Manitoba Public Insurance Corporation

Transcription

1 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance Appointed Actuary s Report as at October 31, 2009 February 2010 Author: Mr. James K. Christie Insurance and Actuarial Advisory Services rnst & Young LLP rnst & Young Tower P.O. Box 251, 222 Bay Street Toronto-Dominion Centre Toronto, Canada M5K 1J7 Phone: Fax: mail: Jim.K.Christie@ca.ey.com

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3 rnst & Young LLP rnst & Young Tower, 222 Bay Street, P.O. Box 251 Toronto, ON M5K 1J7 Canada Tel: mail: Mr. Don Palmer Chief Financial Officer The Manitoba Public Insurance Corporation Donald Street Winnipeg, MB R3C 4A4 2 February 2010 Actuarial Analysis of IBNR Universal Compulsory Automobile Insurance Dear Don: nclosed are six bound copies of our Appointed Actuary s Report for the Universal Compulsory Automobile Insurance operations of Manitoba Public Insurance as of October 31, For your convenience, I am also including an unbound copy. An electronic copy of the report in PDF format will be sent separately. As always, I will be pleased to discuss any questions you may have. Yours sincerely, James K. Christie, FCIA, FCAS Appointed Actuary nclosures James K. Christie is a limited partner of rnst & Young L.P., which provides services to rnst & Young LLP, a member firm of rnst & Young Global Limited

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5 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report Table of contents 1. Scope of Report Introduction Use and Distribution xpression of Opinion Data Data Sources Use of Auditor s Work Reconciliation Claim Data Structure Rounding Assumptions mergence Patterns Materiality Variability Underlying Assets Salvage and Subrogation Background Company Operations Reinsurance Intercompany Recoveries Claim Liabilities Incurred But Not Reported Bodily Injury pre-pipp Bodily Injury PIPP Property Damage Collision Comprehensive Accident Benefits - Weekly Indemnity Accident Benefits - Other Benefits Indexed Losses Non-Indexed Losses Internal Loss Adjustment xpenses Ceded Accident Benefits PIPP nhancements nvironmental Liabilities Pools and Associations Accepted Actuarial Practice Provision for Adverse Deviations Payment Patterns Interest Rates i

6 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 6.3 Carried versus stimated Premium Liabilities Unearned Premium Deferred Policy Acquisition xpense Comparison to prior year estimates Description of Methodologies Incurred Loss Development Method Paid Loss Development Method xpected Loss Method Bornhuetter-Ferguson Method Average Claim Method Glossary xhibits xhibit 1... Summary of Policy Liabilities [Case and IBNR] xhibit 2... Claim Liabilities xhibit 3... Comparison to Prior Claim stimates xhibit 4... IBNR stimates xhibit 5... Internal Loss Adjustment xpenses xhibit 6... quity in Unearned Premium xhibit 7... Claim Liabilities using Accepted Actuarial Practice xhibit 8... Claim Liabilities using Accepted Actuarial Practice by Insurance Year Appendices Appendix A Appendix B Appendix C Appendix D Appendix Appendix F Appendix G Appendix H Appendix I Bodily Injury... Direct/Net Claim Liabilities Property Damage... Direct/Net Claim Liabilities Collision... Direct/Net Claim Liabilities Comprehensive... Direct/Net Claim Liabilities Accident Benefits - Weekly Indemnity... Direct/Net Claim Liabilities Accident Benefits Other (Indexed)... Direct/Net Claim Liabilities Accident Benefits Other (Non-Indexed)... Direct/Net Claim Liabilities... Reconciliation... PIPP nhancements ii

7 1. Scope of Report Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 1.1 Introduction The Board of Directors of Manitoba Public Insurance Corporation ( MPI or the Company ) has appointed James K. Christie as Actuary. This report summarizes the methodologies and assumptions used by your appointed actuary to value the policy liabilities of the Automobile Insurance Division - Universal Compulsory Automobile Insurance ( Basic Autopac ) portfolio of the company as of October 31, This report is part of a series of similar reports addressing the total policy liabilities of MPI. Reports for the other divisions of MPI: Auto Insurance - Special Risk xtension, and Auto Insurance - xtension Autopac will be issued separately. This report updates previous reports as of October 2008 and February 2009 prepared by rnst & Young LLP. For purposes of this report, policy liabilities 1 were reviewed in detail before and after the recognition of applicable reinsurance ( gross 2 and net ). The valuation covers only the policy liabilities referenced in the opinion in Section 2. To the best of our knowledge there are no other policy liabilities. The valuation has been prepared according to Accepted Actuarial Practice ( AAP ). It complies with the appropriate Standards of Practice of the Canadian Institute of Actuaries. This valuation was performed by rnst & Young LLP under the direction of Mr. Christie. Mr. Christie is a Fellow of the Canadian Institute of Actuaries and of the Casualty Actuarial Society. Mr. Christie is available to answer any questions regarding this report and can be reached at the following address: rnst & Young LLP rnst & Young Tower, 222 Bay Street P.O. Box 251, Toronto-Dominion Centre Toronto, Ontario, M5K 1J7 Phone : (416) Fax : (416) mail: Jim.K.Christie@ca.ey.com 1 Policy liabilities are sometimes referred to as premium and claim liabilities. 2 This includes business sold over the counter by MPI (direct) and business sold through independent agents (agency). 1

