DECISION 2018 NSUARB 16 M08394 NOVA SCOTIA UTILITY AND REVIEW BOARD IN THE MATTER OF THE INSURANCE ACT

Transcription

1 DECISION 2018 NSUARB 16 M08394 NOVA SCOTIA UTILITY AND REVIEW BOARD IN THE MATTER OF THE INSURANCE ACT IN THE MATTER OF AN APPLICATION by ECONOMICAL MUTUAL INSURANCE COMPANY for approval to modify its rates and risk-classification system for private passenger vehicles BEFORE: Roberta J. Clarke, Q.C., Member APPLICANT: ECONOMICAL MUTUAL INSURANCE COMPANY FINAL SUBMISSIONS: January 31,2018 DECISION DATE: February 1, 2018 DECISION: Application is approved.

2 -2- I INTRODUCTION [1] Economical Mutual Insurance Company (Economical or Company) filed supporting documents and materials (Application) with the Nova Scotia Utility and Review Board (Board) for approval to modify its rates and risk-classification system for private passenger vehicles (PPV). The Application, dated November 20, 2017, was filed electronically on that date, and the original documents were received on November 27, [2] Information Requests (IRs) were sent to the Company on December 18, 2017, and responses were received on January 9, Additional IRs were issued on January 9, 2018, to which the Company responded on January 10, A final IR was issued to the Company on January 12, The Company responded on January 16, [3] As a result of a review by Board staff, a staff report dated January 19, 2018 (Staff Report) was prepared. The Staff Report was provided to the Company for review on January 19, The Company responded on January 20, 2018, indicating that it had reviewed the Staff Report, changed an effective date, and corrected a typographical error in the Staff Report. On January 31, 2018, Economical advised the Board of some minor corrections to the Application, as well as a proposal to modify the premium structure for one of its endorsement bundles. [4] The Board did not deem it necessary to hold an oral hearing on the Application.

3 -3- II ISSUE [5] The issue in this Application is whether the proposed rates and changes to the risk-classification system are just and reasonable and in compliance with the Insurance Act (Act) and its Regulations. III ANALYSIS [6] The Company sought approval to change its rates and its risk-classification system for PPV. It proposed to create a common rating structure for itself and its sister Companies, Waterloo Insurance Company (Waterloo) and Perth Insurance Company (Perth). Waterloo and Perth will no longer underwrite automobile policies in Nova Scotia, and all their business here will be rolled into Economical. The Application was made in accordance with the Board s Rate Filing Requirements for Automobile Insurance - Section 155G Prior Approval (Rate Filing Requirements). Economical, Waterloo and Perth each had a mandatory filing date of September 1,2017, which the Board extended, ultimately to December 1,2017. [7] The proposed revised effective dates are July 4, 2018, for new business and August 1,2018, for renewal business. Rate Level Changes [8] The Company proposed to change base rates and differentials, as well as the risk-classification system. The proposed changes represent an overall rate level increase of 15.9%, before capping, which is the same increase as its indications.

4 -4- [9] In addition, the Company proposed: A change to its fixed expense structure; Changes to several differentials; Introduction of a number of new rating variables; Introduction of a number of new endorsements and changes to existing endorsements; Removal of the Driving Record Protector as an optional endorsement in favor of automatically offering it for eligible risks; Changes to the rating algorithm; Changes to the rating rules; and, Introduction of a premium capping/cupping program to address dislocation from the proposed changes. [10] In considering the Company s Application, Board staff reviewed all aspects of the ratemaking procedure, including the following: Loss trends and the effects of reform; Loss development; Expense provisions, including unallocated loss adjustment expenses; Credibility standards and procedure; Premium (rate group drift) trends; Experience period and weights; Premium to surplus leverage ratio; and, Target and proposed return on equity (ROE). [11] Board staff advise that three issues arose as a result of its review of the Application: the profit provision, specifically the target ROE; loss trends; and, expenses. Board staff advise that the Board might wish to consider alternatives in determining whether the proposed rates are just and reasonable. All other issues identified during the review by Board staff were resolved through the IR process. Return on Equity [12] Economical used a 12% target ROE, and a 2:1 premium to surplus ratio in developing its indications. The ROE of 12% is at the upper end of the range which the Board has indicated in various decisions to be reasonable. Using Economical s

