3 ICBC hosted a workshop on Basic insurance rate design on October 5, Two working sessions were held subsequently on October 23, 2006 and October 30, 2006 respectively. 13-2

16 current Basic insurance rate structure. ICBC Filing with the BC Utilities Commission 11. Some of the policies ICBC sells involve manual rating methods; they are referred to as Manual Basic policies. Manual Basic policies represent between two and three percent of ICBC s book of business. Manual Basic insurance is comprised of fleet reporting policies, garage policies, special coverages and other miscellaneous policies that involve special rating methods that in some cases are not automated (see Chapter 14, Section C.3). The scope of this Rate Design Application does not include Manual Basic insurance policies, except for the coverage rate adjustments explained in Chapter 17.3 B EXECUTIVE SUMMARY B.1 HISTORY OF ICBC S RATE DESIGN AND CURRENT RATE STRUCTURE 12. Chapter 14 describes how ICBC establishes its rate structure and sets Basic auto insurance rates, and how its method of rate setting has developed since ICBC first wrote auto insurance in Prior to 2003 when the Commission commenced regulating Basic insurance rates, ICBC s Basic insurance rate design was established through provincial government legislation, regulations and policy, and through the approval of ICBC s insurance rates by the Provincial Cabinet. Major changes to ICBC s rate structure have not been implemented frequently because such changes can introduce rate fluctuations for customers if they are not phased in gradually over time. At present, ICBC s rate structure is primarily a policy-based system, although there are also two driver-based premiums. The large majority of the policies are rated using three key rating variables (territory, rate class and driving experience). B.2 RATE DESIGN PRINCIPLES 13. Chapter 15 explains the overall context within which to consider insurance rate design. It describes the insurance industry practice for the selection of rating variables on the basis of four key criteria statistical, operational, social and legal. Insurance companies must weigh the trade-offs between these criteria when they select their rating variables. The Chapter provides an overview of the legal framework that is relevant to the design of Basic insurance rates. It also sets out principles that should further guide Basic insurance rate design: fair, just and reasonable, rate stability and predictability, and administrative simplicity and ease 13-3

17 ICBC Filing with the BC Utilities Commission of understanding. B.3 RATE DESIGN PLANNING AND IMPLEMENTATION 14. Chapter 16.1 sets out ICBC s Basic insurance rate design multi-year plan (the Plan ), including both short-term plans (up to and including 2009) and long-term plans (post 2009). The Plan is consistent with ICBC s rate design principles, as well as with the government directive of January 31, 2007 with respect to rate design. The overall goal of the Plan is to have Basic premiums better reflect the risk of causing crashes and the associated financial implications. The two key objectives for achieving this goal are for rates to move towards actuarial pricing, and for the rate structure to shift towards being more driver-based (variables over which the driver has control and which are more predictive of claims costs). ICBC s Basic insurance rate structure will provide drivers with the ability to affect the premium they pay through their decisions on how they drive and who they allow to drive their vehicles. The design will place the responsibility for driving safely with drivers by focusing on rating variables that drivers are able to control (e.g., convictions, at-fault crashes). Fundamental to rate design, drivers actual risk characteristics will be a key determinant in their rating. 15. Short-term plans identified in the Plan include introducing a new Driver Risk Premium (DRP) program, implementing a new Other Operator rating variable with an additional fixed dollar amount of premium; rate adjustments within the existing rate class / territory structure, and bringing forward rating changes to better reflect the actual risk of fleets. Long-term plans include re-examining the key rating variables used for the large majority of Basic insurance policies (including review of the Claim-Rated Scale to move towards a more driver-based rating system, as well as review of the territory and rate class rating variables); refining the rating for the Other Operator rating variable and analyzing other possible rating variables. 16. Chapter 16.2 provides an explanation of why it is important for rate design changes to be sequenced as they are in the Plan, to achieve effective, efficient and successful implementation. Implementing rate design change at ICBC is a highly complex task because of the size and scope of ICBC s operating environment, and the extensive impact that rate design changes will have for IT systems, brokers, staff and customers. In particular, making large changes to IT systems is a complicated process due to the number of ICBC systems and applications, and their many interdependencies. 13-4

18 ICBC Filing with the BC Utilities Commission B.4 SPECIFIC PLANS 17. In Chapter 17.1, ICBC outlines its intention to replace the existing Driver Penalty Point (DPP) premium with the new DRP program. Drivers will still accrue penalty points when convicted of driving offences, but the driver premium will be based on the type or frequency of conviction, rather than the number of points accumulated. The DRP premium will be related to the risk of being responsible for a crash in the future, as exhibited by the accumulation of convictions and roadside suspensions over a three year period. It is estimated that no more than 5% of drivers will pay DRP (up from about 1.2% of drivers under the current DPP program). Annual revenues are projected to be greater than for the DPP program, and are estimated to be from $40 million to $60 million, with the resulting revenue being part of Basic insurance revenues. As ICBC s rate design initiatives are intended to be revenue neutral, revenue from these changes will be applied to the 2008 revenue requirements for the benefit of all policyholders. 18. In Chapter 17.2, ICBC presents its plan to implement a new Other Operator rating variable to reflect the risk presented by the driving experience of other operators of an insured vehicle. With approximately 22% of crash-related claims in BC involving vehicle operators who are not listed as the Registered Owner (RO) or Principal Operator (PO) of the vehicle, this additional risk posed by operators other than those listed on the vehicle s policy is not currently captured in ICBC s Basic rating structure. During the initial implementation period from May 2008 through April 2010, ICBC plans to collect other operator information on private passenger vehicle policies and charge a $25 additional premium for Other Operators that pose additional risk. Subsequently, ICBC plans to undertake analysis based on the data collected and the implementation of the Other Operator rating variable to arrive at a more reflective indication of the actual risk associated with other operators. Undertaking the data collection necessary for identifying other operators will allow separate analysis of frequent other drivers and their additional risk, which will in turn enable future analysis of the Claim-Rated Scale to focus on the risk of all drivers. ICBC estimates that up to 240,000 to 420,000 policies may be affected by the additional $25 premium, generating approximately $6.0 million to $10.5 million in gross premium revenue that will be part of Basic insurance revenues and applied to the 2008 revenue 13-5

19 requirements for the benefit of all policyholders. ICBC Filing with the BC Utilities Commission 19. In Chapter 17.3 ICBC sets out its proposal to adjust base rates by the actuarially indicated base rate adjustments contained in Appendix 18 D. The base rate is the basis for calculating the Basic insurance premium. It is a rate that applies to all customers in a particular rate class/territory combination, and it is the rate to which a customer s discount or surcharge is subsequently applied. 20. In order to maintain rate stability and predictability of rates for customers, ICBC proposes an annual cap of six percent on the rate adjustments described in Chapter 17.3 as a means of phasing in the indicated base rate adjustments. B.5 GENERAL APPENDICES 21. Chapter 18 contains the general appendices. Appendix 18 A provides a glossary to help participants in the regulatory process understand the terminology used in the 2007 Revenue Requirements Application, as well as this Rate Design Application. Appendix 18 B contains ICBC's Basic Insurance Tariff, previously found largely in government enacted regulation, which sets out the general terms and conditions for Basic insurance, the base rate premiums, and other provisions applicable to Basic insurance. 22. The remainder of Chapter 18 contains ICBC s actuarial analysis for this Application. Appendix 18 C explains the steps involved in calculating the actuarially indicated base rate adjustments. Appendices 18 D and 18 E present the calculation of the actuarially indicated rate adjustments and the impact of the 6% annual cap on those base rate adjustments. 13-6

20 CHAPTER 14 HISTORY OF ICBC S RATE DESIGN AND CURRENT RATE STRUCTURE

21 ICBC Filing with the BC Utilities Commission Table of Contents A Introduction A.1 Underlying Concepts B History of ICBC s Rate Design B.1 Early Years B.2 Fundamental Automobile Insurance Rating Program B.3 Claim-Rated Scale (CRS) B.3.1 Alternate Claim-Rated Scale (ACRS) B.4 Changes to Territory Rating B.5 Principal Operator B.5.1 Origins and Administrative Practice, 1974 to B.5.2 Annual Declaration of Principal Operator, 2003 to Present B.6 Driver-Based Components of ICBC s Rate Structure B.7 ICBC s Basic Rate Design Changes, 1996 to C ICBC s Current Rate Structure C.1 Plate Owner Basic Policies C.1.1 Rate Class Rating Variable C.1.2 Territory Rating Variable C.1.3 Seniors Rate Classes C.1.4 Disability Discount C.1.5 Claim-Rated Scale C.1.6 Driver Penalty Point Premium C.1.7 Multiple Crash Premium C.2 Fleetplan C.3 Manual Basic Policies C.3.1 Garage Rating C.3.2 Compulsory Special Coverages C.3.3 Miscellaneous Policies D Conclusion i

22 ICBC Filing with the BC Utilities Commission Table of Figures Figure 14.1 Timeline: History of ICBC s Rate Design, 1973 to Figure 14.2 Alternate Claim-Rated Scale (ACRS) Currently Used in ICBC s Rate Structure Figure 14.3 ICBC s Territorial Boundaries, BC Figure 14.4 ICBC s Territorial Boundaries, Lower Mainland ii

23 ICBC Filing with the BC Utilities Commission A INTRODUCTION 1. This Chapter describes how ICBC establishes its rate design and sets Basic auto insurance rates, and how its rate structure has developed since ICBC first wrote auto insurance in During this period, major changes to ICBC s rate structure have been implemented infrequently, which has minimized the pricing instability such changes can bring. This Chapter provides an explanation of ICBC s rate structure for those without specialized insurance industry knowledge and serves as background for understanding the plans in this Rate Design Application that are intended to move rates closer to actuarial pricing within the context of government policy and direction. This Chapter is designed to assist in a general understanding of how ICBC sets rates and its purpose is educational only. ICBC s Basic insurance rates are described, for legal purposes, in the Basic Insurance Tariff in Appendix 18 B, which sets out all of the regulatory provisions, practices, and policies related to the calculation of Basic insurance rates. In cases of differences in content between this Chapter and the Basic Insurance Tariff, the Basic Insurance Tariff takes precedent. 2. Section A explains some of the underlying concepts that will be useful for understanding ICBC s rate design. Section B provides an historical overview of ICBC s rate structure and illustrates how it has changed since Section C describes ICBC s current rate structure for different customer groups. A.1 UNDERLYING CONCEPTS 3. ICBC is a provincial Crown corporation with the mandate to provide universal compulsory automobile insurance (Basic insurance) to all motorists in BC. Basic insurance provides mandatory third party legal liability coverage, generally $200,000, if the driver is found to be at fault for a crash and is responsible for causing injury to someone else or damage to someone else s property. 1 Basic insurance also pays for certain injury-related medical and rehabilitation expenses, wage loss and death benefits incurred as a result of a crash, no matter who is at fault (accident and death benefits). Basic insurance additionally includes underinsured motorist protection, hit-and-run and uninsured motorist coverage, and inverse liability 1 For exceptions, see Insurance (Vehicle) Act, Insurance (Vehicle) Regulation (IVR), Schedule 3, section 1. All references to the Insurance (Motor Vehicle) Act and to the Revised Regulation (1984) under the Insurance (Motor Vehicle) Act have been changed to the equivalent section in the Insurance (Vehicle) Act and the Insurance (Vehicle) Regulation because ICBC s rate design will take effect after this legislation comes into force on June 1,

24 ICBC Filing with the BC Utilities Commission coverage. 2 As part of this Rate Design Application, ICBC is proposing rate adjustments for its Basic insurance coverages (see Chapter 17.3). 4. Insurers use rating variables to group customers according to similar risk characteristics, so that an appropriate premium can be determined according to the expected loss of each customer group. ICBC currently uses three key rating variables to calculate auto insurance premiums for the majority of Basic insurance policies (see Sections C.1.1, C.1.2 and C.1.5 below): rate class, territory, and driving experience (including both the number of years licensed and number of at-fault claims). The majority of vehicles covered by ICBC policies (approximately 80%) are in the six private passenger rate classes, with the remainder being motor homes, motorcycles, collector vehicles, recreational trailers, or vehicles in the commercial rate classes At present, ICBC s rate structure is primarily a policy-based system, with a registered owner and principal operator associated with each policy. For the majority of Basic insurance policies, the premium paid in respect of a vehicle is determined first by the rate class and territory of the vehicle insured by the policy. The premium is then adjusted by either a discount or surcharge based on the number of years of driving experience of the principal operator shown on the policy and the claims history attached to the policy ICBC also charges two driver-based premiums: the Driver Penalty Point (DPP) premium, which is charged based on points accumulated on the driver s licence, and the Multiple Crash Premium (MCP), which is charged for having three or more chargeable claims over a three-year period (see Sections C.1.6 and C.1.7 below). 7. In a typical year, approximately 97% of Basic insurance premium revenue relates to Plate Owner Basic policies, including fleet-rated vehicles. The remaining two to three percent of ICBC s book of Basic insurance business is Manual Basic policies, which comprise fleet reporting policies, 5 garage policies, special coverages, and other miscellaneous policies that 2 As hit-and-run and uninsured motorist coverage, and inverse liability coverage are provided by the Basic third party liability premium, the actuaries include the experience of these coverages with third party liability for their analysis. 3 Private passenger rate classes include pleasure use only; vehicle driven to or from work or school not exceeding 15 kilometres; vehicle driven to or from work or school in excess of 15 kilometres; vehicle driven part way to or from work or school, with the use of public transportation; business; and seniors (pleasure use only). Motor homes are also in the private passenger rate classes (see Section C.1.1 (1)(i)) but are excluded from this percentage. 4 For fleet-rated vehicles, only claims history is applicable. See Section C.2. 5 Together fleet reporting policies and Plate Owner Basic policies represent approximately 99% of Basic insurance premiums. 14-2

25 ICBC Filing with the BC Utilities Commission involve special rating methods, which in some cases have not yet been automated. The scope of this Application does not include Manual Basic insurance policies, except for the rate adjustments for coverages explained in Chapter This rate design focuses solely on insurance policies that do not involve special rating methods (policies other than Manual Basic). B HISTORY OF ICBC S RATE DESIGN 8. The historical development of ICBC s rating structure has been closely intertwined with the public policy rationale behind it, and with the influence of insurance industry principles from the 1960s through to the present. ICBC s rate structure has evolved over a period of more than 30 years, with rate design changes being implemented infrequently which minimizes the pricing instability such changes can bring. Prior to 2003 when the Commission commenced regulating Basic insurance rates, ICBC s Basic insurance rate structure was established through provincial government legislation, regulations and policy, and through the approval of ICBC s insurance rates by the Provincial Cabinet. As a result, the government s policy directions with respect to ICBC s rate design are imbedded in ICBC s rate structure. Figure 14.1 illustrates the major events in ICBC s rate design from 1974 to 2007 that are explained in further detail in this Section. Figure 14.1 Timeline: History of ICBC s Rate Design, 1973 to : ICBC created 1974: ICBC starts writing automobile insurance; Driver Penalty Point (DPP) premium introduced 1976: Seniors rate class introduced (25% discount) 1977: Disability discount of 25% introduced; start of Safe Driver Vehicle Discount program : Fundamental Automobile Insurance Rating program eliminated rating based on age, sex and marital status 1982: Claim-Rated Scale (CRS) introduced 1991: 14 territories introduced (plus one for out-of-province vehicles) 2001: Significant changes to CRS; Multiple Crash Premium (MCP) introduced 2003: Annual declaration of Principal Operator; Commission becomes responsible for approving Basic insurance rates 2004: Government issues Special Direction IC2 to the Commission 2007: Government issues direction on Basic insurance rate design 14-3

26 ICBC Filing with the BC Utilities Commission B.1 EARLY YEARS 9. ICBC was created in 1973 under the Act (which in 1979 became the Insurance Corporation Act). The Automobile Insurance Act and regulations thereunder set out the insurance product that ICBC provided, while the Insurance Corporation of British Columbia Act incorporated and described ICBC, its powers and restrictions. 6 ICBC s plan of universal compulsory automobile insurance came into effect on March 1, ICBC s 1974 Basic and Optional rates were based on the following rating variables: 7 Age Sex Marital status Territory of vehicle use (based on where the vehicle was usually used) Make, model and year of the vehicle Vehicle use (pleasure, to and from work, delivery, etc.) Principal operator Occasional male operator(s) under age As of July 1, 1974 ICBC issued a driver s certificate to every licensed driver in BC and charged a premium based on the number of demerit points on the driver s record. An escalating DPP premium for an excessive number of penalty points arising from Motor Vehicle Act driving convictions has thus been a feature of ICBC s rate structure since 1974 and continues today (see also Section C.1.6 below and Schedule E of Appendix 18 B). 12. On March 1, 1976 ICBC introduced a seniors rate class. Today, the seniors rate classes entitle those over age 65 to Basic insurance at a premium discount of 25% as long as they drive their vehicle for pleasure use only (see Section C.1.3 below). 8 Additionally, since March 1, 1977, persons with disabilities have also been entitled to a disability discount of 25% on Basic 6 The Automobile Insurance Act became the Insurance (Motor Vehicle) Act in 1979 and will become the Insurance (Vehicle) Act on June 1, In 1976 government opened up the Optional insurance market to competition between ICBC and private insurers. 8 A new and separate Vehicle Owner category was introduced providing a 25% premium discount on compulsory coverage for senior citizens qualifying as pleasure drivers, and for handicapped drivers operating vehicles with approved hand-operated driving controls. ICBC, Fourth Annual Report for the year ended February 28, 1977, p. 6. There are currently three seniors rate classes: one for private passenger vehicles, one for motorcycles and one for collector vehicles. 14-4

27 ICBC Filing with the BC Utilities Commission insurance. 9 To be eligible for ICBC s disability discount, a person with disabilities must meet the requirements under the Motor Fuel Tax Act for a motor fuel tax rebate. ICBC offers the disability discount for the same public policy reasons as the government offers the motor fuel tax rebate to persons with disabilities, which is intended to assist disabled persons with transportation costs (see also Section C.1.4) In 1977 ICBC began to provide incentives for safe driving, starting with the Safe Driver Incentive Grant for customers under the age of 25. This grant was equivalent to 25% of the registered owner or principal operator s gross premiums for Basic and Optional insurance. To qualify, the applicant could not have accumulated more than five driver penalty points and could not have had a claim in the preceding year. 11 Secondly, influenced, but not governed, by the federal Anti-Inflation Board, 12 ICBC decided in late 1976 (in time for March 1, 1977 renewals) to give a discount of 17.5% on gross premiums for Basic and Optional insurance for those customers who had been claims-free during the preceding year. In the second year of the Safe Driving Discount program, the discounts were set at 15% for a one-year claims-free driving experience, and 25% for two years of claims-free driving. In its third year, the program became known as the Safe Driver Vehicle Discount and added a three-year claims-free discount of 32.5%. The discounts were not intended to be actuarially indicative of the risk of the drivers that fell into these discount categories, but were instead intended to provide some recognition that customers with a favourable claims history should receive a discount. The Safe Driver Vehicle Discount was the start of ICBC using claims history in the rating process to encourage careful and safe vehicle operation See also Schedule G of Appendix 18 B, and BC Reg 600/ For example, see Official Report of the Debates of the Legislative Assembly of British Columbia (Hansard), March 20, 1986, afternoon sitting, p re. fuel tax rebate program. 11 As a further stimulus for safe driving, the Corporation provided in 1976/77 the Under-25 Safe Driver Incentive Grant amounting to approximately $5 million. This incentive plan, completely underwritten by the Corporation, is believed to have helped significantly in reducing accidents in this high-risk group. ICBC, Fourth Annual Report for the year ended February 28, 1977, p. 5. See also ICBC, Fifth Annual Report, 1978, p. 13 and BC Reg 600/76 and BC Reg 643/76. The Under-25 Safe Driver Incentive Grant program was repealed between 1983 and The federal Anti-Inflation Board oversaw the Anti-Inflation Act from 1975 to The Board was responsible for monitoring wage and price controls, and for investigating gas prices, insurance premiums, food prices, etc. to try to control record inflation levels in 1974 and For more information, see Government of Canada website Canadian Economy Online at and ICBC, Fourth Annual Report for the year ended February 28, 1977, p ICBC, Fifth Annual Report, 1978, pp. 8 and 12, and BC Reg 600/76. See also ICBC, Sixth Annual Report for the year ended February 28, 1979, p

28 ICBC Filing with the BC Utilities Commission 14. All other aspects of ICBC s rating structure up to 1979 remained the same as ICBC had put in place in In general, insurers (including ICBC) strive to have a rate structure that distinguishes between identifiable risk characteristics of customers, while being simple enough for customers to understand. B.2 FUNDAMENTAL AUTOMOBILE INSURANCE RATING PROGRAM 15. In the summer of 1979, the BC Legislature passed the Automobile Insurance Nondiscrimination Act, which prohibited auto insurance rates that discriminated on the basis of age, sex or marital status. 14 While this legislation was never proclaimed and therefore never had any legal effect, 15 ICBC adopted the spirit of this legislation and implemented the Fundamental Automobile Insurance Rating program between 1980 and 1981 by not using age, sex and marital status as rating variables. B.3 CLAIM-RATED SCALE (CRS) 16. When the principles of the Fundamental Automobile Insurance Rating program were incorporated, ICBC needed a new way of taking driver risk characteristics into account in its pricing. With DPP already in place to charge a premium based on points accumulated on the driver s licence, ICBC developed a bonus-malus system, similar to that prevalent in continental Europe at the time, which adjusted the premium paid by a customer according to his or her individual claims history by rewarding customers with claims-free experiences and penalizing those with at-fault claims. ICBC adopted the name Claim-Rated Scale for its bonus-malus system when it was implemented in 1982, changing the original Safe Driver Vehicle Discounts to 10%, 20% and 30% and adding a fourth year claims-free premium discount of 35%, as well as surcharges for those responsible for multiple chargeable claims. 16 By 1986, the CRS provided four years of claims-free discounts as follows: First claims-free year 10% Second claims-free year 20% 14 Automobile Insurance Non-Discrimination Act (Bill 33), 1979, section 2 and explanatory notes. See also Official Report of the Debates of the Legislative Assembly of British Columbia (Hansard), July 30, 1979, afternoon sitting, p re. second reading of Automobile Insurance Non-Discrimination Act. 15 These not-in-force sections of the Insurance (Motor Vehicle) Act (sections 47-51) were repealed in May ICBC, Tenth Annual Report 1982, for the twelve months ended December 31, 1982, p. 2. See also BC Reg. 543/

29 ICBC Filing with the BC Utilities Commission Third claims-free year 30% Fourth claims-free year 40% While each claims-free year resulted in a progressively higher discount (to a maximum 40% discount), each chargeable claim resulted in a lower discount or a surcharge. For those with multiple chargeable claims, there was no maximum surcharge because the surcharge end of the CRS was open-ended. All new drivers, regardless of age, started out paying the base rate premium when insuring their own vehicle with no driving experience yet. B.3.1 ALTERNATE CLAIM-RATED SCALE (ACRS) 18. The CRS remained relatively unchanged for almost 20 years. On January 1, 2001, ICBC implemented a significant rate structure change to rebalance the CRS discount levels and address some inherent structural deficiencies that had arisen over time. 18 Under the new Alternate Claim-Rated Scale (ACRS), discount and surcharge entitlement was readjusted to reflect actual loss ratios more accurately and with greater sustainability by slowing the discount growth from 10% increments for the first four years to 5% increments for the first eight years (see Figure 14.2 for the ACRS system that ICBC currently uses in its rate structure and Chapter 16.2 of the Application for an explanation of the process of managing the ACRS changes; further details are in Schedule D of the Basic Insurance Tariff in Appendix 18 B). Transition rules were put in place to limit the impacts of the ACRS changes for customers who did not have any chargeable claims. 19. Under the original CRS, anyone who had a chargeable claim was treated the same, regardless of the number of years of claims-free driving the customer had accumulated (e.g., any customer at the maximum 40% discount level moved to a 10% discount after one chargeable claim). Under the new ACRS, however, the penalty for a chargeable claim now depends on the position of the policy on the CRS, with a far greater premium impact for a policy at a surcharge level than for a policy with more than 15 years with no chargeable claims. Section C.1.5 below describes how the CRS functions at present as part of ICBC s current rate structure. 17 ICBC, Thirteenth Annual Report 1985, for the twelve months ended December 31, 1985, p. 6. See also BC Reg. 379/ BC Reg 292/

30 ICBC Filing with the BC Utilities Commission Figure 14.2 Alternate Claim-Rated Scale (ACRS) Currently Used in ICBC s Rate Structure B.4 CHANGES TO TERRITORY RATING 20. In the early years at ICBC, the dominant territorial structure that was in place at the time and used by auto insurers was adopted by ICBC in 1974 (six territories plus one for vehicles operated out-of-province). ICBC started to re-examine its territorial structure in 1988 and put 15 new territories in place in 1990 (plus one for vehicles operated out-of-province), with rate changes caused by the changes in territorial boundaries being phased-in over time to avoid sudden, significant changes in insurance rates. 19 Economic changes from Expo 86 and the 19 BC Reg 383/

