UNIVERSAL COMPULSORY AUTOMOBILE INSURANCE (BASIC INSURANCE) REVENUE FORECAST

Transcription

1 UNIVERSAL COMPULSORY AUTOMOBILE INSURANCE (BASIC INSURANCE) REVENUE FORECAST DATA BOOK 2011

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3 Table of Contents SECTION 1: MANITOBA ECONOMIC OVERVIEW AND FORECAST MANITOBA S REAL GROSS DOMESTIC PRODUCT (GDP) LABOUR MARKET SITUATION IN MANITOBA INFLATION POPULATION AND ELIGIBLE-TO-DRIVE POPULATION GROWTH IN MANITOBA SUMMARY OF ECONOMIC FORECAST VARIABLES... 4 SECTION 2: MOTOR VEHICLE VOLUME FACTOR OVERALL EARNED VEHICLE UNITS EARNED VEHICLE UNITS BY MAJOR CLASS PROJECTED VEHICLE VOLUME FACTOR... 8 SECTION 3: MOTOR VEHICLE UPGRADE FACTOR OVERVIEW HISTORICAL TREND IN UPGRADE PROJECTED PREMIUM UPGRADE FACTOR SECTION 4: Driver Safety Rating SECTION 5: INVESTMENTS INTRODUCTION INTEREST RATE FORECAST EXPECTED INVESTMENT INCOME BY ASSET CLASS SUMMARY OF FORECASTED RATES SECTION 6: SERVICE FEES AND OTHER REVENUE MOTOR VEHICLE TRANSACTION FEES MOTOR VEHICLE LATE PAYMENT FEES DISHONORED CHEQUE FEES AND DEFAULT FEES ARREARS INTEREST FINANCE PLANS RENTAL REVENUES MISCELLANEOUS NON-POLICY FEES TOTAL BASIC SERVICE FEES AND OTHER REVENUE SECTION 7: FLEETS AUTOPAC FLEET PROGRAM FLEET FORECASTING ASSUMPTIONS SECTION 8: REINSURANCE REINSURANCE CEDED PROGRAM Page i

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5 SECTION 1: FORECAST MANITOBA ECONOMIC OVERVIEW AND 1.1 Manitoba s Real Gross Domestic Product (GDP) Manitoba s real GDP growth for 2010 is expected to be finalized at 2.4%, which was lower than the expected Canadian growth rate of 3.1%. Manitoba underperformed relative to the Canadian average because Manitoba was the only province that did not contract in 2009, when some other provinces experienced sizeable contractions. In 2009, Manitoba s real GDP rate was 0.0% and the Canadian growth rate was minus (-) 2.5%. Last year, the Revenue Forecasting Committee s (RFC) forecast for Manitoba GDP growth was 2.5%, which was 0.1% higher than the expected finalized number. Manitoba s real GDP is expected to grow 2.7% in 2011 and 2.9% in 2012 based on a survey of the private and government economic forecasters, which are summarized in Section Labour Market Situation in Manitoba The unemployment rate in Manitoba increased to 5.3% in 2010, from 5.2% in Since September 2010, Manitoba s unemployment has been the lowest among the provinces. The forecasted unemployment rate for 2011 is 5.0%, again, the lowest among provinces. The forecast for 2012 is 4.9%. Manitoba s average weekly earnings increased 2.0% in 2010, below Canada s increase of 3.6%. Last year s forecast for average wage growth in 2010 was 2.4%, which was 0.4% lower than actual. In 2009, Manitoba s average weekly earnings were up 2.8%, which was above Canada s increase of 1.6%. Manitoba s labour income on a per employee basis had a 1.9% increase in 2010, which was higher than the national average of 1.7%. Last year s forecast for labour Page 1

6 income/employee was 1.8%, which was 0.1% lower than forecasted. The labour income per employee forecasts for 2011 and 2012 are 2.9% and 4.2% respectively. The province s average employment earnings and consumer price inflation affect auto insurance claims costs. Employment wages and earnings are the primary factors considered when determining compensation costs relating to Income Replacement Indemnity (IRI). The province s Industrial Average Wage (IAW) is used for IRI related benefit adjustments, and the 2010 IAW will be published in June Inflation Manitoba s inflation, as measured by the year-over-year change in the Consumer Price Index (CPI), was 0.8% in 2010, and was the lowest among provinces. Last year s forecast for 2010 Manitoba CPI was 1.75% or 0.95% lower than actual. Manitoba s 2010 CPI rate was lower than forecasted because a few CPI sectors either fell slightly or marginally increased. For instance, Manitoba s food costs grew by 0.1% in 2010, which is approximately 17% of the CPI basket. Shelter costs fell 0.2%, which comprises 24% of the index. Household operations increased 0.1%, which is 11% of the CPI for Manitoba, and includes rent, mortgage interest costs, and water and energy. Transportation costs increased 2.9%, partially offsetting the lack of growth in other sectors. Transportation costs make up 21% of the basket. Consumer price inflation is one of the indexing factors used to adjust the Corporation s annual PIPP benefits. It is also an important cost feature in the determination of physical damage claims costs. For PIPP benefits, statutory indexation requires that current benefits must be indexed based on the previous calendar year s CPI. The Manitoba Consumer Price Inflation rate is forecasted at 2.0% for the entire forecast period. Page 2

7 1.4 Population and Eligible-to-Drive Population Growth in Manitoba The province s population grew by 1.3% in 2010, which was the fourth best among provinces. Last year s forecasted Manitoba population estimate was 0.8%, which was 0.5% lower than actual. The main driver for Manitoba s population growth is the Provincial Nominee Program. There was net migration of 10,649 for the year ending October 1, 2010 into the province. This net migration was comprised of 13,157 net international immigration, 2,769 net interprovincial out-migration and a natural increase of 5,578. Manitoba s population is expected to increase by 0.9% and 0.8% in 2011 and 2012 respectively. Manitoba s source population (persons aged 15 or older) grew by 1.4% in 2010, which is a close proxy to the driving-age population (16 and older). This population cohort group grew faster than the total population from 1995 to Global Insight forecasts persons aged 15 or older to grow by 1.1% in 2011, again slightly ahead of Manitoba s overall expected population increase of 0.9%. Page 3

8 1.5 Summary of Economic Forecast Variables Percentage Change in Selected Economic Indicators p 2012 p 2013 p Real GDP p Population Employment Unemployment Rate Average Weekly Wages* Labour Income/Employee Inflation p = projection based on average forecast Sources: Global Insight, "Canadian Provincial Forecast and Analysis", November 30, TD Bank Financial Group, "Provincial Economic Tables", December RBC Royal Bank, "Provincial Outlook", January BMO Financial Group, "Provincial Economic Outlook", February 11, Scotia Bank, "Provincial Trends", November 17, Manitoba's Government, "Manitoba Economic Highlights", February 11, * Manitoba s Average Weekly Wage forecast comes from the Conference Board of Canada, February 19, Page 4

9 SECTION 2: MOTOR VEHICLE VOLUME FACTOR 2.1 Overall Earned Vehicle Units Manitoba s insured motor vehicles, as measured by earned vehicle units, grew 2.43% in 2010/11, following a 2.31% increase in 2009/10. Over the past five years, the number of earned units increased steadily, growing at a rate of 2.0% or higher each year. Basic Earned Units 2001/02 to 2010/11 Insurance Year Earned Units % Change 2001/02 793, % 2002/03 807, % 2003/04 818, % 2004/05 834, % 2005/06 853, % 2006/07 870, % 2007/08 898, % 2008/09 930, % 2009/10 951, % 2010/11 974, % Averages 3-Year 2.76% 5-Year 2.70% 10-Year 2.25% Page 5