5 -5- assumptions for investment return, the target ROE produces a profit provision as a percentage of premium that is also at the top of the range which the Board has considered reasonable. [13] As the Board has expressed concern about the level of ROE and profit observed in the industry generally, in a number of decisions it has required companies to use a 10% ROE in developing its indications. It has also asked individual companies why they should not be required to use a 10% ROE. The same question was posed to Economical. [14] The consolidated financial information for Economical, Waterloo and Perth provided by the Company in its Application revealed that it has not been successful over the last several years in achieving its corporate target ROE, and has only achieved a result within what the Board considers a reasonable range in two of the last five years. The Company s experience in the Nova Scotia market suggests it has been worse than its overall Canadian experience and, therefore, different from the industry. [15] The Company provided indications using a 10% ROE; however, Board staff recommend, based on the apparent difference from industry overall, that the Board allow the use of a 12% target ROE in assessing whether the proposed changes will result in just and reasonable rates. A similar approach was used by the Board in its recent decision on Economical s commercial vehicle (CV) application [2018 NSUARB 7]. [16] The Board accepts the recommendation.

6 -6- Loss Trends [17] Both Economical and the Board s consulting actuaries, Oliver Wyman (OW), based their selected loss trends primarily on a review of the industry experience in Nova Scotia to the end of December, This did not result in identical loss trends because of the time periods selected, and the exercise of actuarial judgment. Additionally, while Economical analysed frequency, severity and loss cost trends separately, OW, while also examining frequency and severity, made its selections based directly on loss costs. For future trends, OW s selections matched its past trends, except for Property Damage, Direct Compensation Property Damage, and Collision coverages while for Economical, most future trends differed from its past trends. [18] The loss trends selected by the Company were relatively close to those selected by OW. The Company provided indications using the OW loss trend selections. The results for loss trends which were not as close to those of OW showed that the OW selections would result in higher indications than the Economical indications. [19] Given the relative closeness of the selections, Board staff recommended the Board use the Economical assumptions for loss trends to determine the appropriate target against which it should assess the reasonableness of the proposed rates. Expenses [20] The expense provision used by Economical was just under 37%, which appears greater than that used by other companies. The Company said that this provision included its Unallocated Loss Adjustment Expenses (ULAE), and, in response to IR-1, Q.4, identified the portion of the provision which composed the ULAE.

7 -7- [21] The Company further explained that the increase in the expense provision resulted mainly from a decrease in premiums, but also from increased investment in information technology and infrastructure to improve customer service. [22] The Company also proposed to recover some of its fixed expenses by a flat charge assigned to its clients of $50 per vehicle, added to the premium for Bodily Injury coverage, except where vehicles carry Comprehensive coverage only, where it will be added to the premium for that coverage. The charge will not be shown separately but will appear as part of the premium. Economical then reduced the fixed expenses used in the indications. According to the Company, the total expense provision and profit remain the same as if the full fixed expenses were used in the indications and there were no fixed expense charges. [23] In response to IR-1, Q.6, the Company said the flat charge is intended to help...reduce the cross-subsidization of fixed expense between high-premium drivers and low-premium drivers. [24] The Board notes that Economical proposed a similar charge, but in a lower amount, in its recent CV application, which the Board approved. The Company said that average premiums and expenses for PPV are higher than those for CV and, therefore, a higher charge was needed. [25] Board staff have recommended that the Board accept the expense provision and the use of the fixed expense charge to enable the Company to recover some costs on a direct per exposure basis. The Board accepts this recommendation. Document