31 ICBC Filing with the BC Utilities Commission building of the Coquihalla Highway, for example, had altered BC s population size and distribution, which meant ICBC s original six territories no longer represented cohesive areas with similar risk. In 1991, ICBC merged Pemberton and Hope into one territory due to similar expected loss costs and a relatively small population base. 20 Since 1991, there have been 14 territories plus one additional territory to capture vehicles primarily operated outside of BC (see also Section C.1.2). 21. Changes to territorial structure are made infrequently and need to be driven by significant changes in the region s risk, such as economic changes, transportation infrastructure and population redistribution, that lead to parts of a territory having more distinct claims costs. When changes are made, they are implemented in a manner that helps rates remain relatively stable for customers. Very few insurance risks are clearly delineated by a boundary, so no matter where territory boundaries are drawn, there may be customers who do not agree with the territory in which they are located, arguing particularly in border communities that they should be paying the lower premiums of a neighbouring territory. When territory issues are being considered, it is important to remember that some customers premiums would have to be increased to offset the lower premiums of any customers that were moved into a lower cost territory. B.5 PRINCIPAL OPERATOR B.5.1 ORIGINS AND ADMINISTRATIVE PRACTICE, 1974 TO Insurers generally ask vehicle owners to declare who the principal operator of the vehicle will be, so that the appropriate premium based on the risk characteristics associated with the person who will be doing most of the driving over the term of the policy can be determined. Since the beginning of ICBC s CRS rating system, the principal operator of a vehicle has been defined as the person who operates the vehicle the majority of the time the vehicle is operated during the term of the policy (in most cases, this person is also the registered owner of the vehicle). 21 For many years, ICBC only required declaration of the principal operator of the vehicle when the insurance policy for that vehicle was first taken out, not on renewal of the insurance policy. 20 BC Reg 448/ BC Reg 379/

32 ICBC Filing with the BC Utilities Commission B.5.2 ANNUAL DECLARATION OF PRINCIPAL OPERATOR, 2003 TO PRESENT 23. The declaration of the principal operator of the vehicle only for new policies resulted in policies for which the premium did not adequately reflect the risk presented because the principal operator might have changed significantly over time. 22 For example, change over time in a household may have resulted in the majority of a vehicle s operation passing to a less experienced or more crash-prone driver in the family, which was a different operator than the principal operator that had been declared when the policy was first taken out. To address this shortcoming, since January 2003, ICBC requires vehicle owners to identify on the application form for each new or renewal policy who the principal operator will be during that policy term and declare that information for rating purposes. This change had the effect of shifting the CRS rating variable to become more driver-based by enabling the reassessment of insurance risk relative to vehicles that had remained within a family group for a number of years and allowing the premium charged to be more reflective of the prospective risk (particularly in the case of inexperienced drivers, or those with at-fault claims). B.6 DRIVER-BASED COMPONENTS OF ICBC S RATE STRUCTURE 24. With its policy-based rate structure, ICBC currently determines most premiums based on the claims history associated with the policy and the number of years licensed of the principal operator. ICBC also charges two driver-based premiums: the DPP premium and the MCP. ICBC is planning to shift to a more driver-based system in the future to increase the role of driving experience in determining premiums. 25. As stated in Section B.1, the imposition of an escalating DPP premium for an excessive number of penalty points arising from Motor Vehicle Act driving convictions has been part of ICBC s rate structure since In 1974, the premium for a driver s certificate was based on the applicant s age and the number of penalty points recorded for the preceding three years under the Motor Vehicle Act and its regulations. 23 Drivers were required to provide information on out-of-province violations and crashes, and ICBC had the ability to levy additional premiums if it determined the driver had not correctly provided such information. The general premium 22 ICBC s 2002 Cabinet Submission on declaration of principal operator identified that 10-15% of ICBC customers would see an impact on their premiums as a result of changing to an annual declaration of principal operator. 23 BC Reg 428/73, BC Reg 1/74 and BC Reg 233/

33 ICBC Filing with the BC Utilities Commission was $10 for all drivers, with the DPP premium ranging from $36 for six points to $400 for 20 or more points collected over three years. In 1988, the DPP program changed to a one-year scan and the annual DPP premium approximately tripled for each chargeable level. 24 In 1990, Criminal Code of Canada offences were also added to the Motor Vehicle Act driving convictions that were originally included in the program. 25 In the early 1990s, the DPP premiums were increased twice again, and in 1994, the threshold for paying DPP premiums was reduced to four points. In 1995 and 1998, the DPP premiums were increased again, with the current schedule of premiums having been in place since In 1997, changes in legislation brought a portion of the consequences for involvement in chargeable claims to bear on the at-fault driver, whether or not they owned the vehicle, and over and above the CRS impact on the policy of the involved vehicle. This Crash Responsibility Charge operated as a form of property damage deductible that was the responsibility of the atfault driver. The amount was $250 per occurrence The Crash Responsibility Charge was unpopular with customers, mainly because it disregarded the long-term driving history of the individual so that a person with twenty years of claims-free driving could receive an invoice for the Crash Responsibility Charge for a single chargeable claim, similar to a driver with one year of claims-free driving. ICBC replaced the Crash Responsibility Charge with the MCP in As described in Section C.1.7, the MCP provides for escalating charges triggered when the driver has had three or more chargeable claims within a three-year scan period (see also Schedule F of Appendix 18 B). B.7 ICBC S BASIC RATE DESIGN CHANGES, 1996 TO As this Section has illustrated, major changes to ICBC s rate structure have not been implemented frequently because such changes can lead to pricing instability if they are not phased-in gradually over time. Looking in particular at the past decade, ICBC s auto insurance rates were frozen for a six-year period from 1996 to 2001, due in part to ICBC s Six Point Plan road safety and claims cost reduction initiatives. 29 In 2002 and 2003, rate adjustments were 24 BC Reg 449/ BC Reg 383/ BC Reg 438/92, BC Reg 404/94 and BC Reg 153/ BC Reg 384/ BC Reg 292/ See ICBC, Annual Report 2000, p. 5, at

34 ICBC Filing with the BC Utilities Commission made to move towards the actuarially indicated base rates for the rate class/territory customer groups that had become unbalanced during the rate freeze. In some cases, ICBC phased-in these rate changes to keep rates smooth and relatively stable for customers. After the Commission commenced regulation of ICBC s rates in 2003, the main focus was on overall Basic insurance rates for ICBC s revenue requirements, with an increase of 0.4% in 2004 to reflect the increase in the premium tax, no increase in 2005 and a 6.5% increase in As this is ICBC s inaugural Rate Design Application to the Commission, the next Section provides an explanation of ICBC s current rate structure as background for understanding the Basic insurance rate design multi-year plan outlined in Chapter 16.1 and the specific rate design plans discussed in Chapter 17. C ICBC S CURRENT RATE STRUCTURE 29. This Section first explains the three key rating variables ICBC uses to determine a customer s auto insurance premium for the majority of Plate Owner Basic policies, as well as additional discounts and driver-based premiums that may apply to these customers. Second, a discussion of ICBC s Fleetplan provides an explanation of fleet-rated vehicles (whose policies are also Plate Owner Basic policies), as well as a description of fleet reporting policies, which are Manual Basic policies. Third, this Section describes how ICBC s current rate structure works for the other types of Manual Basic policies: garage policies (vehicles in the care of a garage or other motor vehicle service facility), special coverages and miscellaneous policies ICBC provides. 30. Most Plate Owner Basic policies are rated first by determining the base rate for the rate class and territory that applies to the vehicle insured by the policy (base rate premium), then by applying the appropriate discount or surcharge to the base rate (see Section 2.C of Appendix 18 B): Rate class: how the vehicle is used (e.g., pleasure, to and from work), as well as type of vehicle (e.g., motorcycles, taxis, buses, trucks) 2. Territory: generally based on the location of the vehicle when not in use (i.e., generally where the vehicle is normally parked overnight) 30 Discounts are not applicable to trailers and limited speed motorcycles

35 ICBC Filing with the BC Utilities Commission 3a. Driving Experience: CRS discounts and surcharges reflect a combination of both the driving experience of the principal operator shown on the policy and the claims history associated with the policy 3b. Claims Experience: Fleet formula provides discounts or surcharges based on the combined claims experience of all policies for fleet-rated vehicles For those seniors that qualify, there is a 25% discount on Basic insurance in the seniors rate classes (see Section C.1.3 below). Additionally, if a customer is eligible for a disability discount, this discount is applied prior to determination of the appropriate CRS level (see Section C.1.4 below). 31. A fleet of at least five vehicles with common ownership or a common lessee has the option of insuring these vehicles under CRS or ICBC s Fleetplan, and paying a premium dependent on the number of at-fault claims of the fleet and the dollar amount of those claims. 31 Under Fleetplan, fleet-rated vehicles are not subject to the CRS, but are rated individually by rate class and territory, then assigned a common discount or a surcharge based on the claims experience of the entire fleet (see Section C.2 below). 32. Manual Basic policies, including fleet reporting vehicles, garage policies, special coverages and other miscellaneous policies ICBC provides, involve special rating methods that in some cases have not yet been automated. The two main distinguishing features of these policies are that first, they are submitted manually (by the broker to ICBC) rather than through the systems used to process Plate Owner Basic policies and second, the pricing of the risk often relies on unique rating variables and/or exposure bases. 33. Garage policies protect the customer s vehicle while it is in the care of individual businesses such as car dealers, auto body shops and service station operators from damage for which the business is liable (see Section C.3.1 below). Special coverages require specific terms and conditions of coverage to accommodate the unique nature of vehicle use and the needs of some customers (see Section C.3.2 below). ICBC also issues a few miscellaneous policies described in Appendix 18 B for special circumstances (see Section C.3.3 below). 31 Vehicle fleets of 20 or more vehicles must be insured under Fleetplan

36 C.1 PLATE OWNER BASIC POLICIES C.1.1 RATE CLASS RATING VARIABLE ICBC Filing with the BC Utilities Commission 34. ICBC has categorized vehicle use into 162 rate classes 32 based on criteria such as how the vehicle is used (e.g., commuting to and from work, long haul commercial trucking) and the type of vehicle (e.g., recreational vehicle, logging truck). 35. Ideally, each group of insured vehicles within a particular rate class would be expected to have risk characteristics that are to a large extent homogeneous, as well as distinctly different in some way from those of the other rate classes. How a vehicle is used is a factor in the probability of it being in a crash, such as for vehicles driven for pleasure compared to vehicles driven to and from work regularly in rush hour traffic, or vehicles used for various commercial purposes. 36. ICBC s rate classes and the risk characteristics that distinguish these groups of customers are described below (see also Schedule B of Appendix 18 B) Private Passenger and Light Commercial Vehicles (5,000 kilograms Gross Vehicle Weight and under) Under this group, vehicles are further divided into two categories: (i) Personal and Business Use, and (ii) Commercial Use. 34 (i) Personal and Business Use Rate classes that ICBC uses to categorize the similar risk characteristics of personal and business use of a vehicle include pleasure use only, to and from work (including one rate class with no distance restrictions, one rate class where the distance travelled does not exceed 15 kilometres, and one rate class where the vehicle is used part way to and from work with public transportation being used for the rest of the journey), business use and 32 ICBC s October 5, 2006 Rate Design Workshop and October 23 and 30, 2006 Rate Design Working Session presentations stated that there were 185 rate classes in ICBC s rate table. For the purposes of this Rate Design Application, 26 storage rate classes have been excluded because they relate to Optional coverage (these 26 storage rate classes were erroneously identified in the October presentations as temporary operation permits). As well, there are two fleet reporting administrative rate classes that should have been included plus one new large fleet bus rate class has been added. See also Schedule B of Appendix 18 B. 33 Observations about group characteristics in this discussion of ICBC s rate classes are generalized assumptions, have not been statistically measured, and do not necessarily apply to every vehicle in each rate class. This Section is intended to provide an overview of ICBC s rate classes for those without specialized insurance knowledge and the technical detail contained in Appendix 18 B should be relied upon if necessary. 34 In Appendix 18 B, Schedule B, Vehicle Use Tables, Table 1, commercial use is defined as use of a vehicle for the delivery or carriage of goods. In Appendix 18 B, Schedule B, Section 1, pleasure use is defined as use of a vehicle for private purposes but does not include business or commercial use; and business use is defined as use of a vehicle in the business or profession of the insured and includes use of a vehicle by an employee who is paid by his employer for that use, but does not include commercial use of the vehicle. Personal use means any non-commercial or non-business use of a vehicle

37 ICBC Filing with the BC Utilities Commission motor homes. Seniors rate classes (pleasure use only) are described in Section C.1.3 below. (ii) Commercial Use Rate classes that ICBC uses to categorize the similar risk characteristics of commercial use of a vehicle include delivery vehicles (e.g., couriers, pizza delivery), farm and fisherman use, artisan use, municipal government and school district vehicles, vehicles used in the logging industries, and u-drive vehicles (vehicles available for hire or rental). Farm and fisherman use is separated into its own rate class because it is not uncommon for vehicles to be left parked while the owner is at work, particularly in the case of fishermen who go out to sea for days at a time. Artisan use means the use of a vehicle by a tradesperson to carry tools, materials and equipment for his or her trade, to deliver goods to be installed and to do estimating work (e.g., cable installers, carpet layers, gardeners, cleaners, repairmen and tree toppers). 2. Delivery Vehicles (Commercial Vehicles Over 5,000 kilograms Gross Vehicle Weight) For these vehicles, there are four key risk characteristics used to rate these policies to be able to track loss experience and charge each group the appropriate premium. First, the type of goods carried (e.g., steel, horses, explosives) can have a significant impact on the loss exposure, can be expected to generate different liability exposures, and might also affect driving behaviour. Second, distance of operation has an impact on risk because longer distances can mean longer hours on the road, tighter schedules, mountainous / unknown terrain (particularly affected by poor weather conditions), and poor road maintenance (in rural and more isolated parts of the province), all of which contribute to the potential loss exposure. The third risk characteristic, where operated (BC, Canada, USA), is closely linked to the distance of operation, but there are also other considerations, such as larger tort awards in some jurisdictions (particularly in the USA), no-fault laws (in both the USA and some Canadian jurisdictions), higher hospitalization costs (in the USA), and difficulties and costs associated with the handling of out-of-province claims. Finally, the ownership of goods is seen to be a contributing factor in risk assessment because larger organizations (typically manufacturers and producers, retail sales chains and others who move their own goods or equipment required in their business) generally own or lease their vehicles and use their own employees as delivery drivers, with the delivery operation considered to be secondary to the organization s main operation. The operating conditions (e.g., delivery, scheduling, vehicle maintenance, drivers working conditions, etc.), could be expected to be different than those in businesses that are shipping non-owned goods. 3. Passenger Carrying Vehicles Buses used for public, airport and charter purposes are rated according to their passenger carrying capacity, distance of operation and where operated (BC, Canada, USA). Passenger carrying capacity is used as a risk characteristic because it reflects the size and associated risk of the bus, and also because the greater the number of passengers, the greater the potential is for a larger number of injuries. Distance of operation and where operated are used as risk characteristics for similar reasons as stated under (2) above. In comparison, buses used for school, private and religious purposes are rated only on passenger carrying capacity because this group of buses generally can be expected not to operate across long distances or outside of BC. Taxis are rated according to their operational boundaries (urban / suburban / rural / Vancouver International Airport) because these boundaries determine such risk 14-15

38 ICBC Filing with the BC Utilities Commission characteristics as population, traffic density and customer volume. In comparison, limousines are categorized as a separate group from taxis because these vehicles are rented or hired with a driver for a minimum period of one hour. The hourly rate to some extent reduces the exposure applicable to taxis as a result of the latter having to pick up as many fares as possible and get them to their destinations quickly. Limousines, on the other hand, are often used for special events such as weddings and graduations, at which they may remain parked for at least some portion of the event. 4. Motorcycles Motorcycles are rated according to engine displacement because it reflects the size and power of the vehicle, and can be expected to have an impact on the potential number and size of claims for this rate class. 5. Collector Vehicles and Motorcycles Collector vehicles and motorcycles that meet the definition of collector motor vehicle are grouped in separate rate classes (restricted to pleasure use only) because they are typically older, rarer and more valuable than ordinary vehicles. Owners of these vehicles would be expected to operate and maintain them with great care. 6. Emergency Motor Vehicles (Police / Fire Department / Rescue or First Aid) This group of vehicles is used for emergency purposes, warranting higher rates of speed and exposure to other potentially dangerous situations that could contribute to claims frequency. This group is divided into all emergency vehicles except voluntary fire department vehicles and volunteer fire department vehicles because volunteer fire department vehicles usually operate in less populated areas, and have a lower frequency of being called out to an emergency; therefore, they present a different risk exposure. The type of emergency vehicle (e.g., private passenger, light commercial, heavy commercial) also plays a role in the rating process for both of the above emergency vehicle groups because the size of a vehicle can influence the risk characteristics. 7. Dump Trucks Dump trucks are isolated from other delivery vehicles in separate rate classes due to the different risk exposure from these vehicles frequently being used on rougher terrain (e.g., off-road, construction sites, etc.) and from operators trying to make as many hauls as possible within a given period of time. Furthermore, the dumping operation in itself presents a risk that is unique to dump trucks. Dump trucks are rated according to ownership (municipal government, highway maintenance, landscape gardener, farmer, all other dump trucks), which may have a bearing on the extent of use of the vehicle, driver training, the incentive to make as many deliveries as possible, meeting deadlines, etc. Additionally, garbage trucks are separated from other dump trucks because of their unique use, with an allocated schedule and route, and slow moving nature due to frequent stops that must be made. 8. U-drive (Commercial Vehicles over 5,000 kilograms Gross Vehicle Weight) This rate class is used for commercial vehicles 5,000 kilograms and over that are used for hire or rental (see 1(ii) above for u-drive vehicles under 5,000 kilograms Gross Vehicle Weight). The only risk characteristic separating one vehicle from another is weight because the risk normally changes in proportion to the size and weight of the vehicle

39 ICBC Filing with the BC Utilities Commission 9. Miscellaneous (Recreational and Commercial) The recreational group includes golf carts and snowmobiles. Golf carts are separated into their own rate class because of their minimal highway use and regulated conditions (restricted licensing). The use of snowmobiles on highway is also minimal and under tight regulation (restricted licensing); however, when operated off highway, they have a higher risk exposure due to high speeds, dangerous terrain, etc., which can play a significant role in claims frequency and severity. The commercial group includes wreckers (which have a unique function in towing other vehicles) cement mixers (carry and supply cement to construction sites, but spend much of their time on site and are not continually on the road to the same extent as other delivery vehicles), oil and gas exploration vehicles (unique function with risk of fire at drilling sites), driving school vehicles (unique risk in that they are operated primarily by learner drivers), industrial machines / road building machines (unique loss exposure due to being slower moving, primarily operated on job sites, and without load when on highway), and a miscellaneous group of vehicles over 5,000 kilograms Gross Vehicle Weight (including artisan, septic tank truck use, water well drilling, parade floats, mobile canteen use, motion picture use), which are grouped together due to smaller numbers and some similarities with respect to limited use, time spent on site and low speed when being operated. 10. Trailers The premiums charged for trailers are minimal because most of the risk is charged under the policy of the pulling vehicle. Where operated as a combination of vehicles, claims are paid under the policy of the pulling vehicle. Premiums for trailers are based on four risk characteristics: 1) personal / recreational use; 2) business / commercial use; 3) use of the pulling vehicle; and 4) weight of vehicle. Trailers with a Gross Vehicle Weight of 700 kilograms or less are all charged the same base premium, regardless of use, because the risk exposure for these small trailers can be expected to be minimal. Trailers weighing over 700 kilograms but used for pleasure purposes only (including all travel trailers) are allocated their own category because the risk exposure for pleasure use trailers can be expected to be lower than it is for business or commercial use trailers. Trailers weighing over 700 kilograms but used for business or commercial use are rated according to the use of the pulling vehicle because the risk presented by a trailer is associated largely with the risk presented by the towing vehicle. 37. Review of the rate class rating variable will occur as part of the longer term plans in ICBC s Basic insurance rate design multi-year plan (see Chapter 16.1 of this Application). C.1.2 TERRITORY RATING VARIABLE 38. The territory rating variable is based on the assumption that people in the same geographic area face similar risks of being involved in a crash. Different territories have different local characteristics and conditions, including traffic density, road design and weather conditions. For example, if a vehicle is from an area where there is a lot of traffic, there is more chance of it being involved in a crash than if the vehicle is from a low traffic area. Road design also plays a role, with some territories having single lane highways and others having divided 14-17

40 ICBC Filing with the BC Utilities Commission highways. Some territories may also have different driving conditions due to weather conditions or terrain. 39. BC is divided into 14 territories for Basic insurance rating purposes, so that the premium charged for each territory reflects the risk of a vehicle assigned to that territory having claims charged against the policy (see Figures 14.3 and 14.4 for maps of ICBC s current territories). Additionally, there is an out-of-province territory (Z) used for vehicles that are primarily operated outside of BC (e.g., students, armed forces personnel, long haul truckers). ICBC s territories are as follows: D - Lower Mainland E - Maple Ridge/Pitt Meadows F - Squamish/Whistler G - Pemberton/Hope H - Fraser Valley L - Thompson/Okanagan N - Kootenays P - Cariboo R - Prince George S - North Coast V - Peace River W - South Vancouver Island and other islands X - Mid-Vancouver Island and Sunshine Coast Y - North Vancouver Island Z - Out-of-Province 40. The territory variable is applied to every Plate Owner Basic policy and can be applied in one of two ways, depending upon the type and use of the vehicle: 1. For private passenger vehicles, light commercial vehicles, recreational vehicles and some heavier commercial vehicles (see Section C.1.1 for definitions), the territory is determined according to the location of the vehicle when not in use because generally, all vehicles operating in the same territory are exposed to the conditions common to that territory. 2. For all other vehicles (primarily those used for transporting goods or passengers), the territory is determined by where these vehicles are operated. If the vehicle operates in 14-18

41 ICBC Filing with the BC Utilities Commission more than one territory, then the territory generating the highest premium is used because the vehicle will be exposed to the greater risks presented by that territory Review of the territory rating variable will occur as part of the longer term plans in ICBC s Basic insurance rate design multi-year plan (see Chapter 16.1 of this Application). Figure 14.3 ICBC s Territorial Boundaries, BC D - Lower Mainland E - Maple Ridge/Pitt Meadows F - Squamish/Whistler G - Pemberton/Hope H - Fraser Valley L - Thompson/Okanagan N - Kootenays P - Cariboo R - Prince George S - North Coast V - Peace River W - South Vancouver Island & other islands X - Mid-Vancouver Island & Sunshine Coast Y - North Vancouver Island Z - Out-of-Province 35 Although there are 14 territories plus one territory for out-of-province vehicles, the actuaries blended the rates for some commercial rate classes so that groups of territories have the same rates. See Section B.2 (paragraph 17) of Appendix 18 C

42 ICBC Filing with the BC Utilities Commission Figure 14.4 ICBC s Territorial Boundaries, Lower Mainland C.1.3 SENIORS RATE CLASSES 42. A seniors rate class is available for private passenger vehicles that are owned and principally driven by a senior citizen (age 65 or over) for pleasure use only, 36 which provides the customer with a 25% discount on the Basic insurance premium. There are also seniors rate classes available for motorcycles and collector vehicles. In the government directive of January 31, 2007 with respect to rate design, ICBC was directed to prepare and implement a Basic insurance rate design plan that retains the seniors discount rate classes and their current method of calculation for the 2008 and future rate years. 37 C.1.4 DISABILITY DISCOUNT 43. If a motorist is 16 years of age or older, owns or leases a vehicle, and is "a person with disabilities," he or she may qualify for a 25% discount on the Basic insurance premium. The vehicle must be rated for pleasure use, to and from work, business use or certain recreational or commercial uses, and this disability discount can only be applied to one vehicle. The government directive of January 31, 2007 with respect to rate design also directed ICBC to include in the Basic insurance rate design plan the retention of the disability discount and its current method of calculation for the 2008 and future rate years There is also a pleasure use only rate class for non-seniors that allows limited travel to and from work or school. See Section C.1.1 and Schedule B of Appendix 18 B. 37 See Appendix 15 A and Appendix 18 B, Schedule B, Tables 4.1-C, 4.14-B and 4.20-B. 38 See Appendix 15 A and Schedule G of Appendix 18 B

43 44. A person with disabilities is someone who: Has suffered loss of a limb. ICBC Filing with the BC Utilities Commission Is permanently dependent on a wheelchair. Has suffered complete and permanent functional loss of lower limbs. Has been certified by a medical practitioner as suffering from a "permanent impairment of movement" such that the use of public transportation by this person would be hazardous (whether or not public transportation is available). Has been certified by a medical practitioner to be suffering from permanent sight impairment and is not eligible to hold a driver's licence under the Motor Vehicle Act (in relation to the owner, not the driver, of the vehicle). Is receiving a 100% disability pension as a result of active service in any war while a member of Her Majesty's forces. Is receiving, or would receive but for having reached the age of 65, assistance or a supplement under the Employment and Assistance for Persons with Disabilities Act To confirm a person s entitlement to a disability discount, ICBC requires individuals to apply for and obtain a fuel tax rebate from BC s Ministry of Small Business and Revenue. Once an applicant receives a Motor Fuel Tax Act registration number, this number can be taken to an insurance broker to apply for the disability discount on one vehicle. C.1.5 CLAIM-RATED SCALE 46. While rate class and territory are important factors in determining a customer s premium, driving experience is the third key rating variable ICBC uses to determine the premium for the policy. The CRS level associated with a policy is based on the number of years licensed of the principal operator shown on the policy, as well as on any chargeable claims by the registered owner, principal operator and any other operators who have had chargeable claims when operating the vehicle. The CRS does not currently take driving convictions, or the years licensed of other operators of the vehicle into account. 47. Vehicles are registered and licensed to the registered owner of the vehicle, who declares the principal operator for the vehicle for the policy term (usually the principal operator is the same person as the registered owner). New policies for new principal operators with no years of driving experience or claims history start out at base rate with no surcharge or discount on 39 Motor Fuel Tax Act, Part 1, section 1, definition of person with disabilities

