Good morning, my name is David Simpson, and I am the President and CEO of Facility Association. We appreciate the opportunity to be here this morning.

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1 NOTES FOR NOVA SCOTIA INSURANCE REVIEW BOARD HEARING November 9 & 10, Introductions Good morning, my name is David Simpson, and I am the President and CEO of Facility Association. We appreciate the opportunity to be here this morning. With me this morning on behalf of Facility Association are: Jill Hepburn, Vice President of Underwriting and Claims for Facility Association. Rick Hill, Personal Lines Supervisor with Aviva Canada Inc. Mr. Hill is the volunteer Chair of the Facility Association Nova Scotia Operating Committee. Mr. Hill has been a member of our Operating Committee for fifteen years and Chair for ten years. Brian Pelly, Partner with Eckler Partners Ltd., Facility Association s consulting actuaries. Mr. Pelly is a Fellow of the Canadian Institute of Actuaries and a Fellow of the Casualty Actuarial Society, and has been affiliated with Facility Association for over 20 years. Eckler Partners Ltd. does property and casualty actuarial work for public and private sector clients across Canada. 2. Preamble We very much appreciate the opportunity to offer brief opening comments this morning and we will keep them as brief as possible to maximize the time available for your questions regarding our filing. Notes for NSIRB Hearing, Nov. 9 & 10,

2 Following my remarks, Ms. Hepburn will give brief overview of the approach we have taken to the risk classification system to comply with the elimination of age and marital status in our rates, Mr. Hill will give a brief overview of market conditions in the province, and Mr. Pelly will present the actuarial case for our rate applications. 3. Facility Association Background Facility Association itself is not an insurer, but rather an association of all automobile insurers in the province. It was formed by the insurance industry to guarantee that car insurance would always be available to those required by law to have it. Under the law, we are required to make sure insurance coverage is provided to eligible owners and drivers, so we have no authority or ability to decline insurance. Because of unique role in the marketplace, we are known as the residual market or market of last resort. We serve six provinces and three territories in Canada with an administrative staff of 14 people and the support of over 80 volunteers from the auto insurance industry throughout the country. Insurance companies are required to be members of Facility Association as a condition of being licensed to sell auto insurance in Nova Scotia, and to share in our financial results according to their market share. I would like to emphasize that the liability of our members for Facility Association losses is unlimited. To give you an idea of what that can amount to for a company operating Canada-wide, our loss for fiscal year totalled over $491 million. Our member companies, therefore, have a keen interest in our financial results. Because they do share in those results Notes for NSIRB Hearing, Nov. 9 & 10,

3 on the basis of market share, if they believe that Facility Association s rates are inadequate, they presumably will be less enthusiastic about competing for the automobile insurance business of consumers. Since we are not an insurance company, the actual insurance is provided by four of our member companies in the province which we identify as Servicing Carriers. They issue and administer policies, collect premiums, and settle claims. Insurance may be purchased through Facility Association from any broker or agent in the province. All brokers and agents use the same manual of rules and rates, so, from a consumer perspective, it does not make a difference from which intermediary a Facility Association policy is purchased. Compensation for our Servicing Carriers and agents and brokers are specified in our Plan of Operation which may be found on our recently re-designed website, Recent news reports have made note of our market share in Nova Scotia of approximately 8% of private passenger vehicles, leading people to naturally question why that is. I want to emphasize that we always want our market share to be as small as possible. In the past three years, we have shipped over 350,000 consumer brochures throughout Atlantic Canada encouraging consumers to shop elsewhere for insurance and giving them information as to how they can improve their eligibility for the voluntary market. Similar information is on our website. Our market share is historically volatile. Slide One shows our private passenger market share for New Brunswick and Nova Scotia since This information is taken directly from our website. The underlying data comes from the automobile insurance statistical plan administered by the Insurance Bureau of Canada in its capacity as the statistical agent for the province. Notes for NSIRB Hearing, Nov. 9 & 10,

4 Slide 1 FACILITY ASSOCIATION Private Passenger Market Share Nova Scotia and New Brunswick 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Sept 2004 NS 3.2% 3.8% 4.3% 5.2% 5.7% 4.9% 4.1% 3.2% 1.3% 0.8% 1.1% 1.9% 4.9% 7.1% 8.1% NB 4.5% 5.1% 5.9% 5.8% 5.1% 4.6% 3.8% 2.6% 1.2% 0.8% 0.9% 1.5% 4.9% 4.5% 1.3% One of the key pieces of information all of us, as consumers, respond to is price information. And as long as our prices our below those of our member companies (assuming companies have confidence in their rates), our market share will be larger than it needs to be. We have seen that time and again in the jurisdictions we serve in Canada. Slide two shows the relationship between our average private passenger premiums and those of the entire industry and our market share for Nova Scotia and New Brunswick. As our prices get closer to those of the industry generally, our market share grows. As I ve said, we see this in all places at all times. Notes for NSIRB Hearing, Nov. 9 & 10,

5 Slide 2 FACILITY ASSOCIATION Comparison of FA Written Premiums to Industry vs FA Vehicle Market Share ( Private Passenger Only) 9% 8% 7% FA Market Share 6% 5% 4% 3% 2% 1% 0% 100% 150% 200% 250% 300% 350% Average FA premium / Average Industry premium NB NS Slide three shows the same data for the six Canadian provinces we serve. Slide 3 FACILITY ASSOCIATION Comparison of FA Written Premiums to Industry vs FA Vehicle Market Share ( Private Passenger Only) 9% 8% 7% 6% FA Market Share 5% 4% 3% 2% 1% 0% 100% 150% 200% 250% 300% 350% Average FA premium / Average Industry premium NL AB NB NS PEI ON Notes for NSIRB Hearing, Nov. 9 & 10,