10 2.2 Earned Vehicle Units by Major Class The tables below show earned units and earned unit growth rates by major class over the past ten years. Earned Units by Major Class 2001/02 to 2010/11 Ins. Year Private Pass Comm. Public Motor- Cycle Trailer ORV Total 2001/02 620,156 40,815 9,093 7,751 89,914 25, , /03 629,546 41,463 9,305 8,290 92,024 26, , /04 635,698 40,817 9,589 8,718 94,736 28, , /05 644,616 40,515 9,900 8,581 99,293 31, , /06 653,982 39,999 10,152 9, ,514 34, , /07 661,439 39,573 10,355 9, ,470 36, , /08 673,695 39,863 10,925 10, ,608 41, , /09 688,998 40,363 10,889 11, ,505 46, , /10 700,527 40,408 10,558 11, ,190 50, , /11 711,929 40,668 10,307 11, ,679 53, ,707 Earned Unit Annual Growth by Major Class 2001/02 to 2010/11 Ins. Year Private Pass Comm. Public Motor- Cycle Trailer ORV Total 2001/ % 0.36% 3.46% 19.17% 2.49% 13.33% 1.64% 2002/ % 1.59% 2.33% 6.96% 2.35% 5.27% 1.80% 2003/ % -1.56% 3.06% 5.16% 2.95% 7.40% 1.35% 2004/ % -0.74% 3.24% -1.57% 4.81% 9.79% 1.98% 2005/ % -1.27% 2.55% 4.91% 6.26% 9.26% 2.24% 2006/ % -1.06% 2.00% 11.01% 6.59% 6.75% 2.05% 2007/ % 0.73% 5.51% 7.50% 8.13% 12.56% 3.17% 2008/ % 1.25% -0.33% 8.81% 8.14% 12.17% 3.53% 2009/ % 0.11% -3.04% 0.59% 5.08% 7.52% 2.31% 2010/ % 0.65% -2.38% 0.88% 6.14% 6.22% 2.43% Averages 3-Year 1.86% 0.67% -1.92% 3.43% 6.45% 8.64% 2.76% 5-Year 1.71% 0.34% 0.35% 5.76% 6.82% 9.04% 2.70% 10-Year 1.49% 0.01% 1.64% 6.34% 5.29% 9.03% 2.25% Page 6

11 According to the Manitoba Highway Traffic Act (HTA), earned units are classified into HTA (private passenger, commercial, public and motorcycles) and non-hta (trailers and off road vehicles) vehicles. This classification is important for claims forecasting purposes because non-hta units (1) do not have PIPP coverage and (2) they represent less than 1% of overall basic claims costs. Therefore, it is more appropriate to use the HTA-only volume growth when forecasting the growth of overall claims volume. Earned units and annual growth rates for HTA and non-hta vehicles between 2001/02 and 2010/11 are presented in the table below. Over the past ten years, HTA units increased an average of 1.46% annually and non-hta units grew an average of 6.15% annually. HTA and Non-HTA Earned Units and Annual Growth 2001/02 to 2010/11 Year HTA % Change Non-HTA % Change 2001/02 677, % 115, % 2002/03 688, % 118, % 2003/04 694, % 123, % 2004/05 703, % 130, % 2005/06 713, % 140, % 2006/07 721, % 149, % 2007/08 735, % 163, % 2008/09 751, % 178, % 2009/10 763, % 188, % 2010/11 774, % 199, % Averages 3-Year 1.76% 7.02% 5-Year 1.67% 7.38% 10-Year 1.46% 6.15% Page 7

12 2.3 Projected Vehicle Volume Factor HTA units are forecast to grow by 1.50% over the entire forecast period, which is similar to the 10-year average growth rate of 1.46%. Non-HTA units are forecast to grow 6.40% in 2011/12 and 6.20% in 2012/13, which is also reflective of the 10-year average growth rate of 6.15%. The overall unit growth (HTA and non-hta) is forecast to grow 2.50% annually over the projection period (i.e. the combined result of the HTA and non-hta unit projections). The following table presents the projected HTA and non-hta volume factors, with a comparison to last year s forecast. This Year s Forecast Last Year s Forecast Year HTA Non-HTA Total HTA Non-HTA Total 2010/ % (a) 6.16% (a) 2.43% (a) 1.50% 5.29% 2.25% 2010/11 (f) 1.50% 6.40% 2.50% 1.50% 5.18% 2.25% 2011/12 (f) 1.50% 6.20% 2.50% 1.50% 5.08% 2.25% 2012/13 (f) 1.50% 6.00% 2.50% (a): actual; (f): forecast Page 8

13 SECTION 3: MOTOR VEHICLE UPGRADE FACTOR 3.1 Overview The motor vehicle upgrade factor measures the impact of changes in the motor vehicle population on insurance premiums due to changes in the distribution of rate groups (i.e. vehicle replacement), vehicle types or body styles, insurance uses and territories. These four aspects affect premiums as consumers: a) Replace old vehicles with new or newer vehicles, which will increase premiums as new or newer vehicles generally have a higher insurance premium. b) Shift their preferences in vehicle type, body style and make. For example, an increase in 4-door sedans in replacing 2-door coupes would decrease overall premiums as 4-door sedans are normally insured at a lower insurance premium. c) Change their motor vehicle insurance use, such as from all-purpose to pleasure, or vice versa, which would decrease or increase premiums. d) Move to different territories. For example, Manitobans relocating from Territory 2 to Territory 1 would face with an increase in insurance premiums because motor vehicles in Territory 1 have higher insurance premiums. The premium upgrade is estimated using the following three methods: The Rate Model (Traditional) method accounts for changes in vehicle type, insurance use and territory that have occurred in the past two years. It estimates the change in premium by applying the new rate (current year) to the vehicles insured in the past two years. Page 9

14 The Financial Model method determines the change in overall revenue in the past year by comparing average premiums of financial transactions processed in the past year to the previous year. The New Vehicle Sales method estimates the increase in revenue based on various scenarios of future new passenger vehicle and light truck sales. The revenue increase is the result of new vehicles replacing older vehicles. 3.2 Historical Trend in Upgrade The table below summarizes the historical trend in the upgrade factor as determined by the three methods. Ins Year Rate Model (Traditional) Financial Model New Vehicle Sales Model Combining 3 Models (Weight: 60% for Rate Model, 20% for Financial, 20% for New Vehicle Sales) 2001/ % 5.50% 4.46% 5.17% 2002/ % 4.10% 4.61% 4.20% 2003/ % 3.60% 3.66% 3.91% 2004/ % 2.89% 3.08% 3.24% 2005/ % 3.27% 2.98% 3.20% 2006/ % 2.13% 2.88% 2.50% 2007/ % 2.25% 2.78% 2.61% 2008/ % 3.27% 2.57% 2.85% 2009/ % 2.92% 2.13% 2.31% 2010/ % 1.96% 1.91% 1.79% Statistics 3 Year Avg 2.22% 2.72% 2.20% 2.32% 5 Year Avg 2.37% 2.51% 2.45% 2.41% 10-Year Avg 3.20% 3.19% 3.11% 3.18% The upgrade factor has been consistently trending downward from about 5.0% in 2001/02 to less than 2.0% in 2010/11. The main reason for the downward trend in the upgrade factor is the flattening of the rate lines for cars and light trucks. The two tables below show the difference between (i) the overall average rate for cars and Page 10