44 ICBC Filing with the BC Utilities Commission the CRS. For the first eight years of driving without a chargeable claim, the discount for the policy increases by 5% off the base rate premium, up to a 40% discount. The maximum discount currently available on Basic insurance is 43%, which is reached after nine or more years of driving without any chargeable claims (see Figure 14.2 above for an illustration of the CRS, as well as Schedule D of Appendix 18 B). 48. If there is an chargeable claim associated with the operation of the vehicle for which the principal operator or other operator is more than 25% at fault, the policy will move as few as three steps to as many as six steps on the CRS, depending on the policy s CRS level prior to the chargeable claim. Policies at CRS levels -15 to -20 would move three steps after a chargeable claim. Policies at worse CRS levels would move more steps as a result of a chargeable claim. Chargeable claims for new drivers or a number of chargeable claims for more experienced drivers result in premium surcharges, with no maximum surcharge on the CRS (see Figure 14.2 above and Table 1 of Schedule D of Appendix 18 B). After a chargeable claim, each year of driving without any chargeable claims will improve the policy s position on the CRS by one step. 49. While the CRS was based on the assumption that past experience is a good predictor of future experience, the system is also set up to recognize that sometimes drivers improve on this future expectation. If a customer who has had a chargeable claim goes three years without any other chargeable claims on the policy, he or she will see a bigger change in the policy s CRS position than would usually occur. After this three year claims-free period, instead of only receiving a one step improvement, customers receiving a surcharge would move back to the CRS base rate premium level (no surcharge or discount), and customers receiving a discount or at the base rate premium level would move back to the level they would have been at prior to their last chargeable claim Because many policies change position each year on the CRS, each CRS level reflects the driving experience of a diverse mixture of customers. The CRS base rate premium level represents the most diverse mixture because it includes brand new drivers, experienced drivers who changed position as the result of a chargeable claim, and surcharge drivers who have returned to this level after three claims-free years. 40 See section 9.1(b) of Schedule D of Appendix 18 B

45 ICBC Filing with the BC Utilities Commission 51. ICBC intends to review the CRS as part of its Basic insurance rate design multi-year plan, with the intent of having driver-based rating variables play a bigger role in determining risk. As part of this model, ICBC would then determine the most appropriate place on the continuum between a purely policy-based and a driver-based insurance model (see Chapter 16.1 of this Application). C.1.6 DRIVER PENALTY POINT PREMIUM 52. If a driver receives more than three driver penalty points within a year on his or her driving record as a result of being convicted for a traffic violation under the BC Motor Vehicle Act or its regulations, then DPP premium will be charged to the individual driver, separate from the vehicle premium. Points can also be received for certain Criminal Code of Canada driving convictions (such as impaired driving). The DPP premium charged depends on the number of points received and is billed annually approximately four weeks before the anniversary of the date for renewal of the individual s driver s licence (the individual s birthday). Premium revenue received from DPP is considered to be a component of the Basic insurance premiums (see also Schedule E of Appendix 18 B). In the Basic insurance rate design multi-year plan, ICBC is planning to change the DPP premium by introducing a new Driver Risk Premium to have driving convictions play a more significant role in determining Basic insurance premiums (see Chapters 16.1 and 17.1 of this Application). C.1.7 MULTIPLE CRASH PREMIUM 53. ICBC also charges the MCP as an additional penalty for drivers who cause multiple crashes. If an individual is found to be 50% or more at fault for three chargeable claims within a three-year period, he or she will have to pay a MCP of $1,000. For each additional chargeable claim within the three years, there is an additional $500 premium. The MCP is attached to the driver's licence and an individual is not able to renew his or her vehicle insurance or driver's licence if the MCP is not paid (see also Appendix 18 B, Schedule F). Review of the MCP will occur as part of the longer term plans to review the CRS in ICBC s Basic insurance rate design multi-year plan (see Chapter 16.1 of this Application). C.2 FLEETPLAN 54. Where there is common ownership or leasing of vehicles, a person or company with a fleet of at least five vehicles has the option of insuring these vehicles under ICBC s Fleetplan, 14-23

46 ICBC Filing with the BC Utilities Commission and paying a premium dependent on how many claims the fleet has made and the dollar amount of those claims. 41 Persons or companies with 20 or more vehicles must be insured as a fleet. The vehicles in the fleet are rated as a single entity in calculating the discount or surcharge, even though the vehicles themselves may be different: big trucks, small trucks and passenger vehicles. 55. Under Fleetplan, vehicles are not subject to the CRS, but are rated individually by rate class and territory, then assigned a common discount or a surcharge. A separate discount and surcharge structure is in place for Fleetplan policies. The base rate premium of a fleet policy is discounted or surcharged based on the combined claims experience of all policies within the fleet account over a three-year period. ICBC caps the impact that a single large claim can have on the determination of the discount or surcharge, as a way to keep premiums stable and predictable. However, fleets with actual loss ratios of 80% or higher are subject to higher caps that result in higher premiums, compared with those accounts with actual loss ratios less than 80%. Those fleets with good risk management programs that train drivers well, and focus on best industry practices and overall loss prevention, will usually experience fewer and less severe claims. As a result, such fleets earn substantial fleet discounts as a result of their good loss experience (see Section 2.D and Schedules I, J and K of Appendix 18 B). Changes to the fleet formula will occur as part of the short-term plans in ICBC s Basic insurance rate design multi-year plan to move closer to actuarially sound rates where premiums will more closely reflect the risk that the customer represents (see Chapter 16.1 of this Application). 56. Fleet-rated vehicles as described above are considered to be Plate Owner Basic policies. However, one type of fleet-rated policy known as a fleet reporting policy, primarily consists of large fleets (i.e., greater than 500 vehicles) that are manually rated and considered to be Manual Basic policies. 41 As a normal part of business, a customer may have a fluctuation in the number of registered vehicles in the fleet. For administrative simplicity, ICBC allows customers to choose whether they want their vehicles to be a fleet or not when they have between 5 and 19 registered vehicles. Under a more restrictive threshold, customers would be required to change the rating of their fleet depending on the season of the year, or for other fleet size reasons

47 C.3 MANUAL BASIC POLICIES C.3.1 GARAGE RATING ICBC Filing with the BC Utilities Commission 57. Garage automobile policies are a separate and distinct component of ICBC s current rate structure with their own unique coverages and rating system, and are often referred to simply as garage policies. Garage policies provide coverage to those who have care, custody or control of the vehicles of others and thereby face various liability exposures that garage policies are designed to cover. Garage policies in BC are compulsory for anyone who is considered to be a garage service operator, which is defined as the operator of a motor vehicle service facility such as a motor dealer, service station operator, motor vehicle repairer, auto body shop repairer, wrecker operator, or the operator of a vehicle parking or storage facility Garage policies have three separate types of coverage: 1) Third party legal liability for owned and customers vehicles (compulsory insurance). 43 2) Own damage coverage for owned vehicles (Optional insurance). 3) Legal liability for own damage to customers vehicles (compulsory insurance for collision or upset, and specified perils; Optional insurance for comprehensive) Rates are based on the historical loss experience for the type of garage operation, as well as on the territory and the limit of liability or deductible selected. Premiums are calculated based on a variety of factors such as the number of licence plates assigned to the garage and the number of people the garage service operator employs. The different rating variables used represent different ways of measuring the level of risk for different coverages presented by each particular garage service operator. Premiums for some coverages may also be calculated based on the maximum limit of value of customers vehicles in a garage service operator s custody at any given time. 45 Some policies are underwritten as set out in Appendix 18 B to take into account unusual aspects of an exposure and to ensure that the premiums that are collected are commensurate with risks that are beyond the scope of most normal garage operations (e.g., 42 IVR, section 1 (1), definition of garage service operator and section 1.1, definition of universal compulsory automobile insurance. Section 149 (1) also prescribes the forms used for garage policies: garage automobile policy and compulsory riders or endorsements (APV-4) and garage non-owned automobile policy (APV-11). 43 Policy limit is $1 million unless the garage provides a letter stating that it does not have any vehicles over 5,000 kilograms Gross Vehicle Weight, in which case, the garage only needs to purchase $200,000 in coverage. 44 Policy limit is $1 million to cover all customers vehicles in the care, custody and control of the garage. Policy limits in excess of $1 million (e.g. $3 million, $5 million or greater) are specially rated as described in paragraph 59. See Sections 2.E.1 2.E.4 in Appendix 18 B. 45 See Sections 2.E.1 2.E.4 in Appendix 18 B

48 ICBC Filing with the BC Utilities Commission a valet parking service run in conjunction with a regular parking facility; a garage operation with more than $1 million worth of customers' vehicles in its care or custody at any given time). 46 C.3.2 COMPULSORY SPECIAL COVERAGES 60. A very small segment of ICBC s Basic insurance business is written on policy forms that require specific terms and conditions of coverage (supplemental to or amended from those set out in the Insurance (Vehicle) Regulation) to accommodate the unique nature of vehicle use and the needs of these customers (comprising total written premium of approximately $9.9 million in 2005). Almost all of these policy forms involve insurance for those vehicles that are licensed under a special licence or a temporary licence with unique conditions of operation. 61. ICBC s Basic Insurance Tariff in Appendix 18 B sets out how the premium is calculated for the Basic insurance portion of the following special coverages prescribed in Part 11 of the Regulation: 1. Temporary operation permit and owner s certificate (APV16 or APV16L). 2. Binder for owner s interim certificate (APV38). 3. Combined non-resident commercial vehicle permit and certificate (APV96). 4. Trailer floater licence and certificate (APV33). 5. Unlicensed farm tractor certificate (APV49). 6. Special agreement vehicle licence and certificate (APV116A). 7. Manufacturer s licence and certificate (APV31). 8. Highway crossing permit and certificate (APV37). 9. Vintage motor vehicle certificate (APV44). 10. Combined certificate of registration of a non-resident motor vehicle and certificate (APV97). 11. Collector multi-vehicle certificate (APV317). 62. Temporary operation permits generated the largest proportion of special coverages premium in Temporary operation permits allow a vehicle owner to licence and insure a vehicle for up to 15 days (a regular licence and insurance can be issued for a minimum three month period). 47 Other commonly purchased special coverages include: the binder for owner's interim certificate, which is a short-term insurance policy issued to insure a vehicle that is licensed outside BC and that is being brought into BC for registration and licensing; the combined non-resident commercial vehicle permit and certificate, which is used for out-ofprovince commercial vehicles that need a temporary licence and insurance to operate in BC; the 46 See Sections 2.E.4 2.E.5 in Appendix 18 B. 47 Most temporary operation permits are written through the automated system even though they are classified as Manual Basic policies

49 ICBC Filing with the BC Utilities Commission trailer floater licence and certificate, which is used by operators of commercial truck tractors who pick up unlicensed and uninsured trailers of third parties for delivery purposes; 48 and the unlicensed farm tractor certificate, which provides the mandatory insurance that farm tractors and other implements of husbandry are required to have for temporary operation on a highway in conjunction with certain farm activities. 49 C.3.3 MISCELLANEOUS POLICIES 63. Manual Basic policies also include a number of miscellaneous policies that are described in more detail in Appendix 18 B. Four miscellaneous policies are issued on a special Autoplan policy form (APV284). For example, vehicles driven only on isolated islands that cannot be accessed by bridge or regularly scheduled ferry service (e.g., Protection Island, Gambier Island and Keats Island) are insured on an isolated islands policy. Usually people who live on these islands have had their vehicle brought there by barge. The base rate premium is determined by the applicable rate class and is assumed to be part of Territory W (regardless of the territory that is actually applicable), then the actual premium is calculated by taking 30% of the base rate premium (see Section 2.F.12 of Appendix 18 B). Other policies issued on the special Autoplan policy form (APV284) include Basic insurance coverage for vehicles that will be operated for a limited time at special events such as music festivals or air shows (special events policies), and Basic insurance coverage for unusual vehicles that do not fit within any rate classes or special coverages (see Section 2.F.14 2.F.15 of Appendix 18 B). 64. The transporter s / demonstration / repairer s licence and certificate of insurance (form MV1914) are floater licences that can be attached to any unlicensed vehicle that is being used by the named insured in his or her business. Transporter floater licences are issued to a person who is regularly engaged in the business of transporting unlicensed vehicles that are not owned by the transporter. Demonstration floater licences are used by those with a Certificate of Dealer Registration and those other than dealers who are authorized by ICBC to operate unlicensed owned or non-owned vehicles, for purposes relating to the business of selling motor vehicles or 48 A floater licence is a licence plate or a paper licence that is not necessarily issued for a specific vehicle; therefore, it can be attached to any unlicensed vehicle that is being used by the named insured in his or her business. When attached to an unlicensed vehicle, the vehicle is deemed to be licensed and insured in compliance with section 3 of the Motor Vehicle Act. 49 Section 8 of the Motor Vehicle Act allows farmers to operate farm tractors and other implements of husbandry on a highway temporarily without a vehicle licence when such operation is in conjunction with certain farm activities. However, the farmer is still required to purchase the mandatory Basic insurance for operation on a highway. See also definitions of farm tractor and implement of husbandry in Motor Vehicle Act, section

50 ICBC Filing with the BC Utilities Commission trailers. Repairer's floater licences are issued to business owners where the principal income from the business is from vehicle repairs and may be used to operate unlicensed vehicles for repairing or testing purposes. Calculation of the premium payable for these floater licences is found in Section 2.F.11 of Appendix 18 B. 65. Finally, there is an overseas tourist policy issued on form APV 272 that can be issued up to a maximum of six months for overseas tourists who need to have insurance for motorcycles, private passenger vehicles, light commercial vehicles or trailers while travelling in BC (see Section 2.F.13 of Appendix 18 B). D CONCLUSION 66. The preceding history of how ICBC s rate structure has developed and changed since 1974, and the overview of ICBC s current rate structure, provides the background necessary to understand the changes proposed in this Rate Design Application. This background illustrates how infrequently ICBC has made major changes to its rate structure, which has minimized the pricing instability that such changes can bring. The legal framework for ICBC s rate design and ICBC s Basic insurance rate design principles are explained in the next Chapter

51 CHAPTER 15 RATE DESIGN PRINCIPLES

52 ICBC Filing with the BC Utilities Commission Table of Contents A Introduction B Criteria for Selection of Insurance Rating Variables B.1 Statistical Criteria B.2 Operational Criteria B.3 Social Criteria B.4 Legal Criteria B.5 Conclusion C The Legal Framework for Basic Insurance Rate Design C.1 Insurance Corporation Act C.2 Utilities Commission Act C.3 Conclusion D ICBC s Basic Insurance Rate Design Principles D.1 Fair, Just, and Reasonable D.2 Rate Stability and Rate Predictability D.3 Administrative Simplicity E Conclusion Appendix 15 A Order in Council No A 15-i

53 ICBC Filing with the BC Utilities Commission A INTRODUCTION 1. This Chapter provides the overall context within which to understand insurance rate design. Its purpose is threefold. First, to provide a context to understand insurance rate design by describing the general industry practice of the selection of insurance rating variables based on four sets of criteria: statistical, operational, social and legal. Second to provide an overview of the legal criteria which ICBC believes are relevant for regulation of the structure of Basic insurance rates. Third to provide principles that ICBC believes should further guide Basic insurance rate design. 2. Section B defines the four sets of criteria that insurance companies generally apply to determine which rating variables are used to group customers for the purpose of setting rates. The four criteria form the framework for this discussion which will also include the trade-offs that must be considered when selecting the rating variables, as some criteria have conflicting objectives. 3. Section C begins with a brief overview of the regulation of Basic insurance prior to Basic insurance rates coming under the jurisdiction of the British Columbia Utilities Commission. The Section then outlines specific provisions of the Insurance Corporation Act (ICA) and special directions to the Commission and government directives to ICBC relevant to the design of Basic insurance rates. The discussion of the Utilities Commission Act (UCA) provides an important context, setting out the general legal requirements which ICBC understands to be applicable to rate design. 4. Section D describes the three principles that ICBC believes are appropriate for the design of Basic insurance rates: fair, just, reasonable, rate stability and predictability, and administrative simplicity and ease of understanding. These principles have their foundation in legislation and in rate design precedent. ICBC must consider these principles in the context of its overall Basic insurance rate structure and the criteria that guides general industry practice for selecting rating variables. 15-1

54 ICBC Filing with the BC Utilities Commission B CRITERIA FOR SELECTION OF INSURANCE RATING VARIABLES 5. The ideal for an insurance company is to have an accurate rate for each customer according to their own risk characteristics. Of course that is not practical. 6. Because not all risk characteristics are quantifiable or useable, an insurance company must compromise by grouping together customers with similar quantifiable and useable risk characteristics. An insurance company uses rating variables to group customers having similar risk characteristics, which in turn allows the company to determine the appropriate premiums for each customer group according to the expected claims costs of the group. 7. Rating variables are a method to group customers according to their relative risk and provide insurance companies with the ability to quantify and verify this risk. Insurance companies want to use the rating variables that are the best predictor of risks and of claims. 8. This Section describes the considerations of an insurance company in the selection of its rating variables. Insurance companies take into account statistical, operational, social and legal criteria, and the process of designing a rate structure involves evaluating trade-offs between the competing interests of these selection criteria. These four criteria form the framework for this discussion. 1 B.1 STATISTICAL CRITERIA 9. There are four statistical criteria in the selection of insurance rating variables: accuracy, homogeneity, credibility and predictive stability. 10. Accepted actuarial practice in estimating rates requires consideration of the statistical criteria, while recognizing that this consideration cannot always take precedence over the other considerations of an insurance company, particularly the legal considerations. Accepted actuarial practice anticipates that in establishing a rate structure there necessarily will be tradeoffs in the selection of rating variables that could prevent the statistical criteria from being optimally met. Moreover, the evaluation of trade-offs within the unique circumstances of an insurance company combined with the need to recognize limitations of certain rating variables 1 The process for selecting rating criteria based on Finger, R.J., Risk Classification, Foundations of Casualty Actuarial Science, (Fourth Edition), Casualty Actuarial Society, 2001, Chapter 6, pp

55 ICBC Filing with the BC Utilities Commission that are mandated by regulatory authorities, will lead to rate structures that are different from one insurance company to another and from one jurisdiction to another. 11. The criterion of accuracy means that rates are related to expected future costs. Therefore, the rate for a given customer is an estimate based on the expected future costs of the customer in that customer group. If there are identifiable cost differences of subgroups within a given customer group, then refinement of the rating structure (either by adding levels to an existing rating variable, or by adding new rating variables) would be necessary to eliminate the cost differences. If rates are not accurate, some groups or subgroups would pay less than the cost they incur while other groups would pay more than the cost they incur. Therefore, accuracy is an important criterion to achieve fairness of rates. 12. The homogeneity criterion means that customers within a given customer group have similar risk characteristics, and therefore would have the same expected costs. This criterion generally requires having more customer groups of smaller size, in order to differentiate customers by their individual risk characteristics. It represents an ideal that is difficult to measure as the experience of any customer may vary from year to year. 13. The credibility criterion means that the customer groups have sufficient data in order to accurately estimate costs. Because it requires that groups be sufficiently large, this criterion often runs counter to the criterion of homogeneity. The ideal is to have both homogeneity and credibility, for then accuracy is achieved. If credibility is increased at the expense of homogeneity, then accuracy will be compromised. 14. The criterion of predictive stability requires that customer groups have average costs that are relatively stable over time. In reality, random fluctuations in claims costs may be present from year to year for any customer group. In order to lessen the fluctuations, insurers make their projections based on multiple years of claims data as opposed to a single year. However, when customer groups are small, this may not provide the desired stability. Another way to enhance stability is to increase the group sizes as suggested by the credibility criterion. B.2 OPERATIONAL CRITERIA 15. In addition to being subject to the statistical criteria, rating variables must take into account practical (operational) considerations, such as the following: objectivity, administrative 15-3

56 ICBC Filing with the BC Utilities Commission expense, verifiability, intuitively related to cost, and avoidance of large rate difference between customer groups. 16. An important criterion in this category is the need for clear and objective definitions of rating variables. In other words, there should be little ambiguity for the rating of any customer based on a specific variable. For example, an insurance company might like to use aggressive driving as a rating variable. However, this would require a subjective assessment, which could result in different answers depending on who records the response. When a situation like this occurs, the insurance company would instead consider an alternative rating variable, in an attempt to capture the risk characteristic. The insurance industry calls such alternative rating variables proxy rating variables. For example, the company could use traffic violations to estimate aggressive driving, based on the assumption that the more violations a customer has, the more aggressively that customer drives. 17. Another important practical consideration is the administrative expense of obtaining rating information. If the cost of obtaining the rating variable information exceeds the value provided by the information, then it is not cost-effective for the insurer to use the rating variable. 18. This leads to the next practical consideration, which is verifiability. Insurance policies are contracts of utmost good faith as applicants are expected to disclose all material facts of which they are aware when entering into the contract. It is important for insurance companies to reduce the incentive to provide false information to obtain a better rate. It is generally difficult to find rating variables that are completely free from risk of misrepresentation by customers. This risk requires a trade-off between the accuracy of the rates and cost of verifying rating information. 19. Another practical consideration is whether the rating variables are intuitively related to cost. Customers are more accepting of a rating variable when there is an intuitive relationship between the rating variable and the cost of insurance. Usually, the stronger this relationship is, the more precise the correlation between the variable and its predictive value. For example, it is generally accepted that people who have more driving experience are more likely to have fewer crashes than people with less driver experience. 15-4

57 ICBC Filing with the BC Utilities Commission 20. The final practical consideration is the avoidance of large rate differences between customer groups. The larger the rate differences, the greater the incentive for customers to misrepresent themselves in order to be rated at a lower premium. B.3 SOCIAL CRITERIA 21. Other considerations for insurance companies in the selection of rating variables are the social criteria. Factors that must be taken into account are: privacy, causality, controllability, affordability, loss control incentive and social policy of government. 22. A rating variable should respect privacy and not seem intrusive to customers. If asked to provide personal information, a customer might perceive this to be an invasion of privacy and refuse to provide the information. If the insurance company persists in using such a rating variable, it may end up with an inaccurate classification of customers who prefer paying more to avoid disclosing private information. 23. A rating variable with a correlation to costs but with no proof of causation is undesirable from a customer s point of view. If a rating variable is directly related to claim frequency or average claim cost, then that rating variable relates to the cause. Unfortunately, it is difficult to determine whether a variable has a causal relationship with costs or simply a correlation. 24. Rating variables are generally more accepted by customers if they are within the control of the customers. Variables that are seen to be largely beyond the customer s control are often met with more resistance. People appreciate that if they drive responsibly and avoid causing crashes, their premiums will be reduced. Therefore, using controllable rating variables serves a second purpose, as it encourages crash prevention. 25. A variable that promotes loss control has a clear benefit to society. It benefits both the customer and the insurance company. Fewer losses lead to fewer costs for the insurance company, which in turns leads to a lower premium for the customer. 26. Affordability of insurance may also be considered when selecting rating variables. Affordability issues tend to appear in systems with a large number of customer groups. The more groups there are, the larger the differential is likely to be between the lowest and the highest premium. 15-5

58 ICBC Filing with the BC Utilities Commission 27. The final social criterion is social or public policy of government. There are sometimes rating variables that have a correlation to risk and could be used as a rating variable, but will be excluded for social policy reasons. These restrictions are often defined by the government and may be found in legislation, regulations or public policy statements. For ICBC the social or public policy is part of its legal framework as set out Section C. B.4 LEGAL CRITERIA 28. Legal criteria are regulations, statutes, government directions and orders which are unique to a particular jurisdiction. In the selection of rating variables for an insurance company, the legal criteria take precedence over all other considerations in the determination of rating variables. The legal framework that governs ICBC is set out in detail in Section C of this Chapter. B.5 CONCLUSION 29. The ideal for an insurance company is to determine an accurate rate for each customer. Accomplishing this would mean accurately pricing each customer according to his or her own risk characteristics. Because that is not practical, it is insurance industry practice to select rating variables based on statistical, operational, social and legal criteria. The process generally involves trade-offs between the competing interests of these various selection criteria. As set out in the Section C below the legal criteria gives further guidance for rate design and the resulting rate structure. C THE LEGAL FRAMEWORK FOR BASIC INSURANCE RATE DESIGN The (ICBC) is a provincial Crown corporation established in 1973 under the Insurance Corporation Act (ICA 3 ) to provide universal compulsory automobile insurance to BC motorists. 31. At the highest level, governance of a Crown corporation is defined through legislation applicable to all Crown corporations, such as the Budget Transparency and Accountability Act, 2 This section provides a layperson overview of the legal framework. The actual acts, regulations and Tariff Schedule provide the details of the legal framework. 3 In 1973 the name of the Act was the Act. 15-6