6 This phenomenon is not unique to Canada. One of the foremost insurance academics in North America, Professor David Cummins of the Wharton School at the University of Pennsylvania has written If the residual market begins to grow after adoption of residual market rates in a competitively rated state, it is strong evidence that residual market prices have been set too low. Information included with our filing shows that for both standard and non-standard risk profiles, our rates are below those of our member companies for many types of risks. As such, for some consumers, we have become a market of convenience, not one of last resort. In short, our prices are inconsistent with our market role. In his final report on auto insurance in Nova Scotia, Consumer Advocate George Jordan included an appendix entitled Understanding Facility Association and I d like to quote briefly from it because he summed up the impact of our rates relative to our member companies, and consumers generally, very well. He wrote: When Facility Association has a loss, everyone who buys auto insurance ends up subsidizing it. Accordingly, it is in the general public interest to ensure that FA rates recover its costs. Facility Association's percentage of the overall market is as cyclical as the rest of the insurance industry. Facility Association s target is not to be in competition with the general market, and even to put itself out of business. Obviously, it ought not to be in competition with its Notes for NSIRB Hearing, Nov. 9 & 10,

7 members, who are subsidizing its costs, but apparently to some extent it is. Occasionally it will have rates lower than those of some companies specializing in higher risks, driving them out of the market with the result that many drivers who could have had other coverage end up in Facility Association to their chagrin, if not to their cost. Rate regulators in Prince Edward Island and Ontario have stated publicly that our rates should be at the top of the market. Where our rates are at the top of the market, affordability and availability of auto insurance improves. In Prince Edward Island, we have seen our market share go from a peak of 8.6% in March of this year to 7.6% in September. In Ontario, we have seen our market share go from a peak of 3.8% in March to 2.4% in September, and numbers continue to decline in both places. In New Brunswick, the story is even more dramatic, where we went from 4.3% in February of this year to approximately 2.5% in May. Given that our market share is strongly correlated with our price levels relative to price levels in the voluntary market, we can be confident that our volumes will go down if our rates are set appropriately at the top of the market. The question then becomes, how fast can that happen? I am pleased to confirm that the Facility Association Board of Directors has authorized a depopulation effort following the final decision on our current rate application. Because we cannot decline coverage, depopulating Facility Association requires coordination and cooperation among Facility Association, member companies and brokers and agents in the province. Realistically, it s the brokers and agents who do the heavy lifting in this type of initiative. Our initial efforts will begin with brokers and agents receiving clean driver listings supported by communications to companies and brokers and agents encouraging Notes for NSIRB Hearing, Nov. 9 & 10,

8 them to remove eligible risks from Facility Association as soon as possible. Because there is no short rate cancellation surcharge for Facility Association policies being replaced in the voluntary market, there is no incentive for the client or the intermediary to wait until renewal to cancel the Facility Association policy. This depopulation plan parallels our successful effort in New Brunswick of earlier this year, and the one we have recently embarked upon in Prince Edward Island. We have directed our Servicing Carriers to produce the clean driver listings and will release them to brokers and agents as soon as we have received a final decision on our rate application. The only reason for this is so that agents and brokers can assist in their clients in making the appropriate decision given individual circumstances. At this point, I would like to emphasize that we are very appreciative of receiving our interim rate order effective Nov. 1 st, as we believe that had we not received such an order, there is the very real risk we would have become the market of choice for certain classes of risks. That said, with the appropriate rate level, and the hard work and cooperation of all stakeholders, I am confident that a successful depopulation effort can take place relatively rapidly. Our current filings contain one significant change in philosophy relative to our previous filings in Nova Scotia (other than those associated with the changes to our risk classification system) and that is the inclusion of a provision for the cost of capital in our rates. Previously, the position not to include a provision for the cost of capital in Facility Association s rates was taken voluntarily by Facility Association at the direction of our Board of Directors. In, the Board of Directors passed a motion that the cost of capital to member companies should be addressed in Facility Association s rates. This change in approach is based on the philosophy that higher-risk drivers should face the same cost elements in their rates as drivers in the voluntary market. It is also based on the notion that since Facility Association premiums must be supported by the capital of member companies just as voluntary market premiums must be, and that since rates are to Notes for NSIRB Hearing, Nov. 9 & 10,

9 be developed to cover expected costs, Facility Association s rates need to include provision for the cost of capital to avoid being subsidized, with the resultant adverse market impacts described by the consumer advocate in his report. Facility Association included a provision for the cost of capital in its rate filing for Prince Edward Island for all classes of vehicles to take effect during Following an investigation, the Island Regulatory and Appeals Commission approved the rates as filed. A provision for the cost of capital will be included in future rate filings in other jurisdictions as well. I expect much of this Hearing will be devoted to a discussion of actuarial matters. We would respectfully request that the Board consider the unique nature, role and impact of the residual market on the insurance marketplace generally in making its final decision. I d now like to turn things over to Jill Hepburn, our Vice President of Underwriting and Claims. Notes for NSIRB Hearing, Nov. 9 & 10,

FACILITY ASSOCIATION NOVA SCOTIA RISK SHARING POOL

Financial Statements of FACILITY ASSOCIATION ACTUARY S REPORT To the Members of Facility Association Nova Scotia Risk Sharing Pool I have valued the policy liabilities of Facility Association Nova Scotia