8 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 1.2 Use and Distribution This report and the opinions and conclusions contained herein were prepared for the internal use of the Company and were based on confidential information supplied by the Company. This valuation has been performed for the preparation of financial statements at October 31, It is not intended nor necessarily suitable for any other purpose. We understand this report will be provided, in its entirety, to the external auditors and to the Public Utilities Board of Manitoba. No further distribution of this report may be made without the prior permission of MPI and rnst & Young LLP. MPI and its Appointed Actuary should be notified immediately following any requests for disclosure of any part of this report. Should the report be disclosed, it must be provided in its entirety. 2

9 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 2. xpression of Opinion To the Board of Directors of Manitoba Public Insurance Corporation: I have valued the policy liabilities of the Automobile Insurance Division - Universal Compulsory Automobile Insurance of the Manitoba Public Insurance Corporation for its balance sheet at October 31, 2009 and their change in its statement of operations for the eight months then ended in accordance with accepted actuarial practice, including selection of appropriate assumptions and methods. I verified the consistency of the valuation data with the company financial records, however a formal audit of the company s financial statements will not be completed until the February 28, 2010 fiscal year end. This opinion is conditional upon receiving an unqualified opinion from the external auditor. The results of my valuation are the following: Claims Liabilities ($000) Actuary s stimate Direct Unpaid Claims and Adjustment xpenses: 1,496,307 Assumed Unpaid Claims and Adjustment xpenses: Gross Unpaid Claims and Adjustment xpenses: Ceded Unpaid Claims and Adjustment xpenses: Net Unpaid Claims and Adjustment xpenses: 0 1,496,307 46,677 1,449,630 Actuary s Premium Liabilities ($000) stimate Gross policy liabilities in connection with unearned 310,365 premiums: Net policy liabilities in connection with unearned premiums: 314,456 Gross Unearned Premiums: 340,794 Net Unearned Premiums: 338,500 Net premium deficiency: 0 Deferred net policy acquisition expenses: 24,044 Maximum net policy acquisition expenses deferrable: 24,044 In my opinion, the amount of Universal Compulsory Automobile Insurance policy liabilities makes appropriate provision for all policyholders obligations. James K. Christie, FCIA January 11,

10 3. Data Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 3.1 Data Sources To perform this valuation, rnst & Young LLP used information provided by: Steve Perlmutter, Manager, Financial Reporting, MPI Luke Johnston, Manager, Actuarial Services, MPI Tai Tong Phoa, Actuarial Analyst, Pricing and conomics, MPI In developing this report, rnst &Young LLP has made use of historical data and other quantitative and qualitative information supplied by the Company. In particular MPI supplied data on Paid claims (gross and net) Unpaid claims (gross and net) arned premiums (gross and net) and Unearned premiums (gross and net). Information was also supplied on internal loss adjustment expenses paid and operating expenses. We have reviewed this information for reasonableness and internal consistency but without independent audit or verification except as noted herein. The accuracy of our results is dependent on the accuracy and completeness of this data. Therefore, any material discrepancies discovered in this data should be reported and, if warranted, this report amended accordingly. 3.2 Use of Auditor s Work We have asked the Company's external auditor: 1. to employ appropriate tests and sampling of the Company s individual records to ensure accurate and proper recording of premium, claim and asset information, 2. to ascertain that proper management controls are in place to ensure completeness of premium, claim and asset data, 3. to ensure that our premium and claim data sets correspond in aggregate to internal company reports, 4. to ensure that reinsurance treaties are properly signed, and 5. to identify any reinsurers who are delinquent in paying accounts. We expect to have received a report from them in these regards, before the Company s balance sheet as of fiscal year end February 28, 2010 is finalized. Should we be advised of any material discrepancies by the auditor s report, we will revise our report accordingly. 4