59 ICBC Filing with the BC Utilities Commission the Financial Administration Act, the Financial Information Act, and the Freedom of Information and Protection of Privacy Act. 32. ICBC operates and administers a plan of universal compulsory automobile insurance as set out under the Insurance (Motor Vehicle) Act In 2003, government passed the Insurance Corporation Amendment Act, 2003, which named the British Columbia Utilities Commission (the Commission or the BCUC) as the regulator of ICBC's Basic insurance rates and service. As a result portions of the Utilities Commission Act (UCA) are applicable to ICBC. 34. Prior to 2003, Basic insurance rate design was a matter for the Provincial Legislature and the Provincial Cabinet, largely dealt with in conjunction with the approval of ICBC s insurance rates, and through legislation, regulations, and policy. Chapter 14 provides a general history of the design and structure of Basic insurance rates and a discussion about rating variables used by ICBC over the years. C.1 INSURANCE CORPORATION ACT 35. The Insurance Corporation Act (ICA) establishes ICBC and sets out its structure, authority and responsibility. 36. Under section 7 of the ICA the corporation is authorized to operate the plan of universal compulsory automobile insurance as set out in legislation. As the provider of compulsory insurance ICBC must ensure that the driving public in BC has access to Basic insurance. Accessibility has been a fundamental requirement in ICBC s rate structure since its inception. The requirement to provide automobile insurance to all motorists sets ICBC apart from private automobile insurers in other jurisdictions. ICBC believes accessibility is an underlying concept guiding Basic insurance rate design. 37. Basic insurance is mandatory under legislation and ICBC accepts all drivers who purchase insurance which in turn minimizes the number of uninsured drivers. Basic insurance can be purchased in all regions of BC. 4 On June 1, 2007 many sections of the Insurance (Motor Vehicle) Act are repealed and the name of the Act is changed to Insurance (Vehicle) Act (IVA). The description of Basic insurance coverage remains defined in the IVA, while provisions relating to the calculation of Basic insurance premiums will be found in ICBC s Basic insurance Tariff. Optional insurance coverage definitions will be contained in a separate Optional insurance policy booklet. 15-7

60 ICBC Filing with the BC Utilities Commission 38. ICBC can only refuse to sell Basic insurance under limited legislative provisions such as when the policyholder has outstanding debts to ICBC, for debt under the Motor Vehicle Act, and outstanding liquor fines under the Liquor Control and Licensing Act. 39. Part 2 of the ICA deals with the regulation of ICBC by the Commission, and sets out the Commission s jurisdiction over ICBC. 40. The ICA provides for policy directions through special directions and government directives. Special Direction IC2 to the British Columbia Utilities Commission, BC Regulation 307/2004 ("Special Direction IC2") issued under the ICA and the UCA, provides direction to the Commission in respect of the exercise of its jurisdiction on Basic insurance rate design: Section 3 (1) with respect to the exercise of its powers and functions under the Act in relation to the corporation generally, the commission must do the following: Section 3(1)(c) subject to (e), for each year for which it fixes universal compulsory automobile insurance rates, fix those rates on the basis of accepted actuarial practice so that those rates allow the corporation to collect sufficient revenue. Section 3(1)(c.1) requires the Commission when regulating and fixing universal compulsory automobile insurance rates, regulate and fix those rates in a manner that recognizes and accepts actions taken by ICBC in compliance with government directives issued to the corporation. See further discussion below. Section 3(1) (d) states that the Commission must ensure that Basic insurance rates are not based on age, gender or marital status. This provision requires that the Commission not approve a rate design that takes any of those factors into account. The exception to this is found in section 3(2) that permits discounts to persons who are at least 65 years of age and discounts for persons with disabilities. Section 3(1)(e) ensure that increases or decreases in universal compulsory automobile insurance rates are phased in in such a way that those rates remain relatively stable and predictable. ICBC believes the effect of this provision is that a change in ICBC s rate structure that would result in large rate increases or 15-8

61 ICBC Filing with the BC Utilities Commission decreases from one year to the next, otherwise known as rate shock, would not be permitted. 41. As it relates to rate design, the effect of the Special Direction IC2 is that rating variables of age, gender, and marital status cannot be used by ICBC, while discounts for seniors and disabled persons are permitted. As well, rates are to remain relatively stable and predictable. 42. The government directive of January 31, 2007 to ICBC with respect to rate design approved by Order in Council No. 39/07 dated February 2, 2007, ( government directive ) (see Appendix 15 A Order in Council No.039/07) provides further directions on Basic insurance rate design. It instructs ICBC to prepare a Basic insurance rate design plan that is to address high-risk drivers, maintain senior rate classes and disability discount, and until 2011 retain certain existing rate design structure elements such as the Claim-Rated Scale (CRS). 43. As set out in the government directive and Chapter 14, the CRS rates drivers based on driving and claims experience, rather than applying discriminatory factors such as age, gender and marital status. The CRS is based on a base rate with defined increments or levels (adjusted over time) both above and below the base rate. Rules that were set out in the Insurance (Motor Vehicle) Act Revised Regulation, and are now in Schedule D of the Basic Insurance Tariff in Appendix 18 B, determine when policyholders move up or down levels, and how many at a time. As noted in Chapter 14 new policies for new principal operators with no years of driving experience or claims history start out at base rate with no surcharge or discount on the CRS. 44. The government directive states: ICBC is directed to prepare and implement a Basic insurance rate design plan that must: (1) for the 2008 and future rate years retain the following key components of the existing rate design structure: Seniors discount rate classes and their current method of calculation Disability discount and its current method of calculation; (2) address the issue of high-risk drivers, as set out in this directive, as a new rate design factor beginning in the 2008 rate year; and (3) retain until at least the 2011 rate year the following existing rate design structure elements: 15-9

62 ICBC Filing with the BC Utilities Commission Claim Rated Scale (the number of levels and impacts of chargeable claims on Claim Rated Scale level) Rate territories and their boundaries Existing rate classes. The basic insurance rate design plan should reflect the Government s intention to preserve rate stability for the majority of basic insurance policyholders. In designing its plan ICBC should look to develop a rate structure that better takes into account the costs incurred by high-risk drivers. Changes affecting high-risk drivers should be applied to driver actions occurring in 2008 and subsequent years. ICBC must submit the plan for high-risk drivers to the Commission for its approval prior to its implementation. This directive does not preclude ICBC from proposing changes to meet ongoing business requirements or changes to basic insurance premium assessments made in the ordinary course of business, subject to the Commission s approval. This approach to rate design positions ICBC to introduce changes required for a more driver based rate design structure in a gradual and systematic manner without undermining the historical stability and predictability. 45. This application includes a Basic insurance rate design plan and is consistent with the government directive. C.2 UTILITIES COMMISSION ACT 46. The Utilities Commission Act (UCA) sets out the Commission s jurisdiction over public utilities. In 2003 the Basic insurance rates and service of ICBC came under Commission regulation. While ICBC is not a utility under the UCA, the sections of the UCA, except those listed in section 44 of the ICA, apply to ICBC. Section 59 of the UCA is significant with respect to the Commission s role in the rate design structure. 47. Section 59(1) states that a public utility (which includes ICBC in this instance) must not make, demand or receive an unjust, unreasonable, unduly discriminatory or unduly preferential rate for a service (which refers to Basic insurance only) or a rate that contravenes any other laws

63 ICBC Filing with the BC Utilities Commission 48. The terms rate and service used in section 59 of the UCA have special definitions that apply only to ICBC. Rate is defined in section 44(3) of the ICA as: compensation of the, other than any fee or other remuneration to which that corporation is entitled for any activity it undertakes under section 7(g)(h) or (i) of the Insurance Corporation Act [those sections refer to money that ICBC collects on behalf of government and remits directly to government and for amounts related to road safety]. 49. This definition of rate must be read in the context of the definition of service in section 44(3) of the ICA which is deemed to be a reference to universal compulsory automobile insurance 50. The effect of section 59(1) of the UCA is that, with respect to its service (Basic insurance), rates should not be unjust, unreasonable, unduly discriminatory or unduly preferential. 51. Section 59(5) of the UCA defines unjust or unreasonable as a rate that is: More than a fair and reasonable charge for service of the nature and quality provided Insufficient to yield a fair and reasonable compensation for the service provided Unjust and unreasonable for any other reason. C.3 CONCLUSION 52. In summary, the legal framework provides the following underlying concepts for selecting rate design principles and the resulting rate structure: Rate changes should be phased in over time to maintain relative stability and predictability (s. 3(1)(e) of Special Direction IC2; government directive of January 31, 2007 with respect to rate design)

64 ICBC Filing with the BC Utilities Commission Fair, just and reasonable rates not based on age, gender and marital status, and not unduly discriminatory or unduly preferential (s. 3(1)(d) of IC2; s. 59(1) and 59(5) of UCA). Actuarially sound rates (s. 3(1)(c) of Special Direction IC2). Rates should reflect government social policy (through government directives such as that dated January 31, 2007 or otherwise). 53. Together these concepts underlie ICBC s rate design principles set out in the Section D below. Also as stated in the Section below on criteria for selection of rating variables, legal criteria take precedence over all other considerations in the determination of rating variables. D ICBC S BASIC INSURANCE RATE DESIGN PRINCIPLES 54. This Section presents principles that ICBC believes are appropriate for the design of Basic insurance rates. These principles further guide Basic insurance rate design. They are aligned with and informed by the legal framework discussed above. 55. The principles are: Fair, just, reasonable. Rate stability and rate predictability. Administrative simplicity and ease of understanding. 56. Each principle is described below. D.1 FAIR, JUST, AND REASONABLE 57. The first rate design principle is that rates should be fair, just and reasonable. This principle has its foundation both in legislation (the UCA) and also in the statistical criteria of the insurance rating variable selection criteria. As set out in the UCA, a rate is unjust or unreasonable if it is more than a fair and reasonable charge for the service provided. A rate should not be unduly preferential or unduly discriminatory

65 ICBC Filing with the BC Utilities Commission 58. From an actuarial perspective if rates are not accurate, some groups or subgroups would pay less than the cost they incur while other groups would pay more than the cost they incur. Accuracy is an important criterion to achieve fairness of rates. (See Section B.1 for a discussion of statistical criterion of accuracy). 59. From ICBC s perspective each group of individuals with similar risk characteristics should pay a similar amount. That is considered fair, just and reasonable. 60. However, ICBC must consider these principles in the context of its overall Basic insurance rate structure. As set out earlier in this Chapter, that context includes the legal framework and public policy set out by the provincial government which currently includes senior rate classes and discounts for disabled persons. ICBC will also have a Basic insurance rate entry point for new drivers, with discounts or surcharges from that entry point dependent on the driver's record. In this context then ICBC considers it fair that these Basic insurance customers pay premiums which are not fully reflective of their risk and cost of their anticipated claims. 61. For other customers, it would be considered unfair, unjust and unreasonable if two Basic insurance policyholders who pose very different risk are charged the same premiums. Likewise it would be unfair, unjust and unreasonable if two Basic insurance policyholders with the very same risk are charged different premiums. 62. Going forward, ICBC will be moving towards a rate structure with rates more reflective of risk. As the number of driving convictions and roadside suspensions (hereafter referred to as driving convictions ) and at-fault crashes are within the control of the driver, having premiums commensurate with risk creates an incentive for the driver to drive responsibly and thereby reduce his or her premiums. ICBC believes that is fair, just and reasonable. More responsible drivers should result in lower frequency and severity of claims, which should lower the overall costs for Basic insurance which benefits all British Columbians. 63. As stated above, given the criteria for selection of insurance rating variables, ICBC s unique legal framework and public policy overlay, Basic insurance rate design embodies the principle of not unduly preferential or unduly discriminatory

66 ICBC Filing with the BC Utilities Commission D.2 RATE STABILITY AND RATE PREDICTABILITY 64. The second principle of rate design is rate stability and rate predictability. This principle has its foundation both in legislation and also in the statistical criteria of the insurance rating variable selection criteria. 65. Section 3(1)(e) of Special Direction IC2 and the government directive both provide that Basic insurance rate increases and decreases should be phased in to ensure rates remain relatively stable and predictable. 66. The statistical criterion of predictive stability requires that customer groups have average costs that are relatively stable over time. As noted in Section B.1 in order to lessen the random fluctuations that may be present in claim costs from year to year, insurers make their projections based on multiple years of claims data as opposed to a single year. Another way to enhance stability when customer groups are small is to increase the group sizes. 67. ICBC believes that the concept of stable and predictable rates for customers should be viewed from the perspective of both the short-term and long-term. Rates that are relatively stable and predictable do not fluctuate dramatically from one year to the next. 68. Illustrative of this principle is the 6% cap on rate adjustments to avoid rate shock so rates are relatively stable and predictable. See the discussion on capping of rate adjustments in Chapter Predictability is also to be part of the ICBC s multi-year rate design plan as set out in the government directive and IC2. ICBC is directed to retain key components of existing Basic rate design structure such as seniors discount rate classes and disability discounts into the future, and the existing rate design structure elements of the Claim-Rated Scale (the number of levels and impacts of chargeable claims on Claim-Rated Scale level), rating territories and their boundaries and existing rate classes until at least Going forward, ICBC s Basic insurance rate design will provide drivers with the ability to affect the premium they pay through their decisions on how they drive and how they allow their vehicles to be driven. The design will place the responsibility for driving safely with the drivers 15-14

67 ICBC Filing with the BC Utilities Commission by focusing on rating variables that drivers are able to control (e.g. convictions, at-fault crashes). This aspect of the design of Basic rates will also provide a measure of predictability. 71. ICBC will introduce changes required for a more driver based rate design structure in a gradual and systematic manner without undermining the historical stability and predictability. 5 D.3 ADMINISTRATIVE SIMPLICITY 72. The third principle of rate design is administratively simplicity. This principle has its foundation both in legislation, rate design precedent and also in the operational criteria of the insurance rating variable selection criteria. 73. Rates should be designed in a way so they are relatively simple for ICBC to administer, and for brokers to use. 74. ICBC notes that under section 60(1)(b)(iii) of the UCA the Commission has due regard to the setting of rates that encourages companies it regulates to increase efficiency, reduce costs and enhance performance. ICBC will achieve its overall goal for Basic insurance rate design while taking into account the operational considerations such as administrative expense and the ease of verifying the rating information collected respecting the driver. 75. It is important that rating variables are objectively defined with little ambiguity and should be intuitively related to costs. The rating variables driver convictions and other operator meet the criteria of objectivity and are intuitively related to costs. See Section B.2 for more discussion of operational criteria. 76. ICBC plans to make changes in Basic insurance rate design such as the first steps in addressing high-risk drivers, and in the introduction and implementation of other operator as a rating variable as administratively simple as possible. Keeping business rules administratively simple is in the interest of ICBC as it has finite resources to develop and implement changes. ICBC recognizes there is a limit to the amount of rate design change that can be undertaken at one time and which Basic insurance policyholders and brokers can absorb at one time. See Chapter 16.2 for a discussion of Managing Rate Design Change. 5 Government directive dated January 31, 2007 BC Reg 039/

68 ICBC Filing with the BC Utilities Commission E CONCLUSION 77. This Chapter has provided a context within which to understand Basic insurance rate design. ICBC has a unique legal framework which governs its Basic insurance rate design and provides the foundation for the rate design principles ICBC considers appropriate for the design of ICBC s Basic insurance rate structure. ICBC believes that there are three principles which are appropriate for the design of Basic insurance rates. These principles in turn give rise to the goal and objectives of Basic insurance rate design as set out in the Multi-Year Plan Chapter Selecting insurance rating variables for the Basic insurance rate structure involves trade-offs between the competing interests of the four selection criteria. However, legal criteria are the most important and take precedence over all other considerations in the determination of rating variables. The trade-offs and considerations are made in alignment with ICBC s rate design principles

69 ICBC Filing with the BC Utilities Commission Appendix 15 A Order in Council No A

70 ICBC Filing with the BC Utilities Commission 15 A-1

71 ICBC Filing with the BC Utilities Commission 15 A-2

72 ICBC Filing with the BC Utilities Commission 15 A-3

73 ICBC Filing with the BC Utilities Commission 15 A-4

74 CHAPTER 16.1 ICBC BASIC INSURANCE RATE DESIGN MULTI-YEAR PLAN

75 ICBC Filing with the BC Utilities Commission Table of Contents A Introduction B Vision and Overall Goal and Objectives for Future Basic Insurance Rate Structure C Strategy Going Forward D Plan Development E The Plan E.1 Process for Managing Rate Design Change E.2 Short-term Plans E.2.1 Driver Risk Premium Program E.2.2 Other Operator E.2.3 Rate Adjustments E.2.4 Commercial Fleets E.2.5 Conclusion E.3 Long-term Plans E.3.1 Process E.3.2 Claim-Rated Scale (CRS) E.3.3 Other Operator E.3.4 Rate Class and Territory E.3.5 Introduction of Other Rating Variables E.4 Conclusion i

76 ICBC Filing with the BC Utilities Commission A INTRODUCTION 1. This Chapter presents ICBC s Basic insurance rate design multi-year plan (the Plan ). 2. The Plan recognizes that ICBC s Basic rate structure exists within the public policy and legal framework set out by the provincial government. While ICBC was preparing this 2007 Rate Design Application, a January 31, 2007 government directive with respect to rate design was issued to ICBC. The directive requires ICBC to prepare and implement a plan that must: (1) for the 2008 and future rate years retain the following key components of the existing rate design structure: Seniors discount rate classes and their current method of calculation Disability discount and its current method of calculation; (2) address the issue of high-risk drivers, as set out in this directive, as a new rate design factor beginning in the 2008 rate year; and (3) retain until at least the 2011 rate year the following existing rate design structure elements: Claim Rated Scale (the number of level and impacts of chargeable claims on Claim Rated Scale level) Rate territories and their boundaries Existing rate classes. 3. The government directive also requires that the Plan should reflect the Government s intention to preserve rate stability for the majority of Basic insurance policyholders and position ICBC to introduce changes required for a more driver-based rate design structure in a gradual and systematic manner without undermining historical stability and predictability. 4. ICBC s Plan is responsive to and complies with the government directive. 5. The purpose of this Plan is twofold: (i) to present to the Commission and interested parties ICBC s vision, overall goals and objectives, and strategy with respect to Basic insurance

77 ICBC Filing with the BC Utilities Commission rate design, and (ii) to set out ICBC s plans for rating variables that will be preserved, new rating variables that will be focussed on in the short-term, and rate design revisions that will be dealt with over the longer-term. The Plan also sets out an indication of the timing and content of ICBC s future rate design filings. ICBC defines short-term as the time period from this filing and up to and including The long-term is defined as post In this way the Plan allows for transparency with respect to the planned changes as well as enhancing driver accountability and overall rate stability and predictability. 6. This is ICBC s first rate design application. A long-term approach to changes in ICBC s rate structure is required for the reasons discussed in this paragraph and elsewhere in this Application. The Plan recognizes that automobile insurance rate design, particularly in the context of ICBC s Basic insurance, is very complex. Changes to Basic insurance rate structure will have to be gradual and will have to recognize that there are limitations that must be addressed before change can occur. As set out in Chapter 14, ICBC s Basic insurance rate structure has evolved over 30 years. It is not practical, and would be very disruptive to Basic insurance customers and brokers to attempt to change it quickly. It is important that the changes that affect Basic insurance customers are done in a manner that avoids rate shock. Changes need to be sequenced in a logical and gradual manner and prioritized for overall effectiveness and efficiency. 7. As described in this Plan, ICBC will address the CRS rating system and its rating variables of driving experience and chargeable claims associated with the policy in four to five years. Thereafter rate class and territory will be examined. 8. The intent of the Plan is to be revenue neutral. As set out below and in the following chapters, customers who are affected by the initial change to address the additional risk posed by other operators will see their premiums increase in While changes respecting premiums for high-risk driving will be implemented in 2008, billing for additional premium will not occur until Revenue from Other Operator will be applied to the 2008 revenue requirements for the benefit of all policyholders. As a result of the rate adjustments customers may experience an increase or decrease depending on their risk characteristics and predicted costs. 9. ICBC s Plan is based on ICBC s experience with the Basic insurance rate structure and insurance industry knowledge. ICBC will adjust its vision and strategy based on quantitative

78 ICBC Filing with the BC Utilities Commission analysis, the experience gained from introducing the planned changes to ICBC s Basic insurance rate structure and any significant changes in ICBC s external operating environment. 10. In accordance with the government directive of January 31, 2007 with respect to Rate Design, and with the approval of the Commission, ICBC intends to examine Basic insurance rate design issues in the manner set out in this Plan. B VISION AND OVERALL GOAL AND OBJECTIVES FOR FUTURE BASIC INSURANCE RATE STRUCTURE 11. This Section outlines ICBC s vision and overall goal and objectives for future Basic insurance rate design. 12. ICBC s overall goal is to have Basic insurance premiums reflect the risk of causing crashes and the associated financial implications. 13. In order to achieve the goal of rates more reflective of risk ICBC has two key objectives which are consistent with and align to the rate design principles set out in Chapter 15: (i) rates move towards actuarial pricing. (ii) rate structure shifts to being more driver-based (variables over which the driver has control and which is more predictive of claims costs). 14. ICBC s future Basic insurance rate structure will provide drivers with the ability to affect their premiums through their decisions on how they drive and who they allow to drive their vehicles. The rate design will place the responsibility for driving safely with drivers by focusing on rating variables that drivers are able to control [e.g. convictions and roadside suspensions (hereafter referred to as driving convictions ) and at-fault crashes]. Fundamental to rate design, drivers actual risk characteristics will be a key determinant in their rating. As a result, ICBC s Basic insurance rate design will shift to being more driver-based. 15. ICBC s future Basic rate design will continue to consider how a vehicle is used and where it is driven as these rating variables will continue to be important predictors of risk. 16. ICBC s future Basic insurance rates will be actuarially sound resulting from, in part, having homogeneous and credible pricing groups of customers as discussed in Chapter

79 ICBC Filing with the BC Utilities Commission 17. ICBC s future Basic rate design will exist within the public policy and legal framework set out by the provincial government and will retain the discounts for seniors and persons with disabilities. ICBC will also have a Basic insurance rate entry point for new drivers, with discounts or surcharges from that entry point dependent on the driver's record. 18. ICBC will achieve this vision while taking into account operational considerations such as administrative expense and simplicity, and ease of verifying the rating information collected as well as keeping rates stable and predictable. C STRATEGY GOING FORWARD 19. For the current Basic insurance rate structure there are two main rating variables associated with what the insurance industry typically calls driving record. For ICBC driving experience is the number of years licensed and claims experience ; claims experience is the history of at-fault claims associated with the vehicle policy. 1 Currently there is limited use of driving convictions in the Basic insurance structure. Drivers with a valid BC driver s licence are billed a penalty premium based on the number of points accumulated against their driving record. This penalty premium does not sufficiently reflect the added insurance risk associated with the driver. 20. Moving forward, ICBC will view driving record to include a balanced use of all three risk characteristics (years licensed, at-fault claims of the driver(s), and driving convictions) which are key indicators of the risk of causing crashes. 21. ICBC currently determines the vast majority of premiums (after base rate 2 is determined) based on the at-fault claims history associated with the vehicle s policy not the claims history of the driver, plus the number of years licensed of the principal driver. 22. In order to have driver premiums more reflective of risk, the role of the driving record in determining premiums needs to increase. That means that each specific risk factor related to the driver s record needs to be considered. Analysis shows that previous at-fault crashes are a good predictor of risk as is driving convictions as set out in the chapters that follow. 1 In the automobile insurance industry generally the at-fault claim follows the driver but will default to a vehicle if a driver is not listed on a vehicle policy. 2 A central aspect of ICBC s current rate design is the rate class/territory base rate structure, in which the rate class and territory combinations define ICBC s customer groups for the purpose of determining base rates

80 ICBC Filing with the BC Utilities Commission 23. With driving record playing a greater role in the future in determining insurance premiums, the premiums will be determined in a manner that better reflects the risk of a crash. This will likely result in relatively lower premiums for lower risk drivers and relatively higher premiums for higher risk drivers who are more likely to cause crashes as set out in this Plan. Drivers will be able to influence their premiums by the decisions they make with respect to safe driving. 24. As the number of at-fault crashes and driving convictions are within the control of the driver, having premiums commensurate with these factors creates an incentive for the driver to drive responsibly and thereby reduce his or her premiums. More responsible drivers should result in lower frequency and severity of claims, which should lower the overall costs for Basic insurance which benefits all British Columbians. D PLAN DEVELOPMENT 25. This is ICBC s first rate design application. As noted in Chapter 14, ICBC s existing Basic insurance rate design structure has its origins with the corporation s creation in 1973 and has evolved with the changes approved by government over the years. 26. The objective of moving to a more driver-based rate structure stems from ICBC s recent evaluation of its current rating structure, which was carried out to identify how the rating structure could be improved to make rates more reflective of the risk of causing crashes and the associated financial implications. ICBC identified that the CRS rating variable, which uses a combination of the driving experience of the principal operator and the claims experience related to the policy (regardless of who the operator was at the time of claim), often does not adequately capture the risk associated with other operators on the vehicle. 27. ICBC also identified that its current DPP program could be strengthened by holding drivers more financially accountable for driving convictions that are related to the risk of causing a crash in the future, and that the period of accountability should be longer than the one year period of the DPP program. As a result of this evaluation, ICBC has concluded that it wants to move toward a rating structure that better takes into account these driver-risk items in determining premium. Such a rating structure will be more driver-based than ICBC s current structure and will be more in line with common practice in the automobile insurance industry that generally considers specific driver-risk factors individually in a manner that gives more weight to