15 light trucks and (ii) the average rate for new cars and light trucks. Compared to prior years, there is significantly less premium upgrade when customers switch from an average rated vehicle to a new vehicle. Average Rates for Private Passenger Cars Policy Year All Cars New Cars Dollar Difference Percentage Difference 2001/02 $748 $1,171 $ % 2002/03 $787 $1,190 $ % 2003/04 $813 $1,151 $ % 2004/05 $860 $1,168 $ % 2005/06 $899 $1,191 $ % 2006/07 $924 $1,214 $ % 2007/08 $934 $1,207 $ % 2008/09 $959 $1,215 $ % 2009/10 $980 $1,220 $ % 2010/11 $995 $1,216 $ % Average Rates for Private Passenger Light Trucks Policy Year All Light Trucks New Light Trucks Dollar Difference Percentage Difference 2001/02 $559 $1,155 $ % 2002/03 $590 $1,169 $ % 2003/04 $628 $1,164 $ % 2004/05 $685 $1,191 $ % 2005/06 $713 $1,219 $ % 2006/07 $745 $1,273 $ % 2007/08 $769 $1,274 $ % 2008/09 $805 $1,289 $ % 2009/10 $828 $1,267 $ % 2010/11 $846 $1,227 $ % Passenger vehicle rate groups are assigned based on the information provided by the Insurance Bureau of Canada s CLEAR rating system. The Corporation then uses these rate groups, combined with actual historical loss experience at each rate group, to calculate the rate line. The rate line is simply the relative loss costs between each rate group. The relativities for low rate groups have been increasing over the past ten years, while the relativities for high rate groups have been decreasing. Page 11

16 A major component (over 30%) of passenger vehicle loss costs are from PIPP benefits. These costs have been shown to be flat (i.e. the same) regardless of rate group. The higher the proportion of PIPP costs in the rate, the flatter the rate line and the lower the upgrade factor. Given that the Corporation is proposing an approximately 20% decline in projected PIPP costs in this Application (see the Claims Forecasting Book, TI.17), it is expected that rate line will be steeper in 2012 and after. The change in the PIPP forecast is expected to stop or reverse the downward trend in the upgrade factor starting in Note: The downward trend in the upgrade factor has not been significantly influenced by new vehicle sales. Manitoba new vehicle sales have remained relatively stable over the past ten years with a high of 47,797 in 2002/03 and a low of 42,835 in 2008/09. The 2010/11 new vehicle sales of 44,025 were approximately equal to the 10 year average of 44, Projected Premium Upgrade Factor The premium upgrade factor is projected at 2.25% throughout the forecast period. The forecasted upgrade is 0.25% lower than last year s upgrade assumption for the following reasons: The three year average upgrade is 2.22% and has been trending downwards. The significant change in the PIPP forecast is expected to stop or reverse the downward trend in upgrade beginning in The table below summarizes the upgrade forecast. Year Projected Annual Vehicle Premium Upgrade Factor This Year s Forecast Last Year s Forecast 2010/ % (a) 2.50% (f) 2011/ % 2.50% 2012/ % 2.50% 2013/ % 2.50% (a) = actual; (f) = forecast Page 12

17 SECTION 4: Driver Safety Rating Effective March 1, 2010, Manitoba Public Insurance implemented the new Driver Safety Rating (DSR) program to replace the previous bonus/malus program. DSR combines the previously separate Basic Driver s Licence Charge, Additional Demerit Point Surcharge, Accident Surcharge and Vehicle Premium Discount systems into one safety rating scale. Therefore, the DSR program will have an impact on both driver premiums and vehicle premiums. The material presented in this section is similar with that shown in the 2011 Rate Application. Some figures have been updated to reflect new information that became available over the past year (e.g PUB Order, actual 2010 earned driver units, revised volume and upgrade assumptions). The Corporation is not proposing any changes to the DSR scale with the exception of the phased in demerit point additional premiums as shown in Appendix A, Exhibit 1. Step 1: Forecast the distribution of earned drivers by DSR level The 2010/11 distribution of earned driver units comes directly from the Enterprise Data Warehouse. To predict driver movement in 2011/12 and thereafter, the Corporation used the actual DSR renewal notice data from January to March of The renewal notices show the actual movement of drivers from their 2010/11 initial DSR level to their new 2011/12 DSR level. It was assumed that the movement pattern in the first three months of 2011/12 would remain consistent throughout the year. The number of driver counts at each DSR level was then multiplied by the expected earned units per driver at each DSR level. The table below shows that actual earned units per driver declines as DSR level declines. Page 13

18 DSR Level Actual Average Earned Driver Units per Driver Fitted Earned Units per Driver DSR Level Actual Average Earned Driver Units per Driver Fitted Earned Unit by Driver N/A N/A N/A N/A The forecasted earned driver unit distribution by DSR level is shown in Appendix A, Exhibit 1. Page 14

19 Infraction Assumptions The infraction assumptions used in the model are shown in the table below: Minor Convictions Major Convictions At-Fault Collisions Fiscal Year Count Freq Count Freq Count Freq 2005/06 54, % 4, % 50, % 2006/07 62, % 5, % 55, % 2007/08 62, % 5, % 56, % 2008/09 61, % 4, % 57, % 2009/10 83, % 5, % 55, % 2010/11 77, % 5, % 58, % 5 Yr Average 69, % 5, % 56, % 3 Yr Average 74, % 5, % 57, % 2011/12 78, % 5, % 58, % 2012/13 79, % 5, % 59, % 2013/14 81, % 5, % 60, % 2014/15 82, % 5, % 61, % 2015/16 83, % 5, % 63, % Adjusted At-Fault Claim Frequency for Transition to DSR Under the old Driver Merit/Demerit system, accident surcharges were assessed on drivers based on their at-fault accident experience in the 12 months prior to the renewal of their driver s license. A driver s renewal notice would be mailed out 45 days prior to the renewal date, reflecting the known at-fault accident information at the time of mailing. When the driver came in to renew their licence they would then be re-rated for any additional at-fault accidents that were reported between the mailing date of the renewal notice and their actual renewal date. Under DSR, renewal notices are mailed 60 days prior to a driver s renewal date. However, at-fault accidents that occur between the mailing date of the renewal notice and the actual renewal date are not used to re-rate the customers DSR level. Rather, the at-fault accidents are assessed on the following year s renewal. Page 15

20 As a result of the above transition, there were approximately 9,500 at-fault accidents between the mailing date of the renewal notice and the actual renewal date that, under the old system, would have been re-rated at the time of renewal. However, these additional at-fault accidents will now be included as movement on the DSR scale. The net impact is a reduction in accident surcharges under the last year of the old driver system and an increase in movement under the second year of DSR. The table below shows the impact of the transition. Accident Surcharge Revenue Accident Surcharges Insurance Year ($000) 2008/09 $13, /10 $14, /11 $8,814* 2011/12 (forecast) $0 * Accident surcharges were lower because of 9,500 at-fault collisions no longer being assessed in the rating period. DSR At-Fault Claim Frequency At-Fault Collisions Original Forecast At-Fault Collisions Adjusted Forecast Fiscal Year Count Freq Count Freq 2009/10 55, % 55, % 2010/11 58, % 48, % 2011/12 58, % 68, % 2012/13 59, % 59, % 2013/14 60, % 60, % 2014/15 61, % 61, % 2015/16 63, % 63, % * The at-fault collision forecast for DSR was revised to reflect the impact of the new assessment period used under DSR. Step 2: Forecast the DSR driver premiums The proposed DSR driver premium table is shown in Appendix A, Exhibit 1. The 2011/12 rates have been approved by the Public Utilities Board, the 2012/13 rates Page 16