11 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 3.3 Reconciliation The actuarial database differs slightly from the amounts booked in the general ledger but these differences do not have any material impact on our analysis. 3.4 Claim Data Structure The Company provided direct and net claim data (including external claim adjustment expenses) for each coverage on both a paid and an incurred basis. This data is split into fiscal insurance years each ending February 28 (February 29 for a leap year). This means the data as of October 31 represents a partial period of the current insurance year. For pre-pipp accident benefits weekly indemnity and for indexed PIPP accident benefits components, historical data was restated to reflect current benefit levels. ffective March 1994, pursuant to an agreement between MPI and the Manitoba Health Services Commission ( MHSC ), subrogation payments to MHSC on individual case files were discontinued. Such payments are now made in bulk and are no longer included in the data triangles for insurance years 1994 and after. A policy management IT system, CARS, became operational in July All existing claim data were reconciled in aggregate at the time of the conversion. The CARS system offered additional flexibility while imposing some new constraints on claims data. The claim data information provided appears to be reasonably consistent with data from prior periods. One of the major changes with CARS is the elimination of the z-files. Broadly speaking these files are external claim adjustments costs, which could not be allocated to individual files. xamples of z-files include but are not limited to master towing contracts, MHSC, doctor contracts, and subrogation allowances for awards not yet recovered. The use of z-files in the claim database was terminated on March 1, Starting with the October 2008 analysis, the data was shown by insurance year ending February at valuation points ending in October and February of each year. Starting with this analysis, the data is shown by accident year ending February at valuation points ending in October and February until 44 months. Thereafter the data is shown only at October valuations. 3.5 Rounding Many figures shown in this report have been rounded to the nearest thousand dollars. Totals and calculations may not agree because of rounding. 5

12 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 4. Assumptions 4.1 mergence Patterns To estimate the ultimate costs of unpaid losses we have relied on incurred and paid loss data triangles, as well as the level of earned premiums recorded each year. Projected future claim reporting and payments were based upon the Company's historical experience, supplemented where deemed appropriate, by patterns drawn from other available sources. We have not anticipated any extraordinary changes to the legal, social or economic environment (or to the interpretation of policy and treaty language) that might affect the cost, frequency, or future reporting of claims. In addition, our estimates make no provision for potential future claims arising from loss causes not contained in the historical data except in so far as claims of these types are included in the reported losses and are routinely developed. 4.2 Materiality We will discuss our standard of materiality, as outlined below, with the external auditors. We have set a precision gauge of $50,000 for data used in our analysis. We expect any unexplained differences to be less than our gauge. We have adopted a materiality standard of $7,000,000 for MPI in total. This amount is less than 1% of MPI s estimated total aggregate liability for gross unpaid claims and claim adjustment expenses. If the total value for all policy liabilities is within $7,000,000 of our estimate we do not consider it to be materially different from ours. For Basic Autopac, as a separate entity, we have used a lesser materiality figure of $6,000,000. If the total value for all Basic Autopac policy liabilities is within $6,000,000 of our estimate we do not consider it to be materially different from ours. This materiality standard is not intended to provide for errors in the estimation process, such as: Parameter specification error, including statistical error in the estimation of the parameters, which arises from distortion in the underlying assumptions due to the possible inability of the historical patterns and trends to adequately describe future events; or Process risk, that is uncertainty associated with the dispersion of the actual outcomes throughout a distribution of possible outcomes. 4.3 Variability The standard of materiality is not a measure of the uncertainty in our estimates. It does not mean that actual results, when all losses are settled, will be within $6,000,000 of our estimate. Policy liabilities are estimates and as such complete assurance cannot be given as to the ultimate accuracy of any 6

13 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report recommended level. The value of policy liabilities represents our best estimate based on the information available to us at the time of our valuation. However, being estimates, they can vary since the actual value is subject to events yet to occur, e.g. the likelihood of claimants bringing suit, the size of awards, or changes in the standards of liability. It should be recognized that future claims emergence may deviate, perhaps materially, from our estimates. In our judgment, we have employed techniques and assumptions that are appropriate and the conclusions presented herein are reasonable. The materiality standard is intended to be used as a guideline in determining the significance of any potential errors in the data used in this analysis. 4.4 Underlying Assets We have not examined the validity of assets supporting the policy liabilities. Throughout our analysis, we have assumed policy liabilities are backed by valid assets with a suitable schedule of maturities and/or adequate liquidity to meet the cash flow requirements of these liabilities. 4.5 Salvage and Subrogation The claim liabilities contained in this report are net of anticipated future salvage and subrogation. If an asset for anticipated salvage and subrogation is included in the balance sheet, the liability for unpaid claims and adjustment expenses should be increased by a corresponding amount. 7