81 ICBC Filing with the BC Utilities Commission recent claims experience, charges additional premium for other operators, and charges drivers additional premium for driving convictions for a period of at least three years. 28. Given the objective to move to a more driver-based rate structure, ICBC examined its two key rating variables, driving experience and claims experience, that are typically associated with driving record. ICBC identified that the way these two variables were defined and being used was not fully reflecting the risk presented by drivers. The current rate structure co-mingles the risk factors whereas the insurance industry typically considers specific individual risk factors years licensed, at-fault claims history of the driver and driving convictions in an integrated manner giving more weight to convictions and at-fault crashes. 29. ICBC reviewed the rating variables used by automobile insurers in other jurisdictions and assessed their validity and applicability for Basic insurance. ICBC found the information on how specific risks of Other Operators 3 and driving convictions are used by other insurers as rating variables very informative. See research on other jurisdictions presented in Chapters 17.1 and Some of the analysis was constrained by the fact that ICBC does not collect certain data, such as whether there is a person other than the principal operator driving the vehicle and what additional risk that other operator poses. 31. ICBC developed a model to predict drivers (not just the registered owner or principal operator) who are most likely to be involved in one or more at-fault crash involvements in the near future, on the basis of their past record of at-fault crashes and convictions for motor vehicle related offences. Through this analysis ICBC was able to identify the correlation between specific convictions and the risk of causing a crash. This information is the basis of the Driver Risk Premium program which begins to address the issue of high-risk drivers. See discussion in Chapter In October 2006 ICBC held a workshop and two working sessions 4 on Basic insurance rate design with interested stakeholders, intervenors from past ICBC regulatory proceedings and Commission Staff. The October 5, 2006 Rate Design Workshop was advertised in the daily and weekly newspapers which are typically used to advertise legal notices of regulatory 3 See ICBC s definition of Other Operator in Chapter ICBC hosted a workshop on Basic insurance rate design on October 5, Two working sessions were held subsequently on October 23, 2006 and October 30, 2006, respectively

82 ICBC Filing with the BC Utilities Commission proceedings. ICBC contacted many stakeholders and intervenors in advance to make them aware of the October 5, 2006 Rate Design Workshop and October 23 and 30, 2006 Working Sessions and the advertisement. 33. The purpose of the October 5, 2006 Rate Design Workshop was twofold: (i) to provide participants with an overview on the fundamentals and key concepts of Basic insurance rate design and the regulatory process and (ii) to elicit comments and feedback on what participants felt the issues were with the current rate structure. 34. At the October 23 and 30, 2006 Working Sessions, ICBC asked participants a number of questions including identifying areas for improvement, changes that ICBC should consider, other factors that should be used in determining rates, definition of a bad driver and how rate design should deal with bad drivers. 35. The Plan will move the Basic insurance rate structure towards its vision while being consistent with its rate design principles (set out in Chapter 15) and objectives and government directives. 36. ICBC recognizes that customers can absorb only so much change at one time. Similarly ICBC must prioritize the rate design changes it undertakes as it has its own operational considerations as set out in Chapter ICBC wants to ensure changes are transparent, administratively simple and easy to understand. Customers also need predictability for their own personal planning or for their businesses. At the October 23 and 30, 2006 ICBC Rate Design Working Sessions, several participants recommended that ICBC focus on getting it right for the majority of customers. ICBC has taken this input into consideration in developing this Plan. E THE PLAN 37. As indicated above, this is ICBC s first rate design application. It sets out the Plan for Basic insurance rate design including ICBC s anticipated next rate design filings and major applications for the next several years. E.1 PROCESS FOR MANAGING RATE DESIGN CHANGE 38. ICBC s process for managing change reduces the risk associated with implementation by providing a disciplined approach that considers all aspects of the change in order to ensure the project is successful

83 ICBC Filing with the BC Utilities Commission 39. ICBC is not proposing extensive rate design change in the short-term, but instead is proposing a long-term timeframe. ICBC will move towards the planned rate structure gradually and systematically in order to ensure the success of the complex and extensive changes that will occur and to ensure that impacts to the operating environment are minimized. 40. The proposed gradual and systematic implementation of rate design changes is consistent with Special Direction IC2 section 3(1)(e), by ensuring increases or decreases in Basic insurance rates are phased in such a way that those rates remain relatively stable and predictable. The proposed implementation approach is also consistent with the government directive of January 31, 2007 with respect to rate design. 41. Planning for change in a proactive manner is considerably more effective and efficient than accommodating change in an uncoordinated and ad hoc manner. An overarching plan needs to be created before change can be implemented, and this involves strategic planning and tactical planning. 42. Planning involves making sure the right changes are being undertaken based on strategic goals and objectives. As stated above the overall goal is to have Basic insurance premiums reflect the risk of causing crashes and the associated financial implications. To achieve this goal, ICBC has the two key objectives of rates moving towards actuarial pricing and the rate structure being more driver-based (variables over which the driver has control and which is more predictive of claims costs). From this strategic planning ICBC has selected the rate design changes set out in this Plan. 43. Planning also involves defining the change and ensuring the change is being implemented efficiently and effectively. The first step is to ensure the changes are being prioritized in a systematic and logical manner. 44. Significant rate design changes should be prioritized, and implemented on a timeline that recognizes the constraints on timing and ICBC s operational capacity to absorb the change. 45. ICBC has prioritized these changes as set out below in its short-term and long-term plans

84 E.2 SHORT-TERM PLANS ICBC Filing with the BC Utilities Commission 46. ICBC s analysis indicates that there are key opportunities to move towards the overall goal of premiums being reflective of risk and the objective for the Basic insurance rate structure to be more driver-based. ICBC will implement these changes in a manner that is consistent with the principles of rate design set out in Chapter To ensure sufficient customer notice and also necessary lead time for ICBC s implementation, ICBC plans that the short-term rate structure changes be commenced effective in 2008 with the exception of the changes for fleetplan which are planned for implementation in E.2.1 DRIVER RISK PREMIUM PROGRAM 48. During ICBC s examination of its rating variable driving experience, it identified that ICBC was not fully capturing the risk encompassed by driving record which typically considers the specific individual risk factor of driving convictions. ICBC wants to make driving convictions and road side suspensions more prominent as a risk factor. For the purposes of this Chapter and for general discussion of the Driver Risk Premium Program, the words conviction and offence will include roadside suspensions. As set out in Chapter 17.1 driving convictions are a good predictor of at-fault crashes. 49. One of the ways in which aggressive driving is currently addressed is through driver point penalty premiums (DPP) which result in premium being assessed against drivers on the basis of driving record. ICBC s analysis shows the risk of future at-fault crashes increases both with the number of prior at-fault crashes and with the number of prior convictions. Analysis shows that drivers who will be charged a Driver Risk Premium have approximately twice the frequency of crashes compared to drivers who will not be charged a Driver Risk Premium. These high-risk drivers are not paying premiums reflective of their additional risk. See Chapter 17.1 for a discussion of the analysis. 50. ICBC is moving towards a more driver-based rate design system, initially through its Driver Risk Premium Program as set out in Chapter 17.1, that increases the direct accountability of drivers by requiring that those high-risk drivers who have convictions pay more premium dollars to cover their anticipated claims costs

85 ICBC Filing with the BC Utilities Commission 51. ICBC has decided that the one year scan period which is used by the DPP program is not a long enough time to develop the information required to establish a driver s premium. The assessment period should be long enough so that the premium reflects the risk of crash more closely than it currently does. Based on the analysis described in Chapter 17.1, ICBC believes that the examination of a more lengthy driving history should play a greater role in determining the driver premium. 52. Rate design changes planned by ICBC in the short-term begin to address the issue of high-risk drivers with the Driver Risk Premium program commencing January 1, As is ICBC s standard practice, ICBC will analyze the data from the program and monitor the program for continuous improvement. E.2.2 OTHER OPERATOR 54. Approximately 22 percent of crash-related claims involve vehicle operators who are not the principal operator or registered owner of the vehicle listed on the insurance policy for the vehicle. In its research, ICBC found that other operator is a commonly used rating variable by the auto insurance industry. In order to use the driving record as a rating variable, and to fully reflect the risk presented, ICBC needs to identify all Other Operators and their driving records. 55. As an example, a motorist, who has been driving for over 10 years and has a driving record that is free of chargeable claims, may be eligible for a CRS level of -10, which equates to a 43% discount on the vehicle s Basic insurance premium. If another operator is permitted to drive the vehicle and he or she has a worse CRS level than the registered owner or principal operator, (e.g. CRS -3, reflecting a 15% discount vs. CRS -10 reflecting a 43% discount), the overall risk on the policy for an at-fault crash is greater than on a policy where there is no Other Operator. Under the current rate structure, the premiums for both vehicles, one with and one without an Other Operator, are the same. The result is that the premium for one vehicle is less reflective of the risk that the operation of that vehicle represents than the premium for the other vehicle. It is this circumstance that ICBC wishes to address with the addition of Other Operator as a new rating variable. 56. ICBC s current rating system does not capture information about other operators of a vehicle, nor does it have a mechanism in place to adjust premiums to reflect the additional risk posed by other operators

86 ICBC Filing with the BC Utilities Commission 57. ICBC s Plan is that in phase one of Other Operator, Other Operator will be implemented as a new rating variable, information will be collected on Other Operators (commencing in 2008) and an additional fixed dollar amount of premium will be charged. This represents the first steps necessary in the implementation of Other Operator as a rating variable. It also positions ICBC to make future changes. 58. ICBC believes using Other Operators as a rating variable will allow it to do a better job in evaluating risk so those who pose additional risk pay additional premium. 59. Undertaking the data collection necessary for identifying other operators allows for separate analysis of other drivers and their additional risk. This analysis in turn will enable the analysis for the Claim-Rated Scale to focus on the risk of all drivers. 60. Until the data is collected and analyzed, registered owners and principal operators who allow others to operate their vehicles will be assessed an additional premium of $25 5 as a step towards more actuarially-based pricing. Specific details regarding Other Operator are found in Chapter E.2.3 RATE ADJUSTMENTS 61. As noted in Chapter 17.3, part of the ordinary course of business, insurance companies periodically review recent claims experience of their customer groups, and update the rates accordingly. This process results in a realignment (or rebalancing) of rates, so that rates for some of the customer groups will increase, while the rates for the remaining customer groups will not change or will decrease. Rate adjustments are calculated in a two-step process as described in Chapter Over time the driving behaviour of customers or the driving conditions of a rate class or territory can change, bringing about changes in claims frequency and claims severity. When claims patterns change, so should the insurance premium. ICBC needs to periodically rebalance the Basic insurance rates of customer groups accordingly. 63. ICBC s rate adjustments proposal includes preservation of both the seniors discount of 25% and the disability discount of 25%. ICBC is applying for Commission approval to adjust base rate premiums by the actuarially indicated base rate adjustments in Appendix 18 D. 5 There are exceptions to the additional premium of $25, as discussed in Chapter

87 ICBC Filing with the BC Utilities Commission 64. In order to maintain rate stability and predictability of rates for customers, ICBC proposed an annual cap of 6% on the rate adjustments described in Chapter 17.3 as a means of phasing in the indicated base rate adjustments. 65. As part of the ordinary course of business, ICBC will periodically review recent claims experience of its customer groups and recommend to the Commission appropriate adjustments to the rates of the customer groups. E.2.4 COMMERCIAL FLEETS 66. Commercial vehicles include vehicles that are rated using the Claim-Rated Scale as well as vehicles defined as a fleet and rated using Fleetplan. 67. A fleet is a group of five or more vehicles commonly owned or leased by a person or company (see definition 6 of fleet in Section 2.D.1 of the Basic Insurance Tariff, and in the Glossary in Appendix 18 A). In 2005, there were approximately 7,000 fleets in BC paying approximately $131 million in premiums to ICBC. The premium from fleet vehicles represents 53% of ICBC s commercial book of business (the rest are rated on the CRS) and 7.5% of ICBC s total premium collected on an annual basis. 68. Fleets with five to nineteen vehicles have the option of purchasing individual insurance policies for each vehicle using the Claim-Rated Scale or purchasing Fleetplan insurance for all vehicles collectively. This flexibility provides operational ease for customers with seasonal businesses. Fleets with 20 or more vehicles must insure using Fleetplan. Fleetplan is the method of insuring fleet vehicles using a scale of discounts and surcharges that takes the combined loss experience of all vehicles in the fleet into consideration. See the Basic Insurance Tariff (Section 2.D.2) for the calculation of premium for Fleetplan vehicles. 69. ICBC s fleet premium structure has not undergone a complete review for many years. While the rate adjustments as set out in Chapter 17.3 include commercial rate classes, ICBC is reviewing the rating structure for Fleetplan vehicles in its entirety and will address it in a 6 A fleet is defined in section 155(1) of the IVR as follows: Fleet means not less than the minimum number of vehicles established by ICBC that (a) are registered in the name of or are leased from a person whose business is the leasing of vehicles to (i) one person (ii) more than one corporation, if the corporations are parent and subsidiary, or (iii) more than one person, if the persons jointly operate a taxi business and the vehicles are controlled by radio dispatch from one dispatching unit, and (b) are rated in a vehicle rate class designated by ICBC

88 ICBC Filing with the BC Utilities Commission separate filing. The objective is to have rates more reflective of claims history and drivers and fleet operators more accountable. 70. ICBC is expecting to address high-risk fleets which have a high frequency of at-fault claims within the control of the driver and the influence of the fleet operator. Currently their rates are not reflective of their loss experience. The intended change will be consistent with ICBC s overall goal to have premiums reflective of risk and provide an incentive for drivers to drive responsibly and for operators to have well managed fleets. 71. Fleets constitute a small but important component of Basic insurance which impacts a distinct group of customers. The Fleetplan is different from the Claim-Rated Scale and is quite technical and complex. ICBC is contemplating a new loss rating algorithm for fleets and anticipates bringing it forward in a separate application to the Commission in 2008 for approval and implementation thereafter. The resulting premium adjustments will be phased in as appropriate to avoid rate shock. 72. The objective is consistent with ICBC s principles of charging fair and more actuarially sound rates, where premiums are set to match the risk that the customer represents. This type of fleet rating is a common insurance industry practice. The change will also address increased accountability of high-risk fleets with at-fault claims, which are within the control of the driver and the fleet. E.2.5 CONCLUSION 73. The preceding paragraphs outline ICBC s short-term changes in its Plan for Basic insurance rate design. 74. A summary of the short-term changes are as follows:

89 Short-term Plans Driver Risk Premium Program Other Operator ICBC Filing with the BC Utilities Commission Description Increase the assessment period for specified driving convictions to three years, and charge additional premium amount for specified convictions as set out in Chapter Identify and then capture claims data of other operators; and charge an initial additional $25 premium as set out in Chapter 17.2 Rate Adjustments Adjustments to maximum of 6% as set out in Chapter 17.3 (exclusive of revenue requirements, Other Operator, and Driver Risk Premiums programs). Fleets E.3 LONG-TERM PLANS In 2008 bring forward to the Commission a loss rating algorithm to better reflect the fleet s actual risk and charge insurance premium commensurate with at-fault claims for implementation in As this is ICBC s first rate design application, a long-term approach to rate design is required to achieve rates more reflective of risk and a rate structure that is more driver-based. Moving forward, ICBC will view driving record to include: a balanced use of three risk characteristics that are key indicators of the risk of causing crashes: years licensed, history of at-fault claims of the driver, and driving convictions. In order to use driving record as a rating variable ICBC must take into account the driving record of all drivers who operate a specific vehicle. To be able to do that ICBC must identify and collect data on Other Operators, and begin to use driving conviction as a specific risk factor in determining driver premium. 76. With the objective of having driving record playing a greater role in determining premiums, ICBC plans to move towards a more driver-based system. Once that is successfully completed, rate class and territory variables can be examined to determine how to best increase credibility and homogeneity. 77. ICBC anticipates filing another major rate design application in four or five years which will include additional plans as noted in the following paragraphs. E.3.1 PROCESS 78. ICBC will undertake consultations through public workshops and meetings with stakeholder groups before its next major rate design application in four or five years. Results from the regulatory proceeding for this 2007 Rate Design Application will also inform the next major application

90 ICBC Filing with the BC Utilities Commission 79. As noted below, the next major priority for ICBC in the Plan is the Claim-Rated Scale, which affects virtually all Basic insurance customers (except those insuring under Fleetplan), followed thereafter by a review of the rating variables rate class and territory. It is anticipated that the impact on customers of changes to rate class and territory definitions would likely not be as far reaching as the impact of changes to CRS. In its next major rate design application, ICBC will set out these plans in greater detail and its rate design priorities for the subsequent years. As the insurance industry is dynamic and the operating environment changes, ICBC recognizes the need to be flexible and to take into account developments that occur together with the experience gained from introducing the short-term changes to ICBC s rate structure set out in this application. E.3.2 CLAIM-RATED SCALE (CRS) 80. The CRS affects almost every Basic insurance customer 7 - approximately 2,500,000 customers. 81. As discussed in Chapter 14, the CRS was first established in 1981 as an open-ended bonus-malus system based on driving and claims experience. The CRS entry point is base rate with defined increments or levels (adjusted over time) to capture the chargeable claims related to the vehicle, and years of driving experience of the principal operator. Defined rules determine CRS position for the vehicle insured. 82. The CRS is a very complex rating system that is not readily understood. It provides a means to reflect risk in a policy-based system but has its shortcomings and is not suited to meet the vision of moving towards a more driver-based system. As well, the operating environment, driving public, and technology, have all changed since the CRS was introduced. 83. In order for premiums to accurately reflect the risk, the policyholders need to be grouped in sufficiently large groups to provide actuarially credible data, but each group must not be so large so that it no longer represents a homogeneous group with similar risk characteristics. 84. To achieve this balance between homogeneity and credibility, ICBC s plan is to shift away from the current CRS. 85. ICBC has identified the following shortfalls with the CRS: 7 Fleetplan customers are not rated using the Claim-Rated Scale

91 ICBC Filing with the BC Utilities Commission The current rate structure co-mingles the risk factors whereas the insurance industry typically considers specific individual risk factors years licensed, at-fault claims history of the driver and driving convictions in an integrated manner giving more weight to convictions and at-fault crashes. Approximately 80% of policyholders are in a single group on the same discount level of the scale. This is not a homogenous group and needs to be more refined. The discounts and surcharges are not related to the actual risk of the different levels on the CRS. The CRS is inefficient in reflecting the different levels of risk. Two people with very different risk characteristics (e.g., a new driver at base rate with no chargeable claims compared to a person with 20 years of driving experience with over 4 or 5 chargeable claims) could be at the same level on the CRS. 86. These shortfalls are illustrated by the following examples. A policyholder who is licensed eight years and has one chargeable claim is at -3 on the CRS or at a 15% discount level. Another policyholder who is licensed three years and has no chargeable claims is also at -3 on the CRS or at a 15% discount level. Another example would be a policyholder who is licensed 20 years and has two chargeable claims, compared to another driver who is licensed 14 years and no chargeable claims and both are at maximum discount. 87. ICBC cannot change CRS at this time. As indicated in paragraph 26, CRS is a combination of the driving experience of the principal operator and the claims experience related to the policy (regardless of who the operator was at the time of claim). In order to move toward a more driver-based system as described in paragraph 26, ICBC must methodically unwind the CRS formula by incrementally introducing over time (so as to avoid rate shock to customers) the individual rating variables that will replace CRS. Other Operator is the first such rating variable to be implemented, which will be followed in the future by the introduction of driving experience and claims experience as separate rating variables in the determination of premiums. Further research and analysis will enable ICBC to propose to the Commission a transition plan to move towards a more driver-based system. 88. Going forward, ICBC will be shifting towards a more driver record rating model that better reflects the years licensed, at-fault claims history, and driving convictions for all drivers on a vehicle

92 ICBC Filing with the BC Utilities Commission 89. As CRS affects almost 95% of Basic insurance customers, the scope of the change is considerable. While the introduction of a new rating system which is more reflective of risk and is more driver-based will provide the greatest benefits to policyholders, the risks associated with the implementation of such a new rating system, especially if done hastily, are extremely high. It is important that ICBC takes the time to conduct the proper analysis to develop a system that meets ICBC s goals and objectives and its rate design principles; that the transition is done in a smooth and transparent manner; and is not overly disruptive to policyholders and brokers. It is critical to get it right. Due to the insurance policy year it will take two full years to transition all customers to the new system. (See Chapter 16.2 Managing Rate Design Change). 90. Beginning in 2008 ICBC will start to undertake analysis and evaluate the feasibility of a new rating system. ICBC will also have the benefit of the initial data collected on other operators. Consistent with the government directive of January 31, 2007 with respect to rate design, ICBC will retain the CRS and its number of levels and impacts of chargeable claims on Claim-Rated Scale levels until As part of that application ICBC will examine the Multiple Crash Premium to determine if it is a necessary complement to a CRS based on driving record and how to properly take into account years licensed, history of at-fault claims and driving convictions of new residents Given the primary importance of driving record in determining the risk, ICBC needs to implement changes to CRS prior to other rate design changes such as rate class and territory. E.3.3 OTHER OPERATOR 93. Based on implementation and data collection for Other Operator as a rating variable, ICBC will be able to undertake analysis to arrive at a more reflective indication of the actual risk associated with Other Operators. 94. As set out in Chapter 17.2, ICBC s plan is to bring forward the findings from its actuarial analysis of the loss experience data, and submit to the Commission a refined plan for incorporating Other Operator as a rating variable into the Basic insurance rate structure. This will allow a more driver-based rating of individual policies than is possible under the current rate 8 New Residents do not receive a CRS level higher than level -8 upon entering the province even though they may have claims history letters that would provide them with a higher CRS level had they been British Columbia residents. There are challenges authenticating claim history letters and verifying claims history

93 ICBC Filing with the BC Utilities Commission structure. The plan will also include the appropriate premium adjustment and business rules required for that additional risk. 95. The implementation of Other Operator as a rating variable will move towards having the driving record of Other Operators of a vehicle reflected in the premium. Other Operator as a rating variable is an important step in helping ICBC understand all the risks associated with drivers and their vehicles. E.3.4 RATE CLASS AND TERRITORY 96. ICBC sets its base rates on the basis of the claims experience of its individual customer groups, where each combination of rate class and territory defines a customer group. As an example, a base rate is set for the rate class of pleasure use of vehicle and the territory of Lower Mainland is based on the claims experience of the customers in that rate class and territory. 97. ICBC has categorized vehicle use into 162 rate classes based on criteria such as how the vehicle is used (e.g., commuting to and from work, long haul commercial trucking) and the type of vehicle (e.g., recreational vehicle, logging truck). 98. Participants at ICBC s October 5, 2006 Rate Design Workshop and October 23 and 30, 2006 Rate Design Working Sessions had various suggestions regarding rate classes including: that they be refined, be fewer in number, special rate classes be established for insured only drivers, or specialty niche rate classes. Most agreed it was important to get the majority right private passenger classes. The rate adjustments set out in Chapter 17.3 help achieve getting the premium right for the majority of classes. 99. ICBC will retain the existing rate classes for Basic insurance until after Thereafter ICBC will undertake a review of its rate classes with a view to administrative simplicity and transparency while addressing the statistical criteria of credibility and homogeneity. The challenge is to achieve the right balance of rate classes; not too many, not too few and having the right ones As set out in Chapter 14, territory is a key rating variable for Basic insurance. Territory takes into account local characteristics and conditions such as traffic density, road design and weather conditions. ICBC has 14 territories within BC, plus one additional territory to capture

94 ICBC Filing with the BC Utilities Commission vehicles primarily operated outside the province. ICBC s overall rating territorial structure and boundaries have remained stable over the past decade Changes to territorial structure need to be driven by clear and long-ranging changes in a region s risk profile such as economic changes, transportation infrastructure, and population redistribution. Generally, territories are sufficiently large that major changes in character and the resulting need for major adjustments are infrequent The challenge with the review of territories is that if one territory s rate decreases, another must increase. There is also a practical issue that the determination of territorial boundaries is inevitably somewhat arbitrary because very few insurance risks are clearly delineated by a boundary. No matter where territory boundaries are drawn, there may be customers who will not agree with the territory in which they have been put, arguing particularly on territorial boundary areas that they should be paying the lower premiums of an adjacent territory As ICBC determines rates individually for each combination of rate class and territory, it is appropriate that any review of the rate classes and territories be done together rather than separately. ICBC has credibility and homogeneity challenges with the existing rate classes and territories. The majority of rate class and territory combinations, which correspond largely to commercial customers, have insufficient claims experience to be statistically credible. On the other hand, the rate class and territory combinations that are reasonably credible represent most of ICBC s customers The problem is a combination of the current definition of territory (boundaries, size, number, density) and the large number of rate classes with a small number of vehicles. Rate class and territory are not in proportion to each other. To address one without the other would cause multiple fluctuations (a yo-yo effect) which would then be repeated when the other variable is adjusted Given that the driving record is a key indicator of risk, ICBC will increase the impact of driving record as a rating variable prior to making changes to rate classes and territories. ICBC believes it is appropriate to make the rate class and territory changes simultaneously after the driving record changes within CRS have been implemented. From development of the application to the Commission to full implementation, including the full insurance policy year and a couple of years of experience, this could be approximately five years