21 are being applied for in this application and all rates thereafter are anticipated applied for rate changes. Step 3: Forecast the earned driver units Although only a portion of 2010/11 earned driver units have been earned under the new DSR system, the Corporation s Enterprise Data Warehouse has been calculating estimated earned driver units for the past five years. In 2010/11 there were 772,922 earned driver units. Driver units are forecasted to increase by the three year average driver unit growth rate of 1.67% per year over the forecast period. Fiscal Year Driver Units Annual Change 2005/06 725, % 2006/07 728, % 2007/08 735, % 2008/09 748, % 2009/10 760, % 2010/11 772, % 5 Yr Average 749, % 3 Yr Average 760, % 2011/12 785, % 2012/13 798, % 2013/14 812, % 2014/15 825, % 2015/16 839, % Step 4: Create the DSR Driver Premium Forecast The DSR driver premium forecast is calculated using the average total driver premium multiplied by the earned driver units in each year (see Appendix A, Exhibit 1). The table below shows the DSR driver premium forecast (excluding accident surcharges from 2010/11) compared to last year s forecast. The 2010/11 actual of $20,982,000 was only $139,000 (or 0.6%) higher than forecast. The differences Page 17

22 between this year and last year s forecast reflect the impact of the additional driver movement expected in 2011/12 (see Adjusted At-Fault Claim Frequency for Transition to DSR in Step 1) along with very minor changes in assumptions based on the 2010/11 actual DSR results. Driver Premiums (excl. Accident Surcharges) 2010/ / / / / /16 This Year s Forecast $20,982 $24,161 $30,062 $37,808 $42,056 $45,806 Last Year s Forecast $20,843 $24,042 $29,807 $37,262 $40,958 $43,774 Difference $139 $119 $254 $546 $1,098 $2,032 Step 5: Forecast the earned units for merit eligible vehicles The earned units for merit eligible vehicles were approximated by using the combined earned unit count for Major Classes 1 and 4 (passenger vehicles and motorcycles). The actual 2010/11 earned units for these vehicle groups was 723,789. In 2011/12 and thereafter the merit eligible vehicle units are forecasted to increase at the HTA unit growth rate. Step 6: Forecast the vehicle premium discounts at each DSR level The Corporation is not proposing any changes to vehicle premium discounts in this application. The vehicle premium discounts by DSR level are shown in Appendix A, Exhibit 1. Step 7: Forecast the number of merit eligible vehicles per driver by DSR level The table below shows the assumptions for the number of merit eligible vehicles per driver in 2011/12 and after. The Corporation recognizes that the increased vehicle premium discounts for drivers with 10 to 15 merits in 2011/12 (e.g. 26% to 33% Page 18

23 vehicle discounts) may change how some customers insure their vehicles in the future. As of the time of writing, the Corporation has one month of data on the actual vehicles per driver (March 2011), which is shown in the table below. The Corporation will be monitoring these results monthly to ensure that actual customer behaviour does not change materially from forecast (e.g. if there are more vehicles insured at DSR +15 than forecasted). Selected ME Vehicles per Earned Driver Observed Merit Eligible Vehicles per Driver in March 2011 DSR Level Demerits Total The complete forecast for merit eligible vehicles per driver is shown in Appendix A, Exhibit 1. The figures are adjusted proportionally in each year so the number of earned vehicle units matches the forecast. Step 8: Forecast the average merit eligible vehicle rate before the impact of DSR From TI.2 of the 2011 Rate Application, the weighted average rate between private passenger vehicles and motorcycles (i.e. the assumed merit eligible vehicle population) was: [($989 x 735,000) + ($1,091 x 12,700)] / (735, ,700) = $991 Page 19

24 This figure was assumed to be the average merit eligible vehicle rate in 2011/12. Thereafter, the average merit eligible vehicle rate (before the impact of DSR and rate changes) is expected to grow by the forecasted combined passenger vehicle and motorcycle upgrade factor of 3.44% per year (note: this upgrade factor is higher than the overall upgrade forecast because merit eligible vehicles have a higher upgrade factor than the overall average for all vehicles, trailers and off-road vehicles). Step 9: Calculate the expected impact of DSR on vehicle premiums The forecasted merit eligible vehicle premiums under DSR are calculated by multiplying together the number of earned drivers, the number of vehicles per driver and the average vehicle premium at each DSR level. The table below shows the expected merit eligible vehicle premium based on the DSR forecast compared to the expected merit eligible vehicle premium that would be expected based on using only upgrade and volume growth. The difference between these two forecasts is DSR drift or the change in the average premium as a result of movement on the DSR scale. Merit Eligible Vehicle Premiums ($000) 2011/ / / / /16 Merit Eligible Vehicle Premium with DSR $728,697 $764,813 $801,855 $840,697 $879,218 Merit Eligible Vehicle Premium without DSR $728,039 $764,384 $802,544 $842,608 $884,672 Difference (DSR Drift) $658 $428 -$689 -$1,911 -$5,454 % Difference (% DSR Drift) 0.09% 0.06% -0.09% -0.23% -0.62% DSR drift is expected to have a very minor impact over the next four years. The drift increases significantly in 2015/16 as the large group of drivers that were placed at DSR 10 in 2010/11 reach the DSR 15 level and have their discount increase from 30% to 33%. Page 20

25 SECTION 5: INVESTMENTS 5.1 Introduction For fiscal 2010/11, the budget for Corporate investment income was $96.5 million. Actual investment income was $100.7 million, which was $4.3 million higher than budgeted. Total fiscal year investment income was up slightly from the previous fiscal year by $4.5 million. During 2010/11, the S&P/TSX Total Return Index returned 24.8% while the Corporation s Canadian large cap equity portfolio returned 26.4%. For U.S. equities, the benchmark in U.S. dollars returned 24.1%, and the Corporation s U.S. equity portfolio, in U.S. dollars, returned 20.3%. The DEX Universe total return bond index returned 4.4% during the fiscal year and the Corporation s marketable bond portfolio returned 5.1%. Of the total investment income for 2010/11, $70.3 million was received from the fixed income portfolio, mainly due to interest on bonds, interest on short-term investments and gains from the sale of bonds. The Canadian equity, U.S. equity and private equity portfolios produced $26.2 million in income during the 2010/11 fiscal year. Real estate income was $4.2 million. As an insurance company Manitoba Public Insurance holds a conservative portfolio. The asset allocation on a market value basis at the end of February 2011 consisted of 71.5% (78.0% as of February 2010) fixed income, 16.5% (14.3%) Canadian equity, 5.4% (3.3%) U.S. equity, 2.0% (3.4%) cash and money market instruments, 4.2% (0.7%) real estate and 0.3% (0.4%) private equity. 5.2 Interest Rate Forecast There are several key rates that are used by the Corporation s Budgeting and Planning Department to help estimate future investment income for Canadian cash holdings, Canadian fixed income, and Canadian and U.S. equities. The rates used over the five year forecast period are the forecasted yield on the 91 day Government Page 21

26 of Canada treasury bill and the forecasted yield on the Government of Canada 10 year bond and U.S. Treasury 10 year note. The following tables show the estimates of the economics departments of several major Canadian banks and Global Insight. Whenever possible, the Bloomberg median economic survey is shown for comparison purposes only. The date of publication and type of forecast by forecasting firm is shown in the table below. Forecasting Firm Date of Publication Type of Forecast BMO NB March 11, 2011 Average Period CIBC February 28, 2011 End of Period RBC Economics March 2011 Forecast End of Period Scotia Economics March 3, 2011 End of Period TD Bank February 15, 2011 End of Period Global Insight March 2011 Forecast Average Period Page 22