14 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 5. Background 5.1 Company Operations MPI was incorporated as a Crown Corporation in 1970 under the Automobile Insurance Act. In 1974 the Automobile Insurance Act was revised and became the Manitoba Public Insurance Corporation Act. Under the provisions of this Act, MPI operates an automobile insurance division and a general insurance division. On March 1, 1994, the province of Manitoba introduced the Personal Injury Protection Plan ( PIPP ). This plan eliminated bodily injury tort actions involving Manitoba drivers within Manitoba and increased payments under no-fault accident benefits coverage. For the coverages affected, we have segregated our analysis into pre-pipp and PIPP eras. The Automobile Insurance division provides Universal Compulsory Automobile Insurance coverage, which is known as Basic Autopac. The basic package includes third party liability with a $200,000 limit, no-fault accident benefits and all perils coverage with a $500 deductible. In addition, MPI writes optional coverage, namely increased liability limits and deductible buy-down coverage in competition with private insurers. This optional coverage is known as xtension. Other vehicle insurance coverages not offered by Basic Autopac or xtension are provided by Special Risk xtension ( SR ). SR was transferred from the General Insurance division to the Automobile Insurance division on November 1, The remaining portions of the General Insurance division have been in orderly runoff since In 2004, all remaining portions of General Insurance division were transferred to the Automobile Insurance division under SR. Only Basic Autopac is the subject of this report. 5.2 Reinsurance MPI s reinsurance structure consists of the following: 1. Auto Facultative excess of loss treaty with retention of $500,000 and a limit of $5 million (SR only). 2. Catastrophe program of $290 million excess of $10 million. MPI retains 2/3 of the $5 million excess of $10 million layer and 1/3 of the $100 million excess of $200 million layer. Therefore the maximum recovery is $253.3 million. 3. Auto/General Liability excess of loss program with retention of $5 million and a limit of $50 million. 8

15 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report The following table shows the general structure of the Auto/General Liability reinsurance coverage applicable from 1994 to present. Calendar Year Reinsurance Coverage ($ million) excess of excess of excess of excess of excess of excess of excess of excess of 5.0 The reinsurance treaties from 1994 onward contain clauses that mandate all open claims for a given calendar year to be collectively settled with the reinsurers for lump sums based on mutually agreed commuted values. The first reinsurance layer for calendar year 1995 has been 100% commuted. For calendar years 1996 and 1997, claims in the first reinsurance layer are currently being commuted on a claim by claim basis. As a consequence MPI has received cash equal to the present value of expected future reinsurance recoveries but in exchange MPI now bears the risk if these claims in aggregate subsequently experience adverse runoff. Our valuation of policy liabilities was made on a direct basis and on a net basis after consideration of all reinsurance. The Company advises that currently there is no material amount of uncollectible reinsurance receivable. However, no absolute certainty can be given on the collectibility of reinsurance. Contingent liability exists to the extent reinsurance becomes uncollectible. 5.3 Intercompany Recoveries MPI s reinsurance treaties for contain aggregate deductibles ranging from $2.0 million to $5.0 million. The aggregate deductible applies to the total ceded amount from all divisions. As such, this aggregate deductible must be allocated to Basic, xtension, & SR to fairly assign an applicable portion to each; the allocation is based on the ratio of Gross Net arned Premium Income ( GNPI ) for the division to the GNPI for all divisions. The intercompany allocations are provided by MPI. They are shown in xhibit 1. 9

16 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 6. Claim Liabilities 6.1 Incurred But Not Reported Our methodology employed the incurred and paid development techniques (also known as the chain ladder methods) and the related Bornhuetter-Ferguson ( BF ) modifications to estimate the liability for Incurred But Not Reported claims ( IBNR ) by line on an ultimate undiscounted basis. A more detailed discussion of these techniques (and their underlying assumptions) is given in the Description of Methodologies section. Because of the change in the data triangles described in section 3.4, the incurred and paid loss development factors have been newly selected to reflect the observed experience. They have broadly been selected to produce the same cumulative factors as before. Historical experience shows that for certain lines of business, the Company s claims are not incurred evenly throughout the year. Therefore when calculating the ultimate incurred claims as of October 31, we have used the following seasonality assumptions. Incurred Losses During the Year Line of Business First 8 months Last 4 months Bodily Injury 67% 33% Property Damage 58% 42% Collision 58% 42% Comprehensive 73% 27% Accident Benefits 67% 33% Bodily Injury pre-pipp As in prior reports, we judgmentally selected IBNR of $200,000 per year for pre-pipp years. ach year we drop the oldest year s IBNR to zero. In this report we dropped the 1991/92 IBNR to zero Bodily Injury PIPP As in prior reports, we have selected the IBNR from the Incurred Bornhuetter-Ferguson method. The data, loss development factors, and selections are shown direct (equal to net) in Appendix A Property Damage As in prior reports, we have selected the IBNR from the Incurred Bornhuetter-Ferguson method. The data, loss development factors, and selections are shown direct (equal to net) in Appendix B. 10