95 ICBC Filing with the BC Utilities Commission 106. ICBC wants to ensure customers, employees and brokers have an opportunity to absorb changes to CRS and there has been a successful transition to the new rating system before embarking upon further rate structure changes. This will ensure change occurs in a gradual and systematic manner without undermining the stability and predictability. E.3.5 INTRODUCTION OF OTHER RATING VARIABLES 107. ICBC s focus is on developing a Basic insurance rate structure that is more driver-based with Basic insurance premiums that are more reflective of the risk of causing crashes and the associated financial implications. Once the changes outlined in this Plan are made ICBC may consider the addition to the rate structure of other variables which have been identified in its research and also raised by participants in the ICBC October 5, 2006 Rate Design Workshop and the October 23 and 30, 2006 Rate Design Working Sessions. Examples of such rating variables are vehicle specific attributes such as vehicle type, vehicle safety features and engine size as well as the enhanced use of mileage. A clear correlation between these variables and claims costs must be established in order for the rating variables to be meaningful. ICBC has not undertaken this analysis at this time as it believes the focus on driving record is a more immediate priority and will have the greatest impact for most customers. At a future date ICBC may be able to establish if these other variables will enhance the predictability of risk, meet the criteria for selection of insurance rating variables and are consistent with a more driver-based Basic insurance rate structure. E.4 CONCLUSION 108. As set out in this Chapter ICBC has undertaken a review of the Basic insurance rate structure and has welcomed the views of participants at the ICBC October 5, 2006 Rate Design Workshop and the October 23 and 30, 2006 Rate Design Working Sessions The ideal for an insurance company is to determine an accurate rate for each customer. Accomplishing this would mean accurately pricing each customer according to his or her own risk characteristics. Because that is not practical as noted in Chapter 15, it is insurance industry practice to select rating variables based on statistical, operational, social and legal criteria. The process generally involves trade-offs. ICBC s unique legal framework which governs its Basic insurance rate design provides the foundation for the rate design principles which informs those trade-offs. Legal criteria is the most important and takes precedence over all other

96 ICBC Filing with the BC Utilities Commission considerations in the determination of rating variables. These trade-offs and considerations are made in alignment with ICBC s rate design principles ICBC s overall goal is to have Basic insurance premiums reflect the risk of causing crashes and the associated financial implications. ICBC s future Basic insurance rate structure will provide drivers with the ability to affect the premium they pay through their decisions on how they drive and who they allow to drive their vehicles ICBC has taken a holistic review of its driving related rating variables with the view to moving towards a more driver-based rating structure. It has identified that specific individual risk factors years licensed, at-fault claims history of the driver and driving convictions and other operators of the vehicle need to be considered priorities in order to have premiums reflect risk As first steps in the Plan, ICBC will address the issue of high-risk driving as well as the additional risk posed by Other Operators. It is necessary to identify who drives the vehicle and the total risk presented. To accurately reflect risk it is necessary to consider the driving record of all operators. The next steps will be to address the rest of the rating structure including the Claim-Rated Scale. ICBC will bring to the Commission a plan to shift to a more driver-based rating system. The timing and approach will be consistent with the government directive of January 31, 2007 with respect to rate design This is ICBC s first rate design application and a long-term approach to rate design is required. The plan recognizes that automobile insurance rate design, particularly in the context of ICBC s Basic insurance, is very complex ICBC will bring forward its next major rate design application in four to five years consistent with the government directive of January 31, 2007 with respect to rate design. This will allow ICBC the time to do the data analysis and detailed planning for ICBC s long-term plans. For example, while the Claim-Rated Scale affects 2,500,000 customers (many more than Other Operator - which is estimated to be approximately 240,000 to 420,000 drivers) identifying and analyzing Other Operator data will enable separate analysis of the risk associated with these drivers. In order to move to a more driver-based system, it is necessary to identify who drives the vehicle and the total risk presented. To accurately reflect risk it is necessary to first collect the data, and then consider the driving record of all operators

97 ICBC Filing with the BC Utilities Commission 115. Changes to Basic insurance rate structure will have to be gradual and will have to recognize that there are limitations to change. It is not practical and it would be very disruptive to Basic customers and brokers to change the ICBC rate structure overnight. It is important that the changes that affect Basic policyholders are done in a manner that avoids rate shock. Changes need to be sequenced in a logical and gradual manner and prioritized for overall effectiveness and efficiency. This plan sets out ICBC s priorities for Basic insurance rate design for the coming years The Plan sets out for the Commission, Basic insurance policyholders and interested parties the plans for change in Basic insurance rate structure that ICBC will focus on immediately, and the rate design elements that should be dealt with over the longer-term. ICBC believes this Plan will both enhance driver accountability and preserve relative rate stability. This Plan offers BC motorists a fair, more risk-based, and more driver-based Basic insurance rate design structure This Plan is consistent with the legal criteria and regulatory principles and legislative framework set out in Chapter 15 and the public policy objectives provided by the Government as well as the government directive of January 31, 2007 with respect to rate design. The Plan provides Basic customers with relatively stable and predictable Basic insurance rates

98 CHAPTER 16.2 MANAGING RATE DESIGN CHANGE

99 ICBC Filing with the BC Utilities Commission Table of Contents A Introduction B Complexity of ICBC s Application Systems B.1 Autoplan Data Capture C Impact on Customers, Brokers, and ICBC Employees C.1 Customer Service C.1.1 Proactive Customer Communication C.1.2 Brokers C.1.3 Responsive Customer Communication C.2 Other Impacts on Employees D Alternate Claim-Rated Scale Project D.1 Application Systems D.2 Customers, Brokers, and ICBC Employees D.3 Summary E Conclusion i

100 ICBC Filing with the BC Utilities Commission Table of Figures Figure Autoplan Data Capture- Business Functions Supported ii

101 ICBC Filing with the BC Utilities Commission A INTRODUCTION 1. This Chapter provides an explanation for why it is important for the rate design changes contemplated in the Basic insurance rate design multi-year plan (the Plan ) (detailed in Chapter 16.1) to be sequenced in a logical, gradual, and phased manner to ensure their effective, efficient, and successful implementation. 2. As discussed in ICBC s Service Plan (see Appendix 11 B of the 2007 Revenue Requirements Application), ICBC is one of the largest property and casualty insurers in Canada with assets of approximately $9.0 billion. ICBC employs approximately 5,000 people and operates through 1,055 business locations across BC. ICBC s insurance is sold through a network of over 900 broker offices, government agents, and appointed agents, who in turn provide service to more than three million customers on a yearly basis for total annual premiums (Basic and Optional) of approximately $3.3 billion. ICBC s business functions are supported by over 600 application systems (defined for the purposes of this Chapter as the computer applications and databases that support ICBC s insurance, financial, and claims functions). These application systems support the approximately six million business transactions and the 100 million system transactions (one business transaction spawns multiple systems transactions) processed through ICBC s primary computing facility annually. 3. Application systems, customers, brokers, and ICBC employees are all part of ICBC s operating environment. The rate design changes identified in the Plan may be the most significant changes to ICBC s rate structure since its inception in 1974 (refer to Chapter 14 for a historical perspective on ICBC s rate structure). In the past, ICBC s rate design changes have for the most part been adjustments to an existing, stable rate structure. For example, the Claim- Rated Scale (CRS) has only had one adjustment of consequence since its introduction in 1982 (that being the Alternate Claims Rated Scale project discussed in Section D). The Plan involves fundamental changes to ICBC s current rate structure (e.g., structural changes to CRS and the introduction of new rating variables), which adds significantly to the complexity of implementation. 4. All areas of ICBC s operating environment will be impacted by the rate design changes contemplated in the Plan due to the complexity involved. A large number of ICBC s application systems will require modification or outright replacement. Every customer will be affected by

102 ICBC Filing with the BC Utilities Commission the rate design changes, some multiple times over the course of the Plan. Every employee and broker affected by the rate design changes will have to be educated and/or trained to ensure they are able to successfully implement and adapt to the changes. 5. The timeframe and sequence of the rate design changes in the Plan have been chosen to allow ICBC to successfully complete the planned rate design changes. Given ICBC s preliminary assessment of the magnitude of the planned changes and ICBC s past experience with rate design change, it is undesirable, and potentially counterproductive, to seek to implement additional short-term rate changes, accelerate the timeline of the long-term rate design changes, or alter the sequence of the any of the rate design changes contemplated in the Plan. 6. The scope and details of the specific rate design changes contemplated in the Plan (such as the changes to CRS) have not been fully developed at this time, therefore, the discussion of rate design change in this Chapter is general. Past rate design changes are discussed in this Chapter to illustrate the impact of the rate design changes contemplated. The full impact of the planned rate design changes will not be fully known until the required analysis is completed and the planned changes are fully developed (refer to Chapters 16.1 and 17 for more details on the specific rate design changes contained in the Plan). 7. This Chapter is structured in the following manner: Section B describes the complexity of ICBC s application systems. Section C describes the impact of rate design change on customers, brokers, and ICBC employees. Section D describes the Alternate Claim-Rated Scale project as a past example of the complexity of rate design change. B COMPLEXITY OF ICBC S APPLICATION SYSTEMS 8. ICBC s application systems form the foundation of ICBC s business functions. The insurance application systems support ICBC s insurance functions (i.e., the support of all aspects of the sale and distribution of Basic and Optional insurance and the vehicle registration and licensing functions). The insurance application systems also connect to the financial application systems that support ICBC s financial functions (such as accounting, banking, Payment Plan transactions, broker commissions, driver premium collection), claims functions (i.e., processing reported claims), and other business functions throughout ICBC

103 ICBC Filing with the BC Utilities Commission 9. From a rate design standpoint, the application systems supporting the insurance functions play a critical part in applying ICBC s rate structure to customers (i.e., charging the correct rates to customers). A structural change to ICBC s current rate structure (for example, the changes to CRS contemplated in the Plan) or the introduction of new rating variables will require significant changes to ICBC s insurance application systems, which will in turn require significant changes to the financial application systems and claims application systems to which they are connected. 10. ICBC s application systems in place today are consistent with and suitable to the needs of the current insurance activities they support, however, they were not designed to undertake the fundamental changes to ICBC s rate structure contemplated in the Plan. Many of ICBC s core application systems have been in place for 25 years or more. Over time, they have been modified through multiple add-ons and enhancements, resulting in a complex design with a high level of integration across application systems. Functional changes cannot easily be isolated to a small section of the application system. As a result, changes need to be made and accounted for in several locations within the application system, which in turn requires changes be made to several other application systems due to the integration across ICBC s application systems. 11. As discussed in Appendix 7.6 A, Section 6.1, of ICBC s 2007 Revenue Requirements Application, the Information Services Division is developing strategies and tactics to undertake the technology implementation aspect of rate design change. In accordance with the Insurance Servicing Direction, ICBC is looking to improve the responsiveness and flexibility of the application systems and modernize the technology upon which they run (for example, possible changes to the point of sale system discussed in Section B.1 below). The costs for these transformations are anticipated to be large and will take several years to complete given the complexity and interdependency issues associated with the application systems and rate design changes. 12. Therefore, in the context of the timeframe of the Plan, the complexity and interdependencies of the application systems will require a highly-disciplined approach to implementing the rate design change because of the widespread impacts and will involve a synchronized set of activities across several business areas

104 ICBC Filing with the BC Utilities Commission 13. The implementation process involves analysis of each affected application system, making the necessary changes to each application system (including the creation of new business rules, system logic, and rating tables), and significant testing for each application system (including testing each application system under many different types of scenarios) to ensure it functions as designed and supports the business as required. 14. These steps put a practical limit on the number and timing of rate changes that can be undertaken in a given period and by necessity extend the time required to complete a given rate design change. The greater scope and complexity of a rate design change involving structural changes to ICBC s current rate structure or the introduction of new rating variables would require higher costs and resource requirements, as compared to a rate design change that merely adjusts the current rate structure. 15. Adding to the challenge of undertaking change of this nature is the finite number of IT employees with the knowledge and experience to apply large changes to application systems and the limited array of test environments for the application system platforms. Also, the implementation of rate design change must be coordinated with other ICBC initiatives affecting the same systems. 16. In order to maximize the successful introduction of application systems changes, given the above factors, ICBC undertakes routine application system changes twice a year, through fall and spring releases. A release bundles together systems maintenance changes and enhancements into a single package. This release process reduces the risks associated with implementing these changes by ensuring changes are developed, tested, and implemented in a coordinated manner. A release is more economical, especially given the complex testing cycle required for application systems, and reduces the impact on brokers and internal staff by creating only two periods of systems change at specific times of the year. However, the release process also constrains the amount of change undertaken each year (each of the two releases have a limited capacity) and can extend the timeframe for implementing change. 17. If large rate design changes were to be undertaken too quickly or too many changes were undertaken at once, then there would be a much higher risk of problems with application systems development. These problems could include a higher possibility of introducing improperly tested system changes, accidentally removing previously made system changes,

105 ICBC Filing with the BC Utilities Commission and even the possibility that application systems could shut down during the implementation process or in the operation of the application systems down the road. 18. To mitigate the risk of disruption to ICBC s customers, the application system changes need to be made in a gradual and controlled fashion, which requires the rate design changes to be implemented gradually as outlined in the Plan. ICBC believes the changes to application systems required to implement a fundamental change to ICBC s rate structure would effectively preclude other rate design changes being implemented at the same time. B.1 AUTOPLAN DATA CAPTURE 19. The Autoplan Data Capture (ADC) application system provides a good illustration of the complexity inherent in making changes to application systems. ADC is ICBC s current point of sale application system and is the broker s primary means of undertaking insurance transactions on behalf of ICBC. A large rate design change would require a major modification or even outright replacement of the components of ADC, as discussed in ICBC s IT Strategic Plan: It may not be in the best interests of ICBC, the Autoplan Brokers, and ICBC s customers to continue to modify ICBC s current point of sale (ADC) and related systems to meet the business requirements of longer term rate design change, customer focus and integrated experience across all key customer touch points. The business process as implemented in ADC is vehicle-based and rigid, (i.e., business rules are imbedded in the system) making an orientation to the customer technically challenging and costly Given the age of ADC and the potential size of the expenditure to modify it to address the business requirements, replacing at least some components of ADC and related systems may prove to be a more prudent approach ADC was introduced over 25 years ago and over time ICBC has continued to expand and change the nature of the functionality at the point of sale for example, reducing overnight processing, expanding the use of real-time processing and editing, and adding functions such Revenue Requirements Application, page 7.6.A

106 ICBC Filing with the BC Utilities Commission as ICBC s Payment Plan. ADC has evolved from the three computer screens used by brokers at the point of sale in 1980 to over 60 computer screens as of February ADC is now ICBC s largest single application system, containing over one million lines of program code, and has interdependencies with many of ICBC s other application systems. 21. The following diagram depicts some of the business functions interdependent with ADC: Figure Autoplan Data Capture- Business Functions Supported SAP (Revenue Stock) AFIS Cheque Refund SPCOV ABR ADC Agency Accounting CPOS CAMS CDIR Payment Plan AFIS (Autoplan Fleet Information System) uses the monthly ADC transaction file to get a list of policies that have changed in the last month. Cheque Refund processes payment, billing, and refund information received from ADC. ABR (Agency Banking Reconciliation) receives banking information by way of an interface file from ADC, and stores and processes agent and claim centre cash deposits. CPOS (Customer Payment Options) receives payment details from ADC, and reconciles credit and debit card transactions made in Claim Centres. Payment Plan receives customer account information interface files from ADC. CDIR (Customer Directory) receives a customer account information interface file from ADC. CAMS (Customer Account Management Systems) is used to identify and collect debts, including Driver Penalty Points, using the information interface file from ADC. Agency Accounting processes and disburses the commissions due to brokers. SPCOV (Special Coverages) is a batch system used to process and account for Special Coverage and temporary operation permit transactions using the Web Policy interface file from ADC. SAP (Revenue Stock) controls the distribution and assignment of plates and decals to agents. ADC reads this database during a transaction to verify the plate/decal status

107 ICBC Filing with the BC Utilities Commission 22. When a major change is made to ICBC s rate structure, ADC and all the supporting and related application systems will require analysis, updating, and testing. In total, a change to ADC has the potential to impact other application systems, including the following: Cash management systems (e.g., for cheque refunds, payment options, payment plans, and debt collection). Insurance coverage transaction processing (e.g., Autoplan fleets, special coverages, and general data capture for Autoplan transactions). Accounting/reporting/inventory reconciliation systems (e.g., bank reconciliations, commission payments to brokers, inventory management (SAP), financial statement reporting, and general ledger reporting). Systems to track 30 years of claims experience data in the customer database. C IMPACT ON CUSTOMERS, BROKERS, AND ICBC EMPLOYEES 23. ICBC s objective in rate design change involving a major change to ICBC s rate structure or the introduction of new rating variables is to ensure that it maintains an appropriate balance among maintenance of good customer service (i.e., ensuring customers do not find the process of purchasing Basic insurance more difficult, time consuming, confusing, unfair, etc.) and not negatively impacting the principles of providing stable and predictable rates to customers (i.e., controlling the costs of implementing change). Implementing the change in this manner will be a highly complex task and will have a major impact on brokers and ICBC employees. The following sections discuss how ICBC ensures customers understand the impact of rate design change and are able to adapt to the change as smoothly as possible, while ensuring the cost of implementing change is controlled and does not unduly impact customers rates. C.1 CUSTOMER SERVICE 24. ICBC has approximately three million customers, spread throughout the province, who purchase Basic insurance on an annual basis. These customers are, for the most part, familiar with the current Basic insurance rate structure because, as mentioned in Section A of this Chapter, ICBC s rate structure has not been significantly changed in the last 25 years. Customers understand the importance of their position on the CRS in determining the amount

108 ICBC Filing with the BC Utilities Commission they pay for insurance. Customers also understand how chargeable claims will impact their position and amount they pay (i.e., a chargeable claim will increase the amount they pay and a year of claims free driving will decrease the amount they pay). 25. However, most customers do not have an intricate understanding of how complex the Basic insurance rate structure really is, that is the complexity of the process to determine the exact amount each customer pays in Basic insurance premiums each year (see Chapter 17.3 Rate Adjustments and Appendix 18 B Basic Insurance Tariff for the full extent of this complexity). Large changes to the current rate structure will cause complex changes to customers rates, which will not align with customers current understanding of the rate structure (i.e., at-fault crashes make insurance costs increase and not having at-fault crashes makes them go down). Customers will then have questions and concerns as to why they are going to be paying more. If customers are going to be paying less because of the rate design changes, then they may ask why the changes were not made earlier and why the rate adjustments are being capped. 26. A good example of this would be the changes to rates customers will see due to the rate adjustments in Chapter 17.3 of this Application. Most customers will not intuitively know how and why territories or rate classes are used to calculate their rates. A customer that has his or her rates increase because of a rate adjustment, despite having a year of claims free driving, will likely want to know why their rates went up as it is contrary to their understanding of how the rate structure works. 27. Any rate design change that would change the current rate structure or add new rating variables will represent a major shift for customers, which will create many customer questions to which there is not a quick and easy answer. This complexity will require significant effort and lead time for brokers and ICBC employees prior to and after implementation to ensure customer service remains at a high level. C.1.1 PROACTIVE CUSTOMER COMMUNICATION 28. Before a large rate design change is implemented, ICBC will undertake an extensive customer awareness campaign in order to advise and educate customers to give them an understanding of the change. The communication needs to be provided before customers come into the broker offices to purchase Basic insurance. The communication must provide

109 ICBC Filing with the BC Utilities Commission helpful and understandable information on what the change is, the degree of the change, when the change is occurring, who is going to be affected, and the reasons for making the change. Providing this level of information to three million customers will require significant lead time and resources. 29. Rate design changes require communication plans with associated materials to be developed, reviewed, and distributed. Depending on the selected media, the communication of key information to customers can require an extended period. In addition, updates are required for customer notices, websites, brochures, manuals, etc. Advertising may also be done through province wide and local media (newspapers, radio, television, Internet, etc.). 30. Providing information to customers ahead of time improves their understanding and acceptance of the rate design change, resulting in fewer questions, problems, and complaints after the change is implemented. The process of renewing insurance policies is much smoother when customers are well informed, particularly if the rate design change requires customers to do something different. C.1.2 BROKERS 31. ICBC s 900 brokers, government agents, and appointed agents (with over 4000 staff combined) are critical to the success of large rate design changes because they are the primary delivery channel for ICBC s products and services and would likely be the customer s first point of contact after rate design change occurs. As discussed in Appendix 7.3 A of the 2006 Revenue Requirements Application, insurance is a highly complex product for customers to understand and brokers provide important in-person advice on coverage and rating issues and provide pre- and post-sales service to customers if they have questions about their insurance purchase. In times of large rate design changes this in-person advice and service is critical. 32. In order to properly provide this advice and service, brokers require advance notification and training for a major change that impacts the way they perform their tasks or impacts the customers they serve. The geographic distribution of brokers throughout the province requires extensive time to ICBC s broker support staff to reach and train all of them. 33. ICBC s experience dictates that providing for more time to build broker awareness and understanding before rate design change is implemented allows for a much quicker adoption of

110 ICBC Filing with the BC Utilities Commission the change by brokers. When brokers feel comfortable with and understand the rate design change, they are more successful in communicating the implication of change to customers. Successful communication of change to customers by brokers, at the point of sale, has proven in the past to significantly increase customers awareness and acceptance of change. 34. The complexity of the rate design change and the amount of time available prior to implementation determines the requirements for training broker employees. A large rate design change will require a significant allotment of time and resources prior to implementation to ensure the change is made in such a way as to provide a relatively seamless change for brokers and ensures the change does not negatively impact the service provided to customers. As part of the implementation of rate design change, ICBC will also evaluate the financial implications associated with broker costs and fees. 35. Broker training is an important part of the process of managing change. Brokers need to effectively operate the application systems they use on a regular basis as changes are made to them, as discussed above in Section C.1. Broker manuals, insurance application system guides, customer brochures, online information, websites, etc. will also need to be updated and brokers need to be well informed of these updates. In addition to the training of broker employees, ICBC s employees who support the brokers need to first be trained in order to engage in the training of brokers and to be able to respond to broker questions post change. 36. An example of a current change affecting brokers is the implementation of the Insurance (Motor Vehicle) Amendment Act, 2003 (Bill 93) changes. These changes required the planning of province-wide broker seminar sessions (three hours long each) with a total capacity for participation by 4100 broker employees. The sessions covered training on the changes to forms, application systems, key messages to communicate to customers, and the explanation of the reasons behind the change. 37. In some circumstances, a large change can require ICBC field employees visit all 900 broker offices, spread throughout the province, to give individual face-to-face training and information. 38. One successful method for limiting the impact of large change on brokers is to perform the training, application systems changes, material changes, etc. in stages over several months. This avoids large disruptions to brokers work schedules and decreases the burden on broker

111 ICBC Filing with the BC Utilities Commission trainers, while also allowing for a more efficient and effective planning process in general. To accomplish this, however, requires the timeframe for implementing change to be extended and phased in gradually. 39. The process of training and educating brokers may be one of the most difficult aspects of implementing a large rate design change because of the number of brokers involved and the extent to which they are spread throughout the province. Ensuring brokers are properly trained and educated is a critical factor in the successful implementation of a large rate design change, which in turn is a critical factor in ensuring customer service remains at a high level. C.1.3 RESPONSIVE CUSTOMER COMMUNICATION 40. In order to ensure strong customer service, ICBC employees who deal with customers also need to be prepared for customer enquiries and concerns regarding the change. It is necessary to educate and train employees to ensure they are able to respond quickly and effectively to customer enquiries and concerns, which in turn allows customers to be better informed and have their questions and concerns resolved. The employees aim to answer questions and concerns in as hassle free a manner as possible. However, as the complexity of change increases, the time required to handle and completely resolve customer enquiries also increases. 41. For the purposes of a large rate design change, where all 3 million customers could potentially be impacted, a major increase in call volumes is likely to occur. If, for example, 1% of customers call in with questions or complaints then that would result in 30,000 calls. ICBC s main call centre in North Vancouver receives approximately 30,000 calls per month, so this modest estimate of 1% of customers calling in to this call centre would effectively double its monthly call volume. 42. The amount of resources needed for employees who deal with customers during periods of change also depends on the procedures put in place ahead of time. For example, telephone technology can be used for scripted self serve call answering, which can lower the number of calls handled by customer contact representatives by sending customers first to a pre-recorded message that provides information and answers to common questions. However, setting up these procedures in advance requires lead time, and these procedures are less effective when many changes are happening at once