27 Interest Rate Forecasts for Government of Canada 10 Year Bonds Calendar Year/ Quarter Scotia CIBC RBC TD BMO NB Global Avg. Median BLMBRG 11:1 3.20% 3.29% 3.25% 3.50% 3.32% 3.64% 3.37% 3.31% 3.40% 11:2 3.25% 3.65% 3.30% 3.75% 3.28% 3.73% 3.49% 3.48% 3.55% 11:3 3.40% 3.55% 3.40% 4.00% 3.44% 3.76% 3.59% 3.50% 3.63% 11:4 3.50% 3.50% 3.80% 4.10% 3.67% 3.80% 3.73% 3.74% 3.85% 12:1 3.70% 3.60% 3.95% 4.20% 3.84% 3.84% 3.85% 3.84% 3.95% 12:2 3.75% 3.85% 4.05% 4.35% 3.98% 3.90% 3.98% 3.94% 4.09% 12:3 3.90% 3.95% 4.15% 4.40% 4.12% 4.06% 4.10% 4.09% 12:4 4.10% 4.00% 4.15% 4.40% 4.25% 4.42% 4.22% 4.20% Interest Rate Forecasts for Canadian Treasury Bills Calendar Year/ Quarter Scotia CIBC RBC TD BMO NB Global Average Median 11:1 1.05% 0.96% 1.10% 1.00% 0.95% 0.99% 1.01% 0.99% 11:2 1.10% 1.20% 1.35% 1.05% 0.98% 1.04% 1.12% 1.08% 11:3 1.30% 1.65% 2.00% 1.50% 1.33% 1.26% 1.51% 1.42% 11:4 1.70% 1.90% 2.05% 2.00% 1.83% 1.77% 1.87% 1.87% 12:1 2.20% 1.85% 2.55% 2.25% 2.33% 2.26% 2.24% 2.25% 12:2 2.30% 1.85% 3.05% 2.50% 2.75% 2.76% 2.54% 2.63% 12:3 2.30% 1.85% 3.50% 2.80% 3.08% 3.00% 2.75% 2.90% 12:4 2.30% 1.90% 3.60% 3.05% 3.50% 3.25% 2.93% 3.15% Interest Rate Forecasts for U.S. 10 Year Bonds Calendar Year/ Quarter Scotia CIBC RBC TD BMO NB Global Average Median BLMBRG 11:1 3.35% 3.42% 3.45% 3.60% 3.46% 3.49% 3.46% 3.46% 3.51% 11:2 3.40% 3.65% 3.50% 3.75% 3.40% 3.58% 3.55% 3.54% 3.60% 11:3 3.65% 3.55% 3.60% 3.90% 3.60% 3.61% 3.65% 3.60% 3.75% 11:4 3.75% 3.35% 4.00% 3.95% 3.90% 3.65% 3.77% 3.83% 3.90% 12:1 4.00% 3.50% 4.15% 4.05% 4.13% 3.69% 3.92% 4.03% 4.10% 12:2 4.10% 3.80% 4.25% 4.10% 4.33% 3.75% 4.05% 4.10% 4.23% 12:3 4.30% 3.85% 4.45% 4.20% 4.53% 3.91% 4.21% 4.25% 12:4 4.65% 3.95% 4.50% 4.20% 4.73% 4.27% 4.38% 4.39% Page 23

28 The Corporation selected the median interest rates shown in the above tables for calendar years 2011 and The median rate is a neutral rate, as half the forecasts are above and half are below this number. Also, use of the median gives all forecasts equal credence and does not favour any one forecaster. For forecasts beyond the end of 2012, the long-term Global Insight interest rates were used. Based on this analysis, the following table shows the selected interest rates for the 2011/12 to 2015/16 Corporate fiscal years. Selected Interest Rate for Insurance Years 2011/12 to 2015/16 Fiscal Year/ Quarter CDN 91-Day T- Bill Rate GOC 10-year Bond Rate US 10-Year Treasury Rate 2011/12:1 0.99% 3.31% 3.46% 2011/12:2 1.08% 3.48% 3.54% 2011/12:3 1.42% 3.50% 3.60% 2011/12:4 1.87% 3.74% 3.83% 2012/13:1 2.25% 3.84% 4.03% 2012/13:2 2.63% 3.94% 4.10% 2012/13:3 2.90% 4.09% 4.25% 2012/13:4 3.15% 4.20% 4.39% 2013/14:1 3.50% 4.77% 4.62% 2013/14:2 3.75% 4.85% 4.70% 2013/14:3 4.00% 4.85% 4.70% 2013/14:4 4.25% 4.85% 4.70% 2014/15:1 4.50% 4.86% 4.71% 2014/15:2 4.50% 4.87% 4.72% 2014/15:3 4.75% 4.89% 4.74% 2014/15:4 4.75% 5.12% 4.97% 2015/16:1 4.75% 5.61% 5.46% 2015/16:2 4.75% 5.82% 5.67% 2015/16:3 4.75% 5.82% 5.67% 2015/16:4 4.75% 5.82% 5.67% Page 24

29 5.3 Expected Investment Income by Asset Class Fixed Income To estimate the investment income for the fixed income portfolio, the forecasted rates for the Canadian 10 year bond are used for the Corporation s marketable nominal bonds, and the forecasted interest rates on the 91 day Canadian treasury bill are used for the Corporation s cash holdings. The yield on Manitoba issued municipal, school division and health facility (MUSH) bond holdings have a higher yield than the Government of Canada 10 year bond. Therefore, a spread is added to the Government of Canada 10 year bond to adjust for the higher expected yield on new MUSH purchases. The Corporation s Investment Department analyzes, on an annual basis, the historical spread in yields between issued MUSH bonds and the historical Government of Canada 10 year bonds. For last fiscal year s interest rate forecast, the historical spread was 1.42%. This year s historical spread was 1.46%. For budgeting purposes, a spread of 1.46% will be added to the Canada 10 year bond in order to budget for the yield on new purchases of MUSH bonds Public Equities The methodology for calculating the income on equities is the same as last year s forecast, which is the average 5 year forecasted long-term interest rate forecast for each equity region plus an equity risk premium of 1.5%. The three equity regions forecasted are for Canadian, U.S. and EAFE (Europe, Australasia and Far East) equities. The Corporation s existing methodology for forecasting equity returns is already consistent with PUB Order 145/10 which stated, MPI consider the use of 5 year averaging, to reduce the annual rate and net income risks that come with increased volatility within the investment market. The average 5 year forecast for Canadian 10 year bonds and U.S. 10 year bonds was 4.6%. Global Insight s 5 year average forecasted interest rate for EAFE was 4.0%, which was based on the weighted five year interest rate forecast for the European Union (75% weight) and Japan (25%) Page 25

30 With an assumed 1.5% equity risk premium, the expected return for the entire five year forecast for Canadian, U.S. and EAFE equity is 6.1%, 6.1% and 5.5% respectively. The table below provides the annual expected equity return for each equity asset class to be used for the entire 5 year forecast. Fiscal Year Canadian Equities US Equities EAFE Equities 2011/12 to 2014/15 6.1% 6.1% 5.5% Alternative Asset Classes There are three alternative asset classes in the Corporation s portfolio: real estate, infrastructure and private equity. The proxies used are included in the table below. Asset Class Proxy Real Estate Manitoba Public Insurance s Forecast of Canadian CPI +4% Infrastructure Manitoba Public Insurance s Forecast of Canadian CPI +5% Private Equity n/a Canadian CPI is forecasted to be 2% over the entire five year forecast. The investment income rate forecast for the alternative asset class is summarized in the table below. Fiscal Year Real Estate Infrastructure Private Equity 2011/12 to 2015/ n/a Page 26