17 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report Collision As in prior reports, we have selected the IBNR from the Incurred Loss Development Method. The data, loss development factors, and selections are shown direct (equal to net) in Appendix C Comprehensive As in prior reports, we have selected the Paid Loss Development method except for the most recent insurance year where the Incurred Development method was used. IBNR for all years was judgmentally selected as 0 if the indicated IBNR was negative. The data is net of the July 1996, August 2001, August 2007 (Dauphin) and August 2009 (Brandon) hailstorm claims. Hailstorm paid and incurred losses and IBNR calculations are shown separately on page 3 of Appendix D. Note that for this line of business reinsurance only applies to hail losses. There is no IBNR provision for the 1996, 2001 and 2007 hailstorms. The August 2009 hailstorm has a direct IBNR provision of $3.5 million. There is no IBNR on a net basis. The direct IBNR was calculated using the Incurred Development method which is shown on page 3 of Appendix D. The IBNR method selection is consistent with the non-hail approach for that insurance year. In March 2001, MPI increased the deductible for glass coverage on xtension from $100 to $200. This increase in deductible was implemented upon renewal of the policy. Following the announcement of this change in coverage, MPI xtension experienced a surge in claims reported for glass coverage in insurance year 2001/02. Because many glass claims exceed the Basic Autopac deductible of $500, this surge also impacted Basic Autopac coverage. The impending deductible increase appears to have caused consumers to repair or replace many windshields much sooner than normal. This caused a onetime surge in glass claims in insurance year 2001/02. We anticipate that glass claims will be lower than usual for the next few years as consumers revert to normal repair/replacement behaviour. Glass claims will continue to occur at normal incidence rates, but the apparent reported incidence rate will remain lower for several years because the backlog of cracked but unreported windshields from earlier years was cleared in fiscal insurance year 2001/02. This may not show directly in the recorded data as the date of loss for glass claims is often inadvertently recorded as the repair date. In this report, we are reserving a bulk amount of $2.4 million to account for these anticipated claim costs. This is the estimated ultimate value of the backlog and is unchanged in aggregate from February In October 2007 we started spreading the backlog provision over additional insurance years by allocating $0.4 million to the most recent year. In this analysis we reduced the allocation to insurance year 2006/07 from $1.6 million to $1.2 million, and added $0.4 million to the 2009/10 insurance year. In future reports the total bulk IBNR provision will be unchanged but $0.4 million will be removed from the 2006/07 insurance year and allocated to the most recent year. 11

18 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report Accident Benefits - Weekly Indemnity At each analysis the historical payments are restated to reflect current benefit levels. The original incurred and paid data triangles before restatement are shown at the beginning of Appendix. This IBNR analysis is done on a gross basis only. We have conservatively assumed that any gross IBNR will be entirely borne by the Company and that no additional reinsurance recoverable will be generated. Thus direct and net IBNR are identical. As in prior reports for claims older than 10 years (1999/2000 and prior) IBNR is established by subtracting individual case estimates from tabular reserves that reflect the age and gender of each individual claimant. These tabular reserves are initially calculated with a 0% interest rate, so that only historic mortality and morbidity experience are reflected. This calculation is summarized in Appendix, page 21. The process for tabular reserves is as follows. Open claims with recent payments are identified and a tabular reserve is set up for each one based on the observed or estimated payment pattern. These make up the majority of claims. For the remaining claims (those with no identifiable payment pattern) it is assumed that 50% of them will ultimately become periodic and so subject to tabular reserving. Thus the non-tabular claims are reserved as a group using the following calculation: 50% of the number of non-tabular claims times the average tabular reserve plus 50% of the total case reserves on the nontabular claims. The October 2005 analysis revealed minor adverse development in the tabular reserve process. Since then the following loss development factors have been applied to the sum of cumulative paid and tabular reserves: Period Factor ult The 240-ultimate factor is based on a further two years development at , and 8 years at Overall this results in an approximate 6% loading for the 120-ultimate tail. The 116-ultimate incurred tail factor of (previously 1.085) was reduced to take into account the increase in the and factors. 12

19 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report The 116-ultimate paid tail factor of (previously 1.977) was reduced slightly. It is the previous 120-ultimate factor of 1.95, increased by 1.04 ^ (1/3). The selected IBNR is based on the Incurred Bornhuetter-Ferguson method for the most recent 5 years (reflecting the case estimation change introduced in 2005 which allows greater emphasis to be placed on a more consistent case reserving approach). The previous 5 insurance years selected IBNR is based on the Paid Chain Ladder method. IBNR for older insurance years continues to be based on the tabular reserving method. The data, loss development factors, and selections are shown direct (equal to net) in Appendix Accident Benefits - Other Benefits This coverage is broken down as follows: Accident Benefits Other Indexed Claims (Appendix F) Accident Benefits Other Non-Indexed Claims (Appendix G). For Accident Benefits Other Indexed Claims, at each analysis the historical payments are restated to reflect current benefit levels. The original incurred and paid data triangles before restatement are shown at the beginning of Appendix F. This IBNR analysis is done on a direct basis only. We have conservatively assumed that any direct IBNR will be entirely borne by the Company. We assume that no additional reinsurance recoverable will be generated by IBNR dollars. Thus direct and net IBNR are identical Indexed Losses The incurred tail factor was selected so that sum of the ultimate losses for insurance years 1996/97 to 1998/99 at 140 months based on the Incurred Development method would be approximately equal to the ultimate losses produced from the Paid Development method. In previous analyses the paid tail factor was based on the assumptions that at 120 months claim payments continue for an average of 25 years and increase by 2.5% each year. In this analysis we have extended our factor selection using the observed data until months. Starting at months we assume payments continue for 23.3 years and increase by 2.5% each year. The selected IBNR is based on the Incurred Bornhuetter-Ferguson method for the most recent 5 years (reflecting the case estimation change introduced in 2005 which allows greater emphasis to be placed on a more consistent case reserving approach). Previous insurance years selected IBNR is based on the Paid Chain Ladder method. The data, loss development factors, and selections are shown direct (equal to net) in Appendix F. 13