112 C.2 OTHER IMPACTS ON EMPLOYEES ICBC Filing with the BC Utilities Commission 43. Implementing rate design change efficiently and effectively will be a complex task because of the size and scope of ICBC s operating environment and the extensive impact rate design changes will have across the operating environment. There will be significant cost implications of the logistical requirements for implementing the change (i.e., the work required by ICBC employees to implement rate design change), change management considerations (i.e., the acceptance and understanding of rate design change by ICBC employees), and the work required to assist customers (discussed in Section C.1 above). 44. ICBC employees have shown themselves to be willing and capable to undertake change. However, it must be recognized that the rate design changes identified in the Plan will be the most significant rate design changes undertaken at ICBC in a long time (as discussed in Section A), and will therefore have broad implications for ICBC employees. The logistics of implementing the planned changes and the acceptance of change by employees could become significant issues if change were undertaken too quickly or too much change was undertaken at once. Therefore, a large and complex rate design change will require extensive lead time and resource commitments to educate, train, and support ICBC s employees. 45. A large rate design change could require face-to-face training sessions for many of the ICBC s approximately 5,000 employees, especially those that deal directly with ICBC s three million customers and 900 brokers (as mentioned in Section C.1). The ICBC employees are spread throughout the province, which significantly increases the time and cost of training and educating. It is also important to note that training and preparing for change takes ICBC employees, as well as broker employees, away from their primary duties of servicing the customers for extended periods. After the training is completed there is then a need to provide continued support in order to reinforce the training and education. 46. As mentioned in Section B, rate design change will also have require a significant amount of work from ICBC s IT staff, who have to undertake the complex work required on the application systems. 47. In order to ensure employees are able to undertake and incorporate large rate design change in manner that does unduly impact customer service or the cost of the implementing change, the amount and pace of change needs to be carefully handled. This is required to

113 ICBC Filing with the BC Utilities Commission ensure each employee understands the change, has the tools to undertake the change requirements, and is committed to the change. D ALTERNATE CLAIM-RATED SCALE PROJECT 48. The Alternate Claim-Rated Scale (ACRS) project, which was ICBC s last significant rate design change, illustrates the extent to which rate design change can impact application systems, customers, brokers, and ICBC employees. ACRS was not a complex rate design change, as compared to the rate design changes contemplated in the Plan. 49. ACRS involved adjustments to the discount and premium levels of CRS (i.e., this was not a major structural change to CRS). Changes included lowering the discount steps from 10% intervals to 5% intervals, increasing the total number of steps, increasing the discounts for longterm claim free drivers, and introducing variable sanctions dependant on current CRS position (i.e. moving a different number of steps based on CRS position). 50. The ACRS project took over a year to successfully complete, despite being a modification to the current rate structure. The timeframe for a structural change or the introduction of new rating variables, as contemplated in the Plan, would be considerably longer given the greater complexity and the larger magnitude of the impacts on the operating environment. D.1 APPLICATION SYSTEMS 51. A total of 79 application systems were impacted by the ACRS changes. These included ADC, the corporate data warehouse, and the application system generating the customer notice letter, plus various history files, data tables (including broker commission structures), and interfaces used by broker and claims personnel. 52. The ACRS project required a transition period where both systems needed to be operational. The new application system was operational for pre-implementation testing before transition of customers from the old system began. In addition, the old application system needed to remain operational, even after the implementation of the new application system, in order for employees to provide the full support required to maintain service levels to customers until all policies had transitioned to the new application system (which takes approximately a year). Any move away from this approach could have negatively impacted service levels

114 ICBC Filing with the BC Utilities Commission Application system changes also had to provide the ability to move between the new rating scale and the transition scale when required. 53. Both application systems had to be carefully managed to ensure the transition from the old application system to the new one did not create disruptions or errors. If this had not been addressed operations could have been impacted with increased customer call volumes, increased length of customer calls, and lowering of customer service/satisfaction ratings. 54. From an information technology perspective, the project required approximately 50 ISD employees, with some working full time on the project for over a year. D.2 CUSTOMERS, BROKERS, AND ICBC EMPLOYEES 55. The ACRS project impacted 200,000 customers (those with less than 40% discounts). Before the project these customers received a 10% increase in discounts following a year without a chargeable claim. After the project, these customers received a 5% increase in discounts following a year without a chargeable claim. The CRS changes contemplated in the Plan could impact three million customers, so the impact on brokers and ICBC employees would be significantly higher. 56. The ACRS project involved an extensive communication program to customers (e.g., direct mailing to customers) and required the updating and replacement of existing brochures and other information that discussed the old CRS (e.g., intranet, Internet, Autoplan, and procedure manuals). 57. The claims automated letter application system was reviewed, and numerous letter templates required revision. Letters generated as a result of the pre-acrs business rules had to be removed at a predetermined time, and replaced with letters that reflected the new CRS. 58. There was an estimated increase in call volume to Customer Contact of 16% and an increased call length of one minute per call in the first quarter of These numbers returned to normal after three months. 59. The increased complexity of variable sanctions also resulted in time spent explaining implications to customers and increased such things as talk times at TCD,

115 ICBC Filing with the BC Utilities Commission appointment times at claims offices, and generated more customer inquiries to Customer Contact. 60. Employees and brokers were impacted as a result of the magnitude of work required to implement the change (especially given the transition period, as discussed above, of having both application systems operational at the same time for approximately a year) and the necessity to absorb the change (along with several other initiatives at the same time) in a short amount of time. 61. Training programs were created for employees who deal with customers. Training focused on the introduction of variable sanction rules to the CRS (i.e., moving a different number of steps based on your position on the CRS), which added significant complexity when compared to the previous structure. Brokers required training, new procedures, new screens, and increased time to explain the changes during communications with customers. 62. Broker representatives provided field training at brokers offices. This option was chosen over group sessions because it was less time consuming to prepare and co-ordinate, but involved time consuming delivery of the training itself. The training became a full time job for field staff for a number of weeks, clearly impacting any other duties during this timeframe. 63. The Broker Enquiry Unit (BEU) was impacted in the short term as brokers sought out information, particularly around grandfathering out the old CRS and how the new rules were to be applied. Broker call volumes to BEU in the first quarter after implementation of ACRS increased by 25%. D.3 SUMMARY 64. The ACRS project required a considerable amount of work and time even though on the surface it looked like a relatively simple change to the Claim-Rated Scale. The impact on ICBC s application systems, customers, brokers, and employees was considerable. This example is illustrative of why larger rate design changes (such as the long-term changes contemplated in the Plan) must be implemented logically and gradually because they involve much more extensive changes to the rate structure than ACRS

116 ICBC Filing with the BC Utilities Commission E CONCLUSION 65. The size and scope of ICBC s operating environment, and the extent to which the operating environment and the rate structure are interconnected, makes the implementation of rate design changes a large and complex undertaking. 66. ICBC s application systems role in the sale of insurance creates the need for significant modifications when large rate design change is undertaken. The complex design and interdependent nature of these application systems requires a disciplined process, which limits the amount and speed of implementing rate design change. 67. The success of keeping customer service levels high and not having costs impacting rates is dependent on implementing rate design change logically, gradually, and in a phased-in manner. Implementing rate design change at ICBC in a manner that does not compromise customer service will be a highly complex task. ICBC will need to undertake extensive preparation in order to be able to proactively communicate to customers ahead of the change and respond to customer questions after the change. 68. ICBC s employees play the critical role of undertaking and implementing rate design change. The broker network provides the important in-person advice and service that ensures the rate design change is successfully implemented to customers. To perform these tasks, ICBC s employees and brokers require a significant amount of training and support. However, the number and geographical distribution of the employees and brokers makes this training and support a resource intensive and time consuming activity, again limiting the amount and speed of implementing rate design change at ICBC. 69. The ACRS project shows the complex nature of implementing rate design changes at ICBC. However, the rate design changes contemplated in the Plan are more complex than any rate design changes undertaken at ICBC in recent years. ICBC has created the Plan with all of the above factors in mind, and firmly believes that any increase to the speed or amount of change in the Plan will jeopardize the Plan s overall success. 70. In summary, rate design change involving major changes to ICBC s current rate structure and the introduction of new rating variables is very complex and requires a logical, gradual, and phased approach in order to be successful. ICBC s Basic insurance rate design

117 ICBC Filing with the BC Utilities Commission multi-year plan is consistent with this approach. ICBC believes that the prioritization and timing in the Plan will allow ICBC to successfully meet the overall goal of having Basic insurance premiums reflect the risk of causing crashes by having rates move towards actuarial pricing and the rate structure becoming more driver based

118 CHAPTER 17.1 DRIVER RISK PREMIUM

119 ICBC Filing with the BC Utilities Commission Table of Contents A Introduction B The Current Driver Penalty Point Program C The Case for Change D Driver Risk Premium Program D.1 The New Model D.2 Evidence to Support Change D.2.1 Conviction History and Crash Risk D.2.2 Conviction History and Crash Risk, Updated Analysis D.2.3 Summary of Conviction History Data D.3 The Three Year Assessment Period D.4 Conviction Categories D.4.1 At Least One Motor Vehicle Related Criminal Code of Canada Conviction D.4.2 At Least Two Roadside Suspensions (Sections or 90.3) D.4.3 At Least One Conviction for Excessive Speed [Section 148(1)] D.4.4 At Least Three Convictions for any Motor Vehicle Offences E Implementation E.1 Surrendering Licences E.2 Number of Drivers Included in DRP and DPP Programs E.3 Revenue Projection E.4 Implementation Schedule F Conclusion APPENDIX 17.1 A SCHEDULE OF CURRENT PENALTY POINT PREMIUM AND REFUND OF THE PREMIUM A APPENDIX 17.1 B CRIMINAL CODE OF CANADA AND 10 POINT MOTOR VEHICLE ACT OFFENCES USED TO CALCULATE DRP B APPENDIX 17.1 C DRIVER RISK PREMIUM BILLING STRUCTURE C APPENDIX 17.1 D DRIVER ACCIDENT RISK IN RELATION TO THE PENALTY POINT SYSTEM IN BRITISH COLUMBIA D 17.1-i

120 ICBC Filing with the BC Utilities Commission APPENDIX 17.1 E THE RELATIONSHIP BETWEEN SPEEDING BEHAVIOUR (AS MEASURED BY VIOLATION CONVICTIONS) AND CRASH INVOLVEMENT E APPENDIX 17.1 F USE OF CONVICTIONS IN INDUSTRY PRACTICE F 17.1-ii

121 ICBC Filing with the BC Utilities Commission Table of Figures Figure Correlation of Contraventions to Crash Risk Figure High Liability Crash Frequency Comparison Figure Comparison of Five Different Assessment Periods Figure Numbers of Drivers in DPP Program and DRP Program 2005 Data iii

122 ICBC Filing with the BC Utilities Commission A INTRODUCTION 1. Driving conviction history is an accepted rating variable used for assessing crash risk in the automobile insurance industry in North America. The intent of the following Driver Risk Premium plan is to link the premium drivers pay for their driver s certificate more closely to their crash risk. 2. Drivers who commit a driving offence under the Motor Vehicle Act (MVA) or its Regulation, or are convicted under certain sections of the Criminal Code of Canada (CCC) accumulate point penalties on their driving record. The assignment of points is in addition to the fine levied for the driving offence. Currently, drivers with a valid BC driver s licence are billed a penalty premium based on the number of points accumulated against their driving record. This penalty premium is commonly referred to as the driver penalty points (DPP) premium. 1 The revenue that is collected is part of the Basic insurance premium revenue. 3. ICBC s authority to collect DPP premium is found in: Section 30.1(a) of the Insurance (Motor Vehicle) Act ( motor vehicle indebtedness ) [Section 93.1 of the Insurance (Vehicle) Act]. Section 34 of the Insurance (Motor Vehicle) Act, allows for the establishment of a point penalty system [Section 34 of the Insurance (Vehicle) Act]. Sections 44 and 45 of the Revised Regulation (1984) under the Insurance (Motor Vehicle) Act. [Schedule E of the Basic Insurance Tariff]. 1 Section 44.1 of the Revised Regulation (1984) to the Insurance (MV) Act refers to point penalties, but penalty points is the term commonly in use. For the purposes of this Chapter, penalty points or DPP will be used unless specific legislation is referenced

123 ICBC Filing with the BC Utilities Commission 4. In the present system, DPP premium is charged based on the number of penalty points accumulated by drivers (see Appendix 17.1 A). ICBC plans to replace DPP with the Driver Risk Premium (DRP). The DRP program discussed in this Chapter is designed to maintain the strengths of the current DPP program, while ensuring that higher risk drivers pay a premium that is more commensurate with their risk of causing crashes. The following sections describe the DPP program as it currently exists, identify areas for improvement, and explain the DRP program including the implementation plan. B THE CURRENT DRIVER PENALTY POINT PROGRAM 5. The DPP program is well-established, having existed in some form as long as ICBC itself. The plan of comprehensive universal automobile insurance came into effect March 1, Effective July 1, 1974 every licensed driver in British Columbia had to carry a driver s certificate issued by ICBC. The premium for the driver s certificate was based on the driver s penalty point record with a minimum annual premium of ten dollars. Penalty points were recorded against the records of drivers who committed offences under the Motor Vehicle Act, or were convicted of certain offences under the Criminal Code of Canada. In addition to the fines or other sanctions imposed by law, holders of BC driver s licences would be billed the penalty point premium based on the number of points accumulated. The separate driver s certificate was abandoned in Section 43 (1) of the Revised Regulation (1984) under the Insurance (Motor Vehicle) Act now says that the driver s certificate is deemed to be incorporated into every valid and subsisting driver s licence. 6. The premiums that are collected as part of the DPP program are part of the Basic insurance premiums. During 2006, the DPP program contributed $17.5 million to Basic insurance premiums. DPP program revenue is applied in its entirety to Basic insurance. The following paragraphs explain how DPP premium is calculated and billed under the current structure. 7. The DPP premium is billed to drivers annually by ICBC approximately four weeks prior to the anniversary date for renewal of the person s drivers licence (the driver s birthday), if four or more points have been added to the driving record since the last assessment. If fewer than four points have been added to the driving record, no premium is billed

124 ICBC Filing with the BC Utilities Commission 8. The premium relates to driving convictions committed and added to the driver s record during the 12 month period ending five months prior to the driver s birthday. This 12 month period is referred to as the scan period. For example, if a person s birthday is June 15 and in the year 2006 they owe a DPP premium, the amount of the premium will be based on the points accumulated between January 15, 2005 and January 15, 2006 (which is the 12-month period that ends 5 months before their birthday on June 15, 2006). Points remain on the driver s record, but are used only once to calculate the DPP premium Since the penalty point premium relates to the driver s certificate, the penalty point premium will be cancelled if a driver surrenders his or her driver s licence for one year. The premium will be reduced, on a pro-rated basis, if the driver has been suspended from driving for 60 days or more. Reductions in DPP premium will also occur if the driver can show that for one of several reasons, they were not using their driver s licence for a minimum period of 30 uninterrupted days. More details concerning premium reduction are in Appendix 17.1 A (Table 2 of Schedule 2.) 10. The DPP premium program has reduced the amount of premium required from Basic policyholders in general. Safe drivers who have not committed traffic offences have benefited year after year through reduced Basic insurance premiums. Drivers who did not want to pay DPP premium in the future could modify their driving habits and avoid convictions. C THE CASE FOR CHANGE 11. The Driver Risk Premium program is designed to build on the DPP structure, and make the premium charged more reflective of a driver s risk of causing crashes than is now the case. 12. The current DPP program assigns penalty points strictly on the number of points, as described in Appendix 17.1 A. This is a simple approach; the more points drivers accumulate, the more premium they will pay. A shortcoming of DPP is that it does not sufficiently recognize that some types of offences are more closely associated with driver risk. ICBC believes that a better way is to examine the types of driving offences that drivers have committed in the past, and determine which driving offences are most closely correlated to the risk of causing a crash in the future. Under such an approach, drivers who receive specific convictions that correlate 2 The number of penalty points recorded for each offence is listed in the Motor Vehicle Act Regulations, Division

125 ICBC Filing with the BC Utilities Commission with a higher crash frequency will pay a higher premium than those drivers without such convictions. 13. ICBC intends to move towards a more driver-based rate structure. Drivers that have a higher risk of causing crashes should pay more premiums even if they do not own vehicles. This is consistent with the government directive of January 31, 2007 with respect to rate design. The directive says, in part, ICBC can contribute to solving the aggressive driving issue through the initiation of a more driver based rate design system that increases the direct accountability of drivers by ensuring that those high-risk drivers who have more crashes, more claims, multiple motor vehicle violations and/or serious Criminal Code convictions are required to pay more premium dollars. 14. ICBC is specifically directed to (2) address the issue of high-risk drivers, as set out in this directive, as a new rate design factor beginning in the 2008 rate year While the DPP program does reflect that higher-risk drivers should pay more, many drivers with a greater risk of causing crashes do not pay a penalty point premium under the current system, as explained in Section D. Under the current structure, about 1.2% of B.C. motorists paid DPP in The DRP program is expected to result in up to 5.0% of drivers paying DRP, which more closely reflects the number of high risk drivers. All DRP revenues will form part of Basic insurance premiums, thereby moderating rate changes for policyholders who are not assessed Driver Risk premiums. 16. A rate structure that is more driver-based will send the right price signals to drivers. The planned improvements to the DPP system will mean that there will be an increased incentive for drivers to drive safely. 17. The current DPP method uses a one year scan period. The one year scan is effectively an assessment period. The driver s behaviour over that one year is examined and, as explained in paragraph 8, this one year assessment is used to determine the convictions that go into the 3 See Appendix 15 A

126 ICBC Filing with the BC Utilities Commission calculation of the premium. The points on the driver s record are used only once to calculate a driver penalty premium. 18. ICBC has determined that one year is not a sufficiently long enough time period to develop the information required to establish a driver s premium. The assessment period should be long enough that the premium better reflects the risk of crashes than it currently does. Based on the analysis described in Section D, ICBC believes that the assessment of a more lengthy driving history should be used in determining the driver premium. D DRIVER RISK PREMIUM PROGRAM D.1 THE NEW MODEL 19. ICBC plans to replace the current DPP program with the DRP program. Drivers will pay a DRP based on their risk of causing crashes in the future. The DRP program will involve more drivers than the current DPP program, but the overwhelming majority of drivers will still not be charged a DRP premium. ICBC anticipates approximately ninety-five percent of drivers will not pay a DRP for their driver s certificate. 20. The program will separate driver premiums from the penalty points assigned for convictions under the Motor Vehicle Act, the Motor Vehicle Act Regulations, and the Criminal Code of Canada. Drivers will still accrue penalty points when convicted of offences, but the driver premium will no longer be based on the number of points. Under the DRP program, the amount of the premium will be determined by the type and/or frequency of conviction. Separating driver premium from the assignment of penalty points provides ICBC with the flexibility to adjust premiums based on risk. 21. Under the DRP program, premiums will be related to the risk of being responsible for a crash in the future, as exhibited by the accumulation of convictions and roadside suspensions (RSS) over an assessment (scan) period extended from one year to three years. 22. The DRP will be charged to those drivers 4 who, over a period of three years, 5 have accumulated: 4 People with an active BC driver s licence as of the person s birthday. 5 Three year period ending five months prior to the person s last birthday

127 ICBC Filing with the BC Utilities Commission At least one motor vehicle related Criminal Code of Canada conviction, or 10 point Motor Vehicle Act (MVA) conviction as set out in Appendix 17.1 B, or At least two roadside suspensions, under sections 215 or 90.3 of the MVA, or At least one conviction for Excessive Speed, under section 148(1) of the Motor Vehicle Act, or At least three convictions for any motor vehicle offences under the MVA, the Motor Vehicle Act Regulations, or as described in Appendix 17.1 B. This category includes Criminal Code of Canada convictions, Excessive Speed convictions, and roadside suspensions 23. The rationale for selecting the convictions and roadside suspensions above is discussed in Section D.2. Appendix 17.1 C illustrates the planned premium structure and how the amounts to be billed for each of the three categories were selected ICBC will administer the DRP program in a similar manner to how the DPP program is currently administered in the sense that a driver who is billed DRP will continue to have the opportunity to eliminate or reduce the amount payable by surrendering his or her driver s licence, as described in paragraph 9. Since the assessment period will be extended from one year to three, drivers will be required to surrender their licences for a longer period of time to completely eliminate the premium. ICBC also plans that drivers who continue to drive while their licence is suspended or surrendered will have their DRP reinstated. These changes are discussed in more detail in Section E, Implementation. 25. Like the DPP program, the Driver Risk Premium program recognises that drivers who do not own vehicles and are not listed as principal operators, nevertheless have a risk of causing crashes. ICBC s plan to begin collecting data on Other Operators (see Chapter 17.2) will 6 Roadside suspensions issued under Sections 215 and 90.3 are not convictions under the Motor Vehicle Act. However for the purposes of this Chapter and for general discussion of the DRP program, the words offence and conviction will include roadside suspension

128 ICBC Filing with the BC Utilities Commission provide ICBC with information on the claims history of other operators of vehicles, but not their traffic conviction history. Also, as discussed in Section D.2, vehicle owners and principal operators with motor vehicle related convictions pose a crash risk over and above that represented by their claims history. A more complete assessment of driving records, including conviction history, will result in a more accurate premium for all policyholders. D.2 EVIDENCE TO SUPPORT CHANGE 26. ICBC has developed the changes to the existing DPP program based on an analysis of drivers with convictions, the crash risk per conviction, and the relationship between conviction history and the risk of future at-fault crashes. For the purposes of this analysis, at-fault is defined as being fifty percent or more responsible for a crash. D.2.1 CONVICTION HISTORY AND CRASH RISK 27. In published peer-reviewed research conducted by ICBC in 1995, Chen, Cooper, and Pinili 7 developed a model to predict drivers who are most likely to have one or more at-fault crashes in the near future, on the basis of their past record of crashes and convictions for traffic law offences, and to suggest an empirical method for establishing appropriate penalty point levels for each conviction type. Their research was based on prior record of convictions from the Motor Vehicle Branch (as it then was) driver licensing system, and information on at-fault crashes from the ICBC database. 28. Chen, et al were able to establish that the future at-fault crash risk increased both with the number of prior at-fault crashes and with the number of prior convictions. 8 Their research also demonstrated that the accumulation of roadside suspensions is significantly related to future at-fault crash risk 9 A three year record of convictions and roadside suspensions was used in the study. 29. In subsequent research conducted by ICBC in 1997, 10 Cooper re-analysed the conviction and crash data from the study conducted by Chen, et al, incorporating severity into 7 Wenjun Chen, Peter Cooper, and Mario Pinili, Driver Accident Risk in Relation to the Penalty Point System in British Columbia, Journal of Safety Research, Attached as Appendix 17.1 D. 8 Appendix 17.1 D, Tables 1 and 2. 9 Appendix 17.1 D, page Peter J. Cooper, The Relationship Between Speeding Behaviour (as Measured by Violation Convictions) and Crash Involvement, Journal of Safety Research, Attached as Appendix 17.1 E

129 ICBC Filing with the BC Utilities Commission the analysis. Cooper concluded that (t)he results of the research identified a clear distinction between the conviction categories of exceeding the speed limit and excessive speed in terms of these accident-violation relationships. 11 In other words, drivers that are convicted of all types of speed-related offences are more likely to cause crashes in the future, but convictions for excessive speed are even more highly correlated with the risk of causing serious crashes. He defined serious crashes as culpable injury crash or fatal crash involvements costing $50,000 or over. 12 A culpable crash is one in which the driver is more than 50% responsible. 30. Figure illustrates results from the 1997 study. The model coefficients express the relative importance of various conviction categories in predicting future culpable crash risk. The higher the coefficient, the stronger the relationship is between the conviction and the risk of causing a crash. Note that CCC Convictions and Speed too fast for conditions and/or Excessive Speed became more predictive of at-fault crashes as the severity of crashes increased. Figure Correlation of Contraventions to Crash Risk Contravention Category At fault crash Failure to yield Major disobey signal Minor disobey signal Criminal code conviction Lane infraction 24-hour roadside suspension Intersection infractions Exceed speed limit Vehicle not up to standard Speed too fast/excessive speed Failure to yield pedestrians etc. Follow to closely Administrative infraction Without due care/consideration Culpable Non Casualty Crash Involvements (1) (2) (3) (5) (4) (8) (6) (7) (9) (10) (11) (13) (14) (12) Not Significant Culpable Injury Crash Involvements Under $10, (1) (2) (3) (4) (8) (6) (5) (11) (9) (13) (12) (7) (10) (14) Not Significant Culpable Injury Crash Involvements $10,000 - $50, (2) (3) (6) (4) (1) (7) (5) (12) (8) Not Significant (10) (11) (9) (13) Not Significant Culpable Fatal Injury Crash Involvements Grater than $50, (4) (3) (9) Not Significant (1) (8) (5) Not Significant (7) Not Significant (2) Not Significant Not Significant (10) (6) 31. It is important to realize that both the 1995 and 1997 studies related conviction categories to the risk of having at-fault crashes for all drivers who had convictions: not just 11 Appendix 17.1 E, page Appendix 17.1 E, page