31 5.4 Summary of Forecasted Rates The table below provides the rates required to calculate the expected investment income by asset class for each fiscal quarter for the entire five year forecast. Fiscal Year/ Quarter CDN Cash Canadian Fixed Income MUSH CDN Equity U.S. Equity EAFE Equity Real Estate Infrastructure 2011/12:1 0.99% 3.31% 4.77% 6.10% 6.10% 5.50% 6.00% 7.00% 2011/12:2 1.08% 3.48% 4.94% 6.10% 6.10% 5.50% 6.00% 7.00% 2011/12:3 1.42% 3.50% 4.96% 6.10% 6.10% 5.50% 6.00% 7.00% 2011/12:4 1.87% 3.74% 5.20% 6.10% 6.10% 5.50% 6.00% 7.00% 2012/13:1 2.25% 3.84% 5.30% 6.10% 6.10% 5.50% 6.00% 7.00% 2012/13:2 2.63% 3.94% 5.40% 6.10% 6.10% 5.50% 6.00% 7.00% 2012/13:3 2.90% 4.09% 5.55% 6.10% 6.10% 5.50% 6.00% 7.00% 2012/13:4 3.15% 4.20% 5.66% 6.10% 6.10% 5.50% 6.00% 7.00% 2013/14:1 3.50% 4.77% 6.23% 6.10% 6.10% 5.50% 6.00% 7.00% 2013/14:2 3.75% 4.85% 6.31% 6.10% 6.10% 5.50% 6.00% 7.00% 2013/14:3 4.00% 4.85% 6.31% 6.10% 6.10% 5.50% 6.00% 7.00% 2013/14:4 4.25% 4.85% 6.31% 6.10% 6.10% 5.50% 6.00% 7.00% 2014/15:1 4.50% 4.86% 6.32% 6.10% 6.10% 5.50% 6.00% 7.00% 2014/15:2 4.50% 4.87% 6.33% 6.10% 6.10% 5.50% 6.00% 7.00% 2014/15:3 4.75% 4.89% 6.35% 6.10% 6.10% 5.50% 6.00% 7.00% 2014/15:4 4.75% 5.12% 6.58% 6.10% 6.10% 5.50% 6.00% 7.00% 2015/16:1 4.75% 5.61% 7.07% 6.10% 6.10% 5.50% 6.00% 7.00% 2015/16:2 4.75% 5.82% 7.28% 6.10% 6.10% 5.50% 6.00% 7.00% 2015/16:3 4.75% 5.82% 7.28% 6.10% 6.10% 5.50% 6.00% 7.00% 2015/16:4 4.75% 5.82% 7.28% 6.10% 6.10% 5.50% 6.00% 7.00% Page 27

32 SECTION 6: SERVICE FEES AND OTHER REVENUE 6.1 Motor Vehicle Transaction Fees Motor vehicle transaction fees range from $9 to $15, with no fee increases expected over the forecasting period. Ownership document fees and short term policy fees account for over 75% of total transaction fees. Total transaction fees are forecasted at $5.3 million in 2011/12, a 3.0% increase over the previous year. In 2012/13 and after, transaction fees are forecasted to increase by an average of 3.1% per year. Motor Vehicle Transaction Fee Forecast ($000) Insurance Year 2010/ / / /14 Total Motor Vehicle Transaction Fees $5,107 $5,261 $5,392 $5,588 % Change 3.02% 2.49% 3.64% 6.2 Motor Vehicle Late Payment Fees Motor vehicle late payment fees remain unchanged at $20. Based on the historical trend, late fees are expected to decline by approximately 4.2% per year over the next two years. Motor Vehicle Late Payment Fee Forecast ($000) Insurance Year 2010/ / / /14 Late Payment Fees $878 $842 $805 $800 % Change -4.10% -4.39% -0.62% Page 28

33 6.3 Dishonoured Cheque Fees and Default Fees Dishonoured Cheque Fees and Default Fees - for returned quarterly time payments and preauthorized monthly time payments - remain unchanged at $20. As the number of pre-authorized payments increase, the volume of dishonoured cheques is expected to decline and the number of pre-authorized default fees is expected to rise. Overall, dishonoured cheque and default fees are expected to increase by approximately 2.3% per year over the next two years. Dishonoured Cheque Fee and Default Fee Forecast ($000) Insurance Year 2010/ / / /14 Dishonoured Cheque Fees $27 $24 $22 $21 Pre-Authorized Default Fees $462 $476 $489 $504 Dishonoured Cheque fee - broker ($8) ($8) ($8) ($8) Total $481 $492 $503 $517 % Change 2.29% 2.24% 2.78% 6.4 Arrears Interest Accounts Receivable payment arrears are calculated based on an interest rate of 1.5% per month. Arrears interest is forecasted at $56,000 in 2011/12 and increasing by approximately $1,500 per year thereafter. Arrears Interest Forecast ($000) Insurance Year 2010/ / / /14 Arrears Interest ($71) $56 $57 $59 % Change % 1.79% 3.51% Note: Arrears interest was negative in 2010/11 as a result of the Honda and Acura immobilizer rebate cheques. Page 29

34 6.5 Finance Plans Quarterly and monthly time payment financing plans offered by the Corporation include a $4 administration fee and interest charges based on the prime rate plus 2%. Customers selecting the monthly payment plan can select pre-authorized payments through their financial institution or through their credit card. The assumptions used to calculate finance administration fees, financing interest and credit card merchant fees for the forecasting period are shown in the table below: Finance Plans - Assumptions Insurance Year 2010/ / / /14 % Taking Quarterly Time Payments 11.50% 11.50% 11.50% 11.50% % Taking Monthly Time Payments 29.30% 29.30% 29.30% 29.30% % of TX Annual Payments 59.20% 59.20% 59.20% 59.20% Basic HTA Volume Increase (Decrease) 1.50% 1.50% 1.50% Basic Non-HTA Volume Increase (Decrease) 6.40% 6.20% 6.00% Basic Upgrade/drift Factor Increase (Decrease) 2.25% 2.25% 2.25% Basic Rate Increase (Decrease) -4.00% -6.80% 0.00% Credit Card Merchant Fee - Visa 1.71% 1.71% 1.71% 1.71% Credit Card Merchant Fee - Mastercard 1.76% 1.76% 1.76% 1.76% Quarterly/Monthly Time Payment Fee $4 $4 $4 $4 Distribution of Cash -Cash/Debit 64.60% 63.60% 62.60% 61.60% -Visa 20.52% 21.02% 21.52% 22.02% -Mastercard 14.88% 15.38% 15.88% 16.38% Average Financing Interest Rate (Prime+2%) 4.69% 5.34% 6.63% 7.88% Financing interest for quarterly and monthly payments are expected to increase by 11.3% (or to $9.6 million) as a result of the forecasted increase in the average financing rate (shown in the table above). By 2013/14, financing interest increases substantially to $14.0 million as the forecasted prime rate continues to increase. Financing administration fees are expected to increase by an average of 3.8% over the next three years. The growth rate is larger than general volume growth because of the forecasted increase in the percentage of customers using financing plans. Page 30

35 As a result of the adoption of IFRS, Credit Card Merchant fees, which were formally included in this section as a revenue offset (decrease), are now included as part of operating expenses. As a result of the above assumptions, total revenues from financing plans are forecasted at $11.8 million in 2011/12, an increase of 9.8%. For 2012/13 and 2013/14, revenues increase substantially as the prime rate is forecasted to increase by over 300 basis points over the forecast period. In 2013/14 total revenues from financing plans are forecasted at $16.3 million. Finance Plans Forecast including Driver Licence Financing ($000) Insurance Year 2010/ / / /14 Quarterly Financing Interest $1,976 $2,201 $2,620 $3,195 Monthly Financing Interest $6,662 $7,417 $8,830 $10,769 Financing Admin Fees $2,117 $2,196 $2,271 $2,371 Total $10,755 $11,814 $13,721 $16,335 % Change 9.85% 16.14% 19.05% 6.6 Rental Revenues On May 1, 2009, the Corporation took possession of the Cityplace building and surrounding parking lots. The projected rental revenues are shown in the table below. Rental revenues are forecast at $2.1 in 2011/12 and are expected to increase at an average of 1.75% per year over the forecast period. Rental Revenues Forecast ($000) Insurance Year 2010/ / / /14 Rent Revenues $2,047 $2,080 $2,107 $2,156 % Change 1.61% 1.30% 2.33% Page 31