20 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report Non-Indexed Losses As in prior analyses, we have selected the IBNR produced from the Incurred Bornhuetter-Ferguson method. The data, loss development factors, and selections are shown direct (equal to net) in Appendix G Internal Loss Adjustment xpenses Derivation of the internal loss adjustment expenses ( ILA ) provision is detailed in xhibit 5. In reports prior to October 2008, the ILA provision factor was based on paid ILA divided by the average of paid and incurred claims. In the October 2008 and February 2009 analyses, the factor was based on paid ILA divided by paid claims. The current analysis reverts back to the prior approach. The ILA provision factor of 8.50% is based on the indicated factor and judgment. We have based our estimate on the traditional paid to paid method that implicitly assumes that ILA is 50% paid when the claim is opened and 50% paid when the claim is closed. ILA was estimated as 8.50% of case outstanding and IBNR liabilities, plus the same percentage applied to pure IBNR to cover claim-opening costs. Pure IBNR is estimated at 5% of the sum of current year incurred losses (as of eight months) plus 1/3 of the prior year incurred losses to allow comparison of annual figures. 14

21 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report Ceded Accident Benefits The ceded reserves are kept in a different claim system. ach ceded accident benefits claim is reserved using an internal claim system that calculates the reserve using a tabular method and discounts payments at a 3.0% discount rate PIPP nhancements In October 2009 the Manitoba legislature passed Bill 36, which enhances PIPP benefits for catastrophically injured claimants. The enhancements impact past and future claimants. The enhancements are: 1. Increase income replacement indemnity to the industrial average wage ( IAW ) if claimant is not already receiving an amount equal to or greater than the IAW. 2. Increase the maximum permanent impairment benefit to $215,000 from $136,000 (figures at March 1, 2009 level). 3. Increase the maximum personal care assistance monthly payments to $4,884 from $4,084 (figures at March 1, 2009 level). 4. Provide the Corporation with the authority to reimburse expenses up to a lifetime limit of $1,000,000 per claimant (figures at March 1, 2009 level). 5. When permanent impairment benefits have been paid, and the claimant is later entitled to death benefits, the death benefits will not be offset by the permanent impairment benefits already paid. (At present, death benefits are offset by permanent impairment benefits already paid.) Note that this proposal applies to all injured claimants. The fourth enhancement was estimated to have a marginal impact on MPI s unpaid claims; therefore, no provision was added for this enhancement. A detailed description of the enhancements and their estimated impact is shown in Appendix J of the February 2009 Appointed Actuary s Report. The current analysis of the impact of Bill 36 is shown in Appendix I of this report. A summary of the estimated impact since February 2009 is shown in the table below. Required IBNR ($000) as of PIPP nhancement 31-Oct Apr Feb-09 Income Replacement Indemnity 18,167 27,082 25,706 Personal Care 19,187 17,654 16,754 Permanent Impairment 22,738 33,855 33,768 Death Benefits 16,991 15,531 14,603 Total 77,082 94,122 90,831 15

22 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report nvironmental Liabilities To our knowledge no exposure exists for mass tort or environmental exposures. As a result, no explicit additional allowance has been made for mass tort and/or pollution claims Pools and Associations MPI does not participate in any pools or associations. 6.2 Accepted Actuarial Practice This analysis initially estimates the ultimate undiscounted incurred claim liability by insurance year, line, and type of business. The estimation of claims liabilities according to accepted actuarial practice ( AAP ) is based on the concepts of present value as well as providing margins for adverse claim development, reinsurance recoveries and investment recoveries. Claims are paid out over time, and in the interim assets backing these claims can be invested to earn interest until payments are required. As claims are paid, actual experience could be worse than expected and prudence suggests an allowance for adverse experience should be added. For each fiscal insurance period the current amount of claims that have been paid are compared to the total amount of claims paid or expected to be paid ( ultimate undiscounted unpaid claims liabilities ). These ratios of historical payment patterns are examined to determine the rate at which claim dollars have been paid in the past. A selected pattern is then applied to current unpaid claims to estimate when these claims will be paid in the future. Claims payments are assumed to be paid in the middle of each period. Based on the selected payment pattern, claim payments are discounted using an expected yield rate from a notionally associated portfolio of assets to produce a present value of future claim payments. The claim payments are then discounted using an interest rate lower than the expected yield rate (the expected rate less a margin). The difference between these two estimates is the interest rate provision for adverse deviation that is intended to provide for possible adverse experience in yield rates, reinvestment, and/or asset defaults. A margin is applied to the present value of future payments to provide a provision for possible adverse experience in claim development or payment patterns. Finally a margin is applied to expected reinsurance recoveries to provide a provision for possible future problems in the collection of these reinsurance amounts. The dollar impact of applying these three margins is collectively referred to as the provision for adverse deviations. The total of the present value of future payments and the provision for adverse deviations (interest, loss development, reinsurance) produce the unpaid claims liabilities according to Accepted Actuarial 16