130 ICBC Filing with the BC Utilities Commission drivers who own cars, or are listed as principal operators, or who use their vehicles for specific purposes. D.2.2 CONVICTION HISTORY AND CRASH RISK, UPDATED ANALYSIS 32. ICBC has performed further analysis, using recent data. This analysis was focussed on the four offences that were most predictive of causing serious crashes, using Cooper s 1997 paper as a guide: CCC offences, Speed too fast/excessive speed, Failure to yield, and roadside suspensions. The convictions that Cooper referred to as Failure to Yield and Major Disobey Signal contain a number of different convictions that are not specified. Since the convictions included in this category cannot be specifically identified, ICBC has decided not to include it in the DRP program, except as a component of the At Least Three Convictions category. 33. ICBC also examined the crash rate of drivers who accumulate at least three motor vehicle related convictions over a three year period. Cooper noted in his 1997 paper that multiple motor vehicle-related convictions, of any type, are associated with increased crash risk. 34. Figure below compares the crash risk of drivers who have been convicted of certain offences, to the crash risk of drivers who have not been convicted of those offences. The following two paragraphs explain the terms used, and the calculations made in Figure High Liability means that the driver was at fault for the crash. 13 The crashes that were examined all occurred in The Count of Drivers is as of December 31, 2004 and is based on the driving record of drivers, using a three year scan period between January 1, 2002 and December 31, Basic Crash Frequency is the Count of High Liability Basic Crashes that occurred in 2005, divided by the Count of Drivers, and expressed as crashes per hundred drivers. For example: 107,377 drivers were in the Three or More Convictions category as of December 31, Those 107,377 drivers had 10,494 High Liability crashes in the year The Basic Crash Frequency of those drivers with Three or More Convictions is 10,494 divided by 107,377, which equals 9.8 crashes per hundred. Drivers who did not have Three or More Convictions had 13 For the purposes of this Chapter, High Liability, culpable, and at-fault all have the same meaning: more than 50% responsible for a crash. Different terms have been used because information used in the Chapter has been drawn from different sources

131 ICBC Filing with the BC Utilities Commission a Basic Crash Frequency ratio in 2005 of 4.0 per hundred drivers. This analysis indicates that those drivers who had Three or More Convictions over a three year period were more than twice as likely to have an at-fault crash in the following year than those who did not. Figure High Liability Crash Frequency Comparison Three or More Convictions Count of Drivers Percent of Drivers Count of High Liability Basic Crashes Basic Crash Frequency 14 Three or More 107, % 10, Other Drivers 2,660, % 105, Total 2,767, % 116, One or More Excessive Speed Conviction Count of Drivers Percent of Drivers Count of High Liability Basic Crashes Basic Crash Frequency Excessive Speed 19, % 1, Other Drivers 2,748, % 114, Total 2,767, % 116, One or More Criminal Code of Canada Count of Drivers Percent of Drivers Count of High Liability Basic Crashes Basic Crash Frequency CCC Convictions 4, % Other Drivers 2,763, % 115, Total 2,767, % 116, Two or More RoadSide Suspensions Count of Drivers Percent of Drivers Count of High Liability Basic Crashes Basic Crash Frequency Two + RSS 10, % 1, Other Drivers 2,757, % 115, Total 2,767, % 116, The number of crashes, per one hundred drivers, that occurred in

132 ICBC Filing with the BC Utilities Commission D.2.3 SUMMARY OF CONVICTION HISTORY DATA 37. Simply put, the analysis in Figure and the studies from 1995 and 1997 confirm that conviction history is an important variable for assessing a driver s risk of causing crashes. Drivers who are convicted of motor vehicle related traffic offences are more likely to cause crashes in the future than drivers who are not. The DRP program incorporates that analysis, resulting in driver premiums that are more closely related to crash risk than is now the case. D.3 THE THREE YEAR ASSESSMENT PERIOD 38. In developing the DRP program, ICBC considered different assessment periods and believes the assessment period should achieve the following objectives: It should be long enough to identify driving behaviour that is clearly associated with increased at-fault crash risk. It should be short enough that only reasonably current driving history is being used. It should be consistent with insurance industry practice, so long as the two objectives above are met. 39. Using the same data as was used in Figure , ICBC compared the at-fault crash risk of drivers who have convictions to drivers who don t, and made those comparisons over five different assessment periods. The results are summarized in Figure Figure Comparison of Five Different Assessment Periods Assessment Period Basic Crash Frequency DRP Drivers Basic Crash Frequency Non-DRP Drivers One Year Scan Two Year Scan Three Year Scan Four Year Scan Five Year Scan ICBC used the same conviction categories as were used in Figure , and compared the Basic crash frequency for assessment (scan) periods of one to five years. The Three or More Convictions category was modified, so that the number of convictions matched the scan

133 ICBC Filing with the BC Utilities Commission period. 15 As an illustration of what Figure shows, the drivers identified using a two-year assessment period had a Basic crash frequency of 8.9 per hundred drivers in 2005; that is more than twice as high as the Non-DRP group (8.9/4.2 = 2.1). 41. It can be seen that the correlation of conviction history to crash risk increases from one year to two, and then from two years to three. The correlation flattens out beyond the three year scan, and ICBC concluded that three years is a long enough period to identify increased at-fault crash risk. ICBC also considered that an assessment period of three years is the norm in the auto insurance industry in Canada when considering a driver s conviction history. For further information, see Appendix 17.1 F, Figure 17.1 F Chen and Cooper used a three year assessment period in their 1995 study, and Cooper used three years in his 1997 study. The evidence used in this chapter confirms that a three year period is sufficient to allow ICBC to identify conviction history that leads to significant increased risk. A three year period is enough time to develop a useful history, yet short enough to ensure that only recent driving behaviour is being used to establish the premium. For these reasons, ICBC chose a three year assessment period. D.4 CONVICTION CATEGORIES 43. It is important to discuss the difference between frequency and severity as they apply to crashes. Generally, frequency refers to the number of crashes; severity refers to the cost of a specific crash. The DRP program is designed primarily to respond to the increased risk of a crash occurring, which is frequency. Severity is more difficult to predict, although, as Cooper found in his 1997 study, some correlation between excessive speeding and increased severity does exist. 44. ICBC developed the conviction categories that will result in Driver Risk Premiums (listed in Appendix 17.1 C), based on the available evidence as reviewed in the prior section. The categories represent risk factors; drivers who fall within one or more of these categories are much more likely to have an at-fault crash than drivers who do not. ICBC chose four categories because the driver-based risk that should result in DRP is found within the four groupings, and yet simplicity and clarity is maintained. ICBC also incorporated the risks of increased severity 15 One year scan used one or more convictions, two year scan used two or more, etc

134 ICBC Filing with the BC Utilities Commission into the decision of which categories to include. The following sections explain the conviction categories selected for the DRP program. D.4.1 AT LEAST ONE MOTOR VEHICLE RELATED CRIMINAL CODE OF CANADA CONVICTION 45. The category of At least one motor vehicle related Criminal Code of Canada Conviction (CCC) or 10 point MVA conviction as described in Appendix 17.1B is important to the DRP program and must result in significant premium, due to the nature of the offences. Examples of these types of convictions are: Section 220 Causing death by Criminal Negligence Section 249.1(3) Flight causing bodily harm or death Section 253 Operation while impaired 46. It may appear from Figure that a CCC conviction is not closely correlated to crash risk; it shows that a driver with at least one CCC conviction had a crash frequency of 7.4. However, a CCC conviction is so serious that it often results in sanctions that reduce the chances of causing an accident in the future. For example, the person s driver s licence will often be suspended for a lengthy period of time. It is even possible that the person convicted may serve a custodial sentence. Sanctions such as these reduce the opportunity for the driver to be on the road in the future, and therefore reduce the crash risk. Despite those sanctions, this category of driver was 76% more likely to have an at-fault crash than someone with no such convictions (7.4/4.2 = 1.76). 47. ICBC views driving that results in a motor vehicle related CCC conviction as inappropriate driving behaviour. Figure illustrated that a CCC conviction had the highest correlation with serious crashes (those involving fatalities or over $50,000). For these reasons, ICBC s plan is that these convictions continue to attract substantial driver premium. D.4.2 AT LEAST TWO ROADSIDE SUSPENSIONS (SECTIONS OR 90.3) 48. The next category is At least two roadside suspensions, under sections or 90.3 of the Motor Vehicle Act. Figure shows that a driver with at least two roadside suspensions was 2.5 times more likely to have a crash than drivers who do not have at least two roadside

135 ICBC Filing with the BC Utilities Commission suspensions (10.5/4.2 = 2.5). ICBC recognizes that incorporating roadside suspensions into drivers premiums is a new concept in British Columbia. Therefore, ICBC s plan requires at least two suspensions before charging a Driver Risk premium, ensuring that only drivers with a very high crash risk enter the DRP program through roadside suspensions. Drivers in this category had the highest correlation to crash risk, compared to the other groups. D.4.3 AT LEAST ONE CONVICTION FOR EXCESSIVE SPEED [SECTION 148(1)] 49. The third category to attract DRP is At least one conviction for Excessive Speed, under section 148(1) of the Motor Vehicle Act. Even one conviction is correlated strongly with crash risk, as seen in Figure Drivers with one Excessive Speed conviction are more than twice as likely to have a crash as drivers who do not (9.0/4.2 = 2.1). An Excessive Speed conviction means that the driver exceeded the posted speed limit by more than 40 kilometres per hour. This is dangerous driving behaviour and should attract DRP. D.4.4 AT LEAST THREE CONVICTIONS FOR ANY MOTOR VEHICLE OFFENCES 50. The final category is At least three convictions for any motor vehicle offences under the MVA, the Motor Vehicle Act Regulations, or as described in Appendix 17.1 B. As mentioned above, this category was chosen because of the very strong correlation between convictions for three or more offences and crash risk, as seen in Figure Driving in an unsafe manner, over a period of years, is high-risk driver behaviour. 51. ICBC did consider other categories of convictions, in addition to the ones chosen. ICBC decided not to include Speed too fast for conditions because it is a less objective offence than exceeding the speed limit by more than 40 kilometres per hour. Other offences were examined, but not included because they were not as closely correlated to crash risk as the offences that were selected. Convictions that do not attract DRP directly will be included in the Three convictions for any motor vehicle offences category. E 52. IMPLEMENTATION The following section outlines ICBC s implementation plan for the DRP program

136 E.1 SURRENDERING LICENCES ICBC Filing with the BC Utilities Commission 53. ICBC plans to modify some provisions under the current DPP program which allow drivers to reduce or eliminate penalty point premiums by surrendering their licences (the current provisions were discussed in paragraph 9, and in Appendix 17.1 A, Table 2). Driver Risk Premiums will be reduced or eliminated in the same way as DPP premiums are now, except that the three year scan means a licensee will face a decision to surrender his or her licence once per year for three successive years, assuming no additional convictions. The convictions and roadside suspensions will remain on the driver s record for three years from the date of conviction. 54. Unlike the current program, DRP will be reinstated, effective to the date of the original billing, if, while the driver s licence is under suspension or surrendered: The licensee commits a violation of the Motor Vehicle Act, the Motor Vehicle Act Regulations, or the Criminal Code of Canada. The licensee is declared as principal operator or other operator on any new policy or renewal of a Basic insurance policy during the prorate period. The licensee is involved as a driver in any claim. 55. These provisions ensure that ICBC collects the appropriate premium. When a driver surrenders his or her licence, the DRP is not charged because the risk of causing a crash is no longer there. The expectation is that someone who surrenders a licence will not be driving. If ICBC becomes aware that an unlicensed driver is driving, the DRP will be reinstated. E.2 NUMBER OF DRIVERS INCLUDED IN DRP AND DPP PROGRAMS 56. Extending the scan period from one year to three years, and the revised conviction categories and roadside suspensions, will bring more drivers into the program. Figure below compares the DRP and DPP programs

137 ICBC Filing with the BC Utilities Commission Figure Numbers of Drivers in DPP Program and DRP Program 2005 Data DPP Program Analysis Count of Drivers Percent of Drivers Count of High Liability Basic Crashes Basic Crash Frequency 16 DPP Drivers 34, % 3, Non DPP Drivers 2,733, % 112, Total 2,767, % 116, DRP Program Analysis Count of Drivers Percent of Drivers Count of High Liability Basic Crashes Basic Crash Frequency DRP Drivers 120, % 11, Non DRP Drivers 2,647, % 104, Total 2,767, % 116, Figure shows that 1.2 % of drivers received DPP invoices in It also shows the percentage of drivers who would have received DRP invoices, had the new system been in place since This suggests that the percentage of drivers who pay DRP may be 4.4 %, as opposed to the 1.2% that pay DPP premium. The Count of Drivers column in Figure shows numbers of drivers on an annual basis. 58. It is important to realize that Figure shows hypothetical data only; it sets out what may have happened in the past. It is not possible to determine precisely how people will react when the new system is in place. ICBC hopes that higher-risk drivers will improve their driving in order to avoid DRP, so that a smaller percentage of drivers will be affected than is suggested by Figure Certainly, ICBC s expectation is that approximately 95% of BC drivers will not be charged DRP. 59. ICBC conducted an analysis of all drivers as of December 31, 2004 and their crash experience in If the DRP structure had been in place since January 1, 2002 the additional set of drivers affected by the proposed DRP program would have had a Basic crash rate of 9.3 crashes per hundred drivers. By comparison, those drivers excluded by the proposed DRP program and formerly part of the DPP program had a Basic crash rate of The number of crashes per hundred drivers

138 ICBC Filing with the BC Utilities Commission The evidence confirms that the DRP Program will be more effective at selecting drivers whose historical driving behaviour is predictive of future at-fault crash involvement than the DPP program. E.3 REVENUE PROJECTION 60. For comparison purposes, the following amounts were recorded as written premium under the DPP program from 2004 to 2006: (millions) 2004 $ $ $ This premium, which is part of the Basic insurance revenue, has resulted in lower Basic insurance premiums for the approximately 98% of drivers who were not assessed driver premiums. 62. Projecting revenue from the DRP program is difficult, as is predicting the number of drivers who will commit offences. ICBC hopes high risk drivers will improve their driving habits to reduce their risk of having at-fault crashes, and will reduce or eliminate the additional premium charged for their greater risk. However for illustrative purposes, if the DRP program had been fully operational in December 31, 2002 and had drivers behaved exactly as they did under the DPP program, ICBC estimates these higher-risk drivers would have paid approximately $60 million in DRP. 63. Once the DRP program is fully operational, annual revenues are projected to be within the range of $40 million to $60 million. Given the magnitude of the changes, volatility in revenue projections is expected. ICBC expects that both bad debt expense and driver licence surrender may increase. As will be seen in Section E4, DRP will be phased in over a period of years. Revenue will increase over time as the DRP program moves closer to full implementation. The premium collected will be part of Basic insurance revenues, and will be used to offset any general rate increases. The DRP program is not designed to increase the total amount of Basic insurance premium; it is designed so that high-risk drivers pay a larger share

139 ICBC Filing with the BC Utilities Commission 64. ICBC anticipates that the average DRP will be approximately $500 per year. Because the assessment period will be three years, the same offences may result in premium being charged for three years. The average Basic insurance vehicle premium in 2006 (excluding the premium paid for trailers 17 ) was $706 per year. This average annual premium is inclusive of Claim-Rated Scale discounts and surcharges. The analysis contained in Figure illustrates that a driver who will be charged DRP is approximately twice as likely to have a crash as drivers who do not pay DRP. As such, a driver in this category could expect to have, on average, a Basic insurance premium twice as high as a non-drp driver. On that basis, $500 per year is a reasonable amount to charge so that the risk is closer to being properly priced. Some DRP drivers already pay more than the average Basic vehicle insurance premium of $706, but those who do not own vehicles do not pay any Basic vehicle insurance premium at all. Further information about the proposed DRP Billing Structure is set out in Appendix 17.1 C. E.4 IMPLEMENTATION SCHEDULE 65. ICBC plans to implement the Driver Risk Premium Program on a forward looking basis; it will not be retroactive. After the Commission approves the plan, ICBC will communicate with its customers and stakeholders in the latter part of All convictions added to a driver s record as of January 1, 2008 will be scanned in parallel with the existing system. 66. The DRP program will calculate premium based on conviction date, rather than the date of the violation. ICBC has determined that offences that occur prior to January 1, 2008 will not be included in the calculation of DRP premium, even if a conviction for the offence is subsequently registered in Offences that occurred before 2008 will be used only for calculating DPP premium under the existing structure. 67. The following paragraphs provide an explanation of how the DRP will be calculated during the implementation period. 17 The premium paid for Basic insurance policies for trailers was excluded from the figure, because ICBC determined that conviction history is unlikely to have a material affect on the risk of future at-fault crashes involving trailers

140 ICBC Filing with the BC Utilities Commission 68. As discussed in paragraphs 7 and 8, the conviction history scan period ends five months prior to the driver s birthday; that allows enough time for convictions to be registered and appeals to be heard. In order to allow enough time for implementation, ICBC plans that the first DRP invoices will be sent with respect to birthdays that occur in January Drivers with a January 1, 2009 birthday will: Have their conviction history examined from August 1, 2007 to August 1, 2008 for the purposes of calculating DPP premium. Have their driving history examined from January 1, 2008 to August 1, 2008 for the purposes of DRP, except that offences that occurred prior to January 1, 2008 will not be included, even if a conviction is registered in An invoice will be mailed for the higher of the two premiums. Drivers with a February birthday will have an eight month DRP scan in 2008, March birthdays a nine month scan, and so on. Parallel scans will continue until three years of driver history, starting from January 1, 2008 is available for all drivers. The DRP program will then be fully operational and the DPP program will be retired. 70. ICBC chose this transitional approach in order to avoid making the program retroactive. The DRP program cannot be fully implemented until there has been a full three year assessment period for all drivers. ICBC did not want to wait three years to begin making improvements, and so developed the schedule described above. F CONCLUSION 71. The DPP program has been in effect for more than 30 years. Policyholders who do not pay drivers premium have benefited through reduced Basic insurance premiums. The DRP program is an expansion of and an improvement on the current DPP program. The DRP program is an important part of ICBC s rate design; the intent is not to collect more Basic insurance premium overall, but rather to collect more of that premium from drivers who are more likely to cause crashes. The DRP program focuses on controllable driving behaviour and will serve as an incentive for safe driving. It will provide drivers the opportunity to affect the premium they pay through their decisions on how they drive

141 APPENDIX 17.1 A SCHEDULE OF CURRENT PENALTY POINT PREMIUM AND REFUND OF THE PREMIUM 17.1 A

142 ICBC Filing with the BC Utilities Commission Insurance (Motor Vehicle) Act REVISED REGULATION (1984) UNDER THE INSURANCE (MOTOR VEHICLE) ACT [includes amendments up to B.C. Reg. 135/2006, June 19, 2006] Schedule 2 Table 1 Point Penalty Premium [en. B.C. Reg. 153/98; am. B.C. Reg. 292/2000, Sch. A, s. 8.] (section 44.1) Column A Column B Class of Drivers by Number of Point Penalties Annual Premium $ 0-3 nil A-1

143 ICBC Filing with the BC Utilities Commission A-2

144 ICBC Filing with the BC Utilities Commission A-3

145 ICBC Filing with the BC Utilities Commission or more A-4

146 ICBC Filing with the BC Utilities Commission Table 2 Refund of Driver Penalty Point Premium (section 46 (1)) Column A Circumstances Column B Minimum Time Requirements Column C Additional Requirements Suspension 60 days or more M.V.D. confirmation on suspensions before 1982 Voluntary surrender 30 days or more M.V.D. confirmation Out of province for part or whole period covered in billing 30 days or more written confirmation of issue date, or photocopy of new drivers licence Not in Canada or U.S.A. for part or whole period covered in billing 30 days or more photocopies of passport date stamp confirming out of country dates Incarceration 30 days or more letter from prison authorities, confirming dates of incarceration and that there were no out privileges when driver's licence could have been used Medical reason 30 days or more physician's letter confirming that person is unable to drive no evidence of driving, e.g. points or claim on driving record * Minimum time requirement refers to a continuous period of time A-5

147 APPENDIX 17.1 B CRIMINAL CODE OF CANADA AND 10 POINT MOTOR VEHICLE ACT OFFENCES USED TO CALCULATE DRP 17.1 B

148 ICBC Filing with the BC Utilities Commission CRIMINAL CODE OF CANADA AND 10 POINT MOTOR VEHICLE ACT OFFENCES USED TO CALCULATE DRP Criminal Code of Canada 1 Description of Offence 1 Section 219 Criminal Negligence 2 Section 220 Causing death by Criminal negligence 3 Section 221 Causing bodily harm by criminal negligence 4 Section 236 Manslaughter 5 Section 249 (1) (a) Dangerous operation of a motor vehicle 6 Section 249 (3) Dangerous operation causing bodily harm 7 Section 249 (4) Dangerous operation causing death 8 Section (1) Flight 9 Section (3) Flight causing bodily harm or death. 10 Section 252 (1) Failure to stop at scene of accident 11 Section 253 (a) Operation of motor vehicle while ability impaired by alcohol or drugs 1 ICBC is confirming that this is a comprehensive list of CCC offences to be used in calculating DRP. A complete, updated list will be filed with the Commission by mid April B-1

149 ICBC Filing with the BC Utilities Commission 12 Section 253 (b) Operation of motor vehicle with more than 80 milligrams alcohol in blood 13 Section 254 (5) Failure or refusal to provide sample of breath or blood 14 Section 255 (2) Operation of a motor vehicle while impaired causing bodily harm 15 Section 255 (3) Operation of a motor vehicle while impaired causing death 16 Section 259 (4) Operation of motor vehicle while disqualified 17.1 B-2

150 ICBC Filing with the BC Utilities Commission Motor Vehicle Act Description of Offence 1 Section 90.4 Driving while suspended 2 Section 95 Driving while prohibited or suspended 3 Section 100 Failing to stop for peace officer 4 Section 102 Driving while prohibited or suspended 5 Section 103 Driving while suspended 6 Section 224 Driving with more than 80 milligrams of alcohol in blood 7 Section 226 Refusal to give blood sample 8 Section 234 (1) Driving while suspended 17.1 B-3

151 APPENDIX 17.1 C DRIVER RISK PREMIUM BILLING STRUCTURE 17.1 C

152 ICBC Filing with the BC Utilities Commission DRIVER RISK PREMIUM BILLING STRUCTURE 1. Figure 17.1 C.1 illustrates the planned billing structure in the DRP program. Figure 17.1 C.1 DRP Billing Structure Conviction Count Three or More Convictions Criminal Code of Canada Convictions Two or More Roadside Suspensions Excessive Speed Convictions 1 $905 $320 2 $3,760 $370 $370 3 $350 $8,160 $430 $430 4 $400 $14,560 $490 $490 5 $460 $24,000 $560 $560 6 $530 $24,000 $640 $640 7 $610 $24,000 $740 $740 8 $700 $24,000 $850 $850 9 $810 $24,000 $980 $ $930 $24,000 $1,130 $1,130 Each additional conviction will increase at a rate of 15% rounded to the nearest $10 increment 2. Three or more convictions of any kind Two or more roadside suspensions One or more excessive speed convictions ICBC developed the premium schedule shown above based on the information in Figure (Chapter 17.1, page 10) as well as the belief that CCC Convictions must result in substantial premium. The proposed premium scale for CCC convictions is unchanged from the current DPP scale, as seen in Appendix 17.1 A, Table Figure (Chapter 17.1, page 10) shows that Two or More Roadside Suspensions has the highest correlation with at-fault crash risk, followed by Three or More Convictions, followed by One or More Excessive Speed Convictions. ICBC set the relative premiums accordingly, so that the highest risk driving behaviour attracts the highest premium. 4. The base premium in the premium schedule is $320 for one Excessive Speed Conviction. As discussed previously in Section E.3 of Chapter 17.1, DRP drivers present about twice the risk of at-fault crashes and so should pay something approaching twice the average Basic premium. ICBC estimates that the proposed premium schedule will result in annual DRP of about $500 per driver (for the approximately 5% of drivers who are billed DRP.) While that is 17.1 C-1

153 ICBC Filing with the BC Utilities Commission less than the average Basic insurance vehicle premium, it is a significant move towards a more risk-based driver premium. 5. The DRP structure will have increases in increments of 15% for additional convictions or roadside suspensions. This is consistent with insurance industry practice, and ICBC s analysis indicates that most of the increased risk of at-fault crash occurs at the first step of the four categories shown above. 6. Figure 17.1 C.2 provides two examples of how the DRP will be calculated, compared to what the premium would be under the existing DPP structure. Figure 17.1 C.2 Sample DRP Billing Conviction History Based on a 3-year Scan Premium Under Current DPP Premium Under Planned DRP 1 Driver #1 1 excessive speed conviction, 8 months ago 3 penalty points no premium charged. $320 additional premium in year 1, 2 & 3 Driver #2 1 excessive speed convictions, 20 months ago 1 roadside suspension, 8 months ago 3 penalty points for excessive speed (previous year) no premium. No premium charged. $670 additional premium 2 for year 1 & 2. By year 3, the dated conviction would no longer appear in the scan. 1 unsafe pass on right conviction, also 8 months ago 2 penalty points, no premium charged. 1 The amounts to be billed as shown in Figure 17.1.C.2 assume no further convictions. The DRP plan does not affect the issuance of penalty points by the Superintendent of Motor Vehicles; however the premium charged for the driver certificate will not be based on penalty points. 2 (Premium for Excessive speed is $320) + (Premium for Three or More Convictions is $350) = $ C-2

154 APPENDIX 17.1 D DRIVER ACCIDENT RISK IN RELATION TO THE PENALTY POINT SYSTEM IN BRITISH COLUMBIA 17.1 D

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165 APPENDIX 17.1 E THE RELATIONSHIP BETWEEN SPEEDING BEHAVIOUR (AS MEASURED BY VIOLATION CONVICTIONS) AND CRASH INVOLVEMENT 17.1 E

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