36 6.7 Miscellaneous Miscellaneous fees include items such as miscellaneous salvage sales, unclaimed cheque revenues, etc. These fees are expected to remain constant at about $400,000 in 2011/12 and 2012/13. In 2013/14, the fees increase to $3.6 million from expected unclaimed cheque revenue from the $320 million rebate issued in May Miscellaneous Fees Forecast ($000) Insurance Year 2010/ / / /14 Miscellaneous Fees $1,209 $407 $404 $3,555 % Change % -0.82% % 6.8 Non-Policy Fees Service fees and interest are derived from several areas that are not directly related to policy writing, although the nature of the revenues is similar. Non-policy financing plans generate financing interest at prime plus 2% and time payment administration fees of $4 per agreement. Financing plans are available for terms of one to five years for such items as claims buybacks, immobilizer purchases and arrears. Customers may also finance their drivers licence premiums, including demerit premiums and accident surcharges. Other non-policy fees include late payment fees and payment default fees. Nonpolicy fees are forecasted at approximately $390,000 in 2011/12, increasing to $439,000 by 2013/14. Non-Policy Fees and Interest($000) Insurance Year 2010/ / / /14 Non-Policy Fees $367 $390 $413 $439 % Change 6.27% 5.90% 6.30% Page 32

37 6.9 Total Basic Service Fees and Other Revenue The table below contains the total forecasted services fees and other revenues from Sections 6.1 to 6.8. Basic service fees and other revenue are expected to increase by 2.15% to $21.3 million in 2011/12. In 2012/13 and 2013/14, total revenues are expected to increase by an average of 17.5% per year to $29.4 million in 2013/14. Total Service Fees and Other Revenue Forecast($000) Insurance Year 2010/ / / / MV Transaction Fees $5,107 $5,261 $5,392 $5, MV Late Payment Fees $878 $842 $805 $ MV Cheque/Default Fees $481 $492 $503 $ Arrears Interest ($71) $56 $57 $ Finance Plans 6.6 Rent Revenues 6.7 Miscellaneous Fees 6.8 Non-Policy Fees Other Adjustments Total % Change $10,755 $11,814 $13,721 $16,335 $2,047 $2,080 $2,107 $2,156 $1,209 $407 $404 $3,555 $367 $390 $413 $439 $120 $0 $0 $0 $20,893 $21,342 $23,402 $29, % 9.65% 25.84% Page 33

38 SECTION 7: FLEETS 7.1 Autopac Fleet Program Autopac Fleet Program The Autopac Fleet Program upholds the Corporation s commitment to a rating structure that rewards safe driving and vehicle maintenance. By encouraging fleet owners to share our interest in safety, they will see the results of their safety records reflected in a sliding scale of rebates and surcharges. Fleet Owner Customers are deemed to be a fleet owner when they have ten or more vehicles registered on the first day of any customer month. The number of vehicles was set at ten because this is the average number of vehicles that a typical company would have registered. Rebates and Surcharges Rebates and surcharges are determined by the loss experience of the fleet. The loss experience is the ratio between all losses paid by the Corporation and fleet premiums. Claims are included according to the degree of responsibility with the exception of comprehensive claims, which are fully included in the loss ratio calculation. The current maximum amount used for any individual loss is $25,000. Rebates and surcharges will vary, depending on the loss ratio. For the 2011 policy year, the maximum rebate is 25% of fleet premiums and the maximum surcharge is 50% of fleet premiums. These percentages were initially chosen to reflect a fleet program break-even loss ratio of 80% to 85%. Proposed Changes to the Fleet Scale For 2012/13, the Government is expanding the fleet rebate scale from the current 45% or lower loss ratio to 37% or lower loss ratios. The Corporation is proposing expanding the fleet rebate discounts to align with the new scale. Under the proposal, fleets will be eligible for rebates up to 33 percent. The maximum fleet rebate would then match the Page 34

39 maximum rebate received by individual customers on the Driver Safety Rating scale. The proposed new levels on the fleet rebate scale are shown below. No changes are proposed to the surcharge scale. Loss Ratio Rebate/ Surcharge New 37% -33% New 38% -32% New 39% -31% New 40% -30% New 41% -29% New 42% -28% New 43% -27% New 44% -26% Current Max Rebate 45% -25% As stated in the previous section, the existing fleet scale was chosen to reflect a loss ratio in the 80% to 85% range. To test the reasonableness of the proposed fleet scale, the historical fleet premiums were restated to reflect the amounts that would have been received using the proposed scale. The results are shown below ($000): Policy Year Net Premiums Reported Losses Ultimate Losses Claims Expenses Net Loss Ratio 2006/07 $33,464 $20,010 $20,335 $3, % 2007/08 $37,020 $25,482 $26,014 $4, % 2008/09 $41,949 $23,766 $25,151 $4, % 2009/10 $40,528 $22,963 $24,889 $4, % 2010/11 $40,443 $22,425 $25,182 $4, % Average: 74.2% Based on the above, the proposed fleet scale would have resulted in a net (i.e. after rebates and surcharges) loss ratio of 74% over the past five years. If this loss ratio is adjusted for the approved 2011 non-dsr rate decrease (-0.4%) and the proposed 2012 overall rate decrease (-6.8%), then the expected loss ratio is approximately 80.0%. This loss ratio was deemed to be reasonably close to the loss ratio target for Basic products. Page 35

40 7.2 Fleet Forecasting Assumptions General The following general assumptions apply to fleets: General economic conditions will not have an impact on fleet vehicle usage. Fleet revenue forecasts are based on the proposed rebate/surcharge scale. Changes to that scale will impact forecasts Fleet Counts Total fleet counts have increased by an average of 2.83% per year over the last five years although the average number of vehicles per fleet has decreased by 0.9% over the same time period. For the forecast period, fleet counts are expected to increase at the same rate as HTA units (see section 2, volume factor). Rebates, surcharges and nil counts are forecasted using the five year average percentage of total fleet counts. Fleet Counts Financial Reporting Period Rebates Surcharge Nil Total Average Vehicles per Fleet 2004/05 1, , /06 1, , /07 1, , /08 1, , /09 1, , /10 1, , Average Percentage Increases 3 year 4.17% -4.89% -5.61% 2.44% -1.65% 5 year 3.48% -0.17% -0.53% 2.83% -0.90% Forecast 2010/11 1, , /12 1, , /13 1, , Page 36

41 Percentage of Total Fleet Counts Financial Reporting Period Rebates Surcharge Nil Total 2004/ % 16.20% 2.61% % 2005/ % 17.28% 3.14% % 2006/ % 17.46% 2.82% % 2007/ % 17.07% 2.30% % 2008/ % 15.81% 3.17% % 2009/ % 13.97% 2.21% % Averages 3 year 81.82% 15.62% 2.56% % 5 year 80.95% 16.32% 2.73% % Forecast 2010/ % 16.29% 2.71% % 2011/ % 16.34% 2.72% % 2012/ % 16.32% 2.74% % Average Fleet Premiums Average total fleet premiums have increased by an average of 4.43% per year in the last five years. Before applying rate changes, the average total premiums are expected to grow by the Basic upgrade factor for the entire forecast period. The table below shows the historical and projected fleet premiums under the current fleet scale and the proposed fleet scale. Note: The average fleet premiums under the proposed fleet scale have been restated to reflect the premiums that would have been collected if the proposed scale was in place. The average rebate per fleet customer is approximately $2,500 higher under the proposed scale. Rebate and surcharge average premiums are based on the allocation of total premium to each component, as shown in the next section. Page 37

42 Average Fleet Premiums Financial Reporting Period Rebates Current Fleet Scale Surcharge Total Premiums Rebates Proposed Fleet Scale Surcharge Total Premiums 2004/05 $6,438 $5,097 $25,981 $8,369 $5,097 $25, /06 $7,531 $4,822 $29,284 $9,791 $4,822 $29, /07 $7,750 $5,875 $30,767 $10,075 $5,875 $30, /08 $8,918 $6,342 $34,304 $11,593 $6,342 $34, /09 $8,411 $6,077 $32,639 $10,934 $6,077 $32, /10 $8,237 $6,056 $32,275 $10,709 $6,056 $32,275 Average Percentage Increases 3 year 2.05% 1.02% 1.61% 2.06% 1.02% 1.61% 5 year 5.05% 3.51% 4.43% 5.05% 3.51% 4.43% Forecast 2010/11 $8,417 $6,003 $32,824 $10,942 $6,003 $32, /12 $8,572 $6,097 $33,428 $11,144 $6,097 $33, /13 $8,169 $5,815 $31,856 $10,620 $5,815 $31, Total Fleet Premiums The total fleet premiums are based on the forecasted fleet counts and the forecasted average premiums from the previous sections. Total fleet premiums are forecasted to grow by the product of (1 + HTA volume growth), (1 + upgrade) and (1 + approved or proposed rate changes). In financial reporting period 2010/11, total fleet premiums are forecasted to increase by 3.21% (volume = 1.51%, upgrade = 1.70%) to $55.8 million. In 2011/12, the growth rate is 3.40% (volume = 1.50%, upgrade = 2.25%, non- DSR rate change = -0.40%). In 2012/13, the growth rate is -2.02% (volume = 1.50%, upgrade = 2.25%, rate change = -6.80%). Rebate and surcharge premiums were assumed to remain at a constant percentage of total premiums over the forecast period. For financial reporting period 2010/11 and 2011/12, the forecast is made using the current (existing) fleet scale. In 2012/13 and after, the forecast is made using the proposed fleet scale. In the table below, the bold figures represent the applicable forecast. These assumptions result in forecasted net rebates of $9,919 million in 2010/11 and $10,256 in 2011/12. In 2012/13, net rebates Page 38

43 increase by $3.1 million to $13,396 after the proposed fleet scale is implemented. Fleet Premiums ($000) Financial Reporting Period Rebates Current Fleet Scale Surcharge Net Rebates Rebates Proposed Fleet Scale Surcharge Net Rebates Total Premiums 2004/05 $7,616 $1,203 $6,413 $9,901 $1,203 $8,698 $37, /06 $8,985 $1,249 $7,736 $11,681 $1,249 $10,432 $43, /07 $9,625 $1,598 $8,027 $12,513 $1,598 $10,915 $47, /08 $11,584 $1,744 $9,840 $15,059 $1,744 $13,315 $55, /09 $11,161 $1,574 $9,587 $14,509 $1,574 $12,935 $53, /10 $11,565 $1,417 $10,148 $15,035 $1,417 $13,618 $54,061 Average Percentage Increases 3 year 6.31% -3.93% 8.13% 6.31% -3.93% 7.65% 4.09% 5 year 8.71% 3.33% 9.61% 8.71% 3.33% 9.38% 7.39% Forecast 2010/11 $11,582 $1,663 $9,919 $15,057 $1,663 $13,394 $55, /12 $11,975 $1,719 $10,256 $15,568 $1,719 $13,849 $57, /13 $11,584 $1,663 $9,912 $15,060 $1,663 $13,396 $55,812 Percentage of Total Fleet Premium Financial Reporting Period Rebates Current Fleet Scale Surcharge Net Rebates Rebates Proposed Fleet Scale Surcharge Net Rebates Total Premiums 2004/ % 3.18% 16.94% 26.16% 3.18% 22.98% % 2005/ % 2.85% 17.62% 26.61% 2.85% 23.77% % 2006/ % 3.33% 16.75% 26.10% 3.33% 22.77% % 2007/ % 3.16% 17.81% 27.25% 3.16% 24.09% % 2008/ % 2.94% 17.93% 27.14% 2.94% 24.19% % 2009/ % 2.62% 18.77% 27.81% 2.62% 25.19% % Average Percentage Increases 3 year 21.08% 2.91% 18.17% 27.40% 2.91% 24.49% % 5 year 20.76% 2.98% 17.78% 26.98% 2.98% 24.00% % Forecast 2010/ % 2.98% 17.78% 26.98% 2.98% 24.00% % 2011/ % 2.98% 17.78% 26.98% 2.98% 24.00% % 2012/ % 2.98% 17.78% 26.98% 2.98% 24.00% % Page 39

44 SECTION 8: REINSURANCE 8.1 Reinsurance Ceded Program The Corporation s Basic reinsurance program consists of two main components: The Catastrophe program protects the Corporation against major weather related physical damage events such as hail and flood. The Casualty Excess of Loss program protects the Corporation against the cost of serious bodily injury claims under PIPP and third party liability legal actions in jurisdictions outside Manitoba. Despite a difficult market, the Corporation was able to fully place all layers with the exception of the first layer which is 82.83% placed. Page 40

45 8.1.1 Catastrophe Program The 2011 Catastrophe program has largely retained the unique threeyear feature as in The overall program was placed as follows (note: M stands for millions ): The Corporation continues to self-insure up to $15 million. The layers to $200M continue to be placed on a three year basis in This portion of the program has been placed on a flat fee basis which reduces the Corporation s costs in the second and third years. Page 41

46 An additional layer to $300M was purchased beginning in /3 rds of the $100M xs $200M layer will be covered commencing in March The Corporation will self insure the remaining 1/3 rd, consistent with The Corporation placed the 2011 Catastrophe treaty commencing March 2011 (historically placed in January of each year) in order to align reinsurance treaties with the Corporate year-end, and in so doing, chose to be 1/3 rd bare on all layers for January and February 2011 (correctly anticipating no catastrophic losses during that time frame). The estimated premiums for the 2011/12 Basic Catastrophe program are $6.6 million. This reflects a price increase of 10% on the first two operating layers and a 3.5% (inflation and HTA unit growth) increase on all layers (excluding premium adjustments and reinstatements). The Corporation s decision to selfinsure an additional 1/3 rd on all layers for January and February until 2013/14 (as described above) is reflected in reduced written premiums in each of the fiscal years preceding 2013/14. Premiums are expected to increase by approximately 3.5% per year in 2012/13 and thereafter. Forecasted Basic Reinsurance Premiums ($000) Catastrophe Program Insurance Year 2010/ / / /14 10M xs 15M $731 $723 $781 $1,211 25M xs 25M $1,638 $2,007 $2,146 $3,329 50M xs 50M $1,472 $1,505 $1,532 $2,338 50M xs 100M $817 $817 $831 $1,269 50M xs 150M $603 $602 $613 $ M xs. 200M $503 $1,003 $502 $1,039 Other* $0 $0 $0 $0 Total $5,764 $6,657 $6,404 $10,121 * Premium Adjustments or Reinstatements Page 42

47 8.1.2 Casualty Program The Casualty program is placed on a calendar year basis. For 2011, the Corporation faced minor premium changes on most layers compared to In 2011, the Corporation placed coverage for a 14-month term in order to align reinsurance treaties with the Corporate year-end. The overall program was placed as follows: Protection for losses up to $50 million was purchased in 2011, consistent with Due to the placement of the 2011 casualty program for a 14-month period commencing Jan 1, 2011 (2010/11), there are no written premiums for the Basic Casualty program in the 2011/12 fiscal year. In 2012/13, casualty premiums are expected to be $2.7 million; an increase of 4% compared to 2010/11 (excluding premium adjustments and reinstatements). Premiums are expected to increase by CPI of 2% in 2013/14 and thereafter. Page 43