23 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report Practice. This amount less the current outstanding claims generates the IBNR according to AAP. xhibit 7, page 1 shows gross unpaid claims calculated on an Accepted Actuarial Practice basis. xhibit 7, page 4 shows net unpaid claims calculated on an Accepted Actuarial Practice basis Provision for Adverse Deviations The Standards of Practice of the Canadian Institute of Actuaries identify three major valuation variables: claim development, reinsurance recovery and interest rate. The Standards define ranges for the selection of margins for each of these three valuation variables, namely between 2.5% and 15% for the claim development variable 3, between 0% and 15% for the reinsurance variable, and between 50 and 200 basis points for the interest rate variable 4. The selected margins for claims development are as follows: Bodily Injury Pre-PIPP % Bodily Injury PIPP % Property Damage % Collision % Comprehensive % Accident Benefits - pre PIPP % Accident Benefits PIPP Weekly Indemnity % Accident Benefits PIPP Indexed % Accident Benefits PIPP Non Indexed % Prior to the February 2008 analysis MPI held an allowance for uncollectible reinsurance as part of its general allowance for doubtful accounts. This allowance was sufficiently large to encompass the otherwise applicable margin for reinsurance, and accordingly the selected margin for reinsurance was set to 0%. Starting with the February 2008 analysis, to account for the removal of the allowance for uncollectible reinsurance a reinsurance margin of 5% has been applied Payment Patterns The selected payment patterns for discounting were based on the Company s own experience patterns. The selections are shown in xhibit 7. For Accident Benefits Weekly Indemnity claims older than ten years, the tabular reserves discounted at 0.0%, 1.1% and 2.1% are shown in Appendix, p For Accident Benefits Other Indexed claims older than ten years, the present value factor applied to the 3 ffective 31 December 2009 the range is 2.5% to 20.0%. 4 ffective 31 December 2009 the range is 25 to 200 basis points. 17

24 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report undiscounted unpaid claims is the Commuted Reserve Factor shown in Appendix, p. 20. It represents the ratio of average development from 120 months to ultimate based on expected interest rates relative to 0% interest rates. For example is ( )/( ) Interest Rates For lines of business that are not inflation-indexed, liabilities were discounted using an interest rate of 4.1%. This is the duration-weighted market yield 5 of the Company s bond portfolio at October 31, Details of the calculation of this rate are shown below. At February 2009 the rate used was 4.6%. MPI's Bond Portfolio at October 31, 2009 Category Market Duration Yield-tomaturity Yield Adjusted Weight Value ($000) (years) Description Government Bonds 926, % % 3.48% market yield Corporate Bonds 41, % % 4.10% market yield Real Return Bonds 162, % % 3.82% market yield + assumed inflation factor of 2.0% Non-marketable Bonds 431, % % 6.07% amortized yield Floating Rate Note 112, % % 0.53% market yield 1,674, % % 4.00% weighted average 4.11% duration weighted average 4.10% selected discount rate For lines of business that are inflation-indexed (Accident Benefits Weekly Indemnity and Accident Benefits Other Indexed), we assumed an interest rate of 2.1% starting in the year ending February This is based on the Company s assumption that inflation will be 2.0%. Since future claim payments will be inflated by 2.0% and then discounted by 4.1%, this is equivalent to discounting at a rate of 1.041/ = 2.1%. At February 2009 the rate used was 2.6%. 6.3 Carried versus stimated The claim liabilities carried by the Company as of October 31, 2009 do not necessarily match those estimated in this report. We understand that the amounts carried by the Company will be revised so that there will be no material differences as of February 28, Certain fixed income assets are designated as Held to Maturity. The yield on these assets is the weighted average of the amortized yield implicit in the original purchase of each of these assets. 18

25 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 7. Premium Liabilities Premium liabilities are not a specific item in the financial statements. Deferred policy acquisition expenses are limited to a maximum amount based on the claim liabilities expected to occur as the unearned premium matures. 7.1 Unearned Premium MPI provided unearned premiums on direct and net bases that are shown in xhibit 1. The calculation of unearned premium is done pro rata based on the term of the policy. 7.2 Deferred Policy Acquisition xpense The equity in the unearned premium (unearned premium less expected future cash flows), constrains the maximum deferred acquisition expense, and is calculated in xhibit 6. The net unearned premium is adjusted for the expected cost of non-proportional reinsurance during the term of the unearned premium. This reinsurance is purchased annually in January. At October 31 the actual reinsurance unearned premium represents approximately one sixth of the original cost. Thus an additional expected cost of non proportional reinsurance is normally added equal to twice the ceded unearned premium to match the ratio of direct unearned premium to direct written premium. The direct undiscounted loss ratios were based on a review of the latest three insurance years claim ratios adjusted for loss trends, premium changes, catastrophes and seasonality. The net discounted loss ratio was selected after applying discount factors and margins for adverse deviation. All calculations are shown in xhibit 6. Maintenance expenses are estimated at 1/3 of normal operating expenses and are set at 2.77% of net earned premiums after review of the last three years actual operating ratios. Internal loss adjustment expenses are based on the ILA provision calculated in xhibit 5. Since the unearned premium is greater than the expected costs associated with the unearned premium, there is no premium deficiency. Since the calculated maximum net deferred acquisition expense is less than the Company s booked deferred acquisition expense, the booked deferred acquisition expense must be reduced so that it is less than or equal to the calculated maximum. 19

26 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report 8. Comparison to prior year estimates xhibit 3 compares the current undiscounted estimates by line to those established in prior reports. The commentary below excludes the impact of the PIPP enhancements introduced in Comments will be specifically made if the development is more than our standard of materiality of $6.0 million. From February 2009 to October 2009 In total there has been favorable direct development of $74.6 million and favorable net development of $76.6 million. In particular we observed: Direct favorable development of $39.1million for Accident Benefits Weekly Indemnity (net $40.3 million) due to changes in selected factors and development that was more favourable than anticipated. Direct favorable development of $33.1million for Accident Benefits Other (Indexed) (net $34.0 million) due to changes in selected factors and development that was more favorable than anticipated. From February 2008 to February 2009 In total there has been favorable direct development of $135.7 million and favorable net development of $137.6 million. In particular we observed: Direct favorable development of $63.3 million for Accident Benefits Weekly Indemnity (net $64.4 million) due to changes in selected factors and development that was less than anticipated. Direct favorable development of $64.7 million for Accident Benefits Other (Indexed) (net $66.0 million) due to changes in selected factors and development that was less than anticipated. From February 2007 to February 2008 (from the October 2008 report) In total there has been favorable direct development of $61.5 million and favorable net development of $58.3 million. In particular we observed: 20

27 Manitoba Public Insurance Corporation Automobile Insurance Division - Universal Compulsory Automobile Insurance October 2009 Appointed Actuary s Report Direct favorable development of $25.1 million for Accident Benefits Weekly Indemnity (net $23.6 million) due to changes in incurred development factors and development that was less than anticipated. Direct favorable development of $28.3 million (net $26.7 million) for Accident Benefits Other (Indexed) due in part to the reduction in the paid tail factor. From February 2006 to February 2007 (from the October 2007 report) In total there has been favorable direct development of $67.0 million and favorable net development of $69.5 million. In particular we observed: Direct favorable development of $56.5 million for Accident Benefits Weekly Indemnity due in part to a reduction in paid and incurred development factors. On a net basis, the favorable development amounts to $57.8 million. From February 2005 to February 2006 (from the October 2006 report) In total there has been favorable direct development of $59.7 million ($64.3 million favorable for PIPP insurance years and $4.6 million unfavorable for pre PIPP years) and favorable net development of $38.2 million ($42.8 million favorable for PIPP insurance years and $4.6 million unfavorable for pre PIPP years). Specifically we observed: A direct unfavorable development of $10.1 million for Accident Benefits Weekly Indemnity ($5.6 million for PIPP insurance years, $4.4 million for pre-pipp years). On a net basis, the unfavorable development amounts to $23.7 million ($19.3 million for PIPP insurance years and $4.4 million for pre-pipp years). A direct favorable development of $63.7 million (net $55.8 million) for Accident Benefits Other (Indexed) due to case development that was less than anticipated across all insurance years. A favorable development of $1.3 million for Bodily Injury. An unfavorable development of $0.3 million for Property Damage. An unfavorable development of $2.4 million for Collision. A favorable direct development of $3.8 million Comprehensive. A favorable development of $3.7 million for Accident Benefits Other (Non-Indexed). From February 2004 to February 2005 (from the October 2005 report) In total there has been favorable direct development of $23.5 million ($24.1 million favorable for PIPP insurance years and $0.6 million unfavorable for pre PIPP years) and favorable net development of $22.4 million ($23.0 million favorable for PIPP insurance years and $0.6 million unfavorable for pre PIPP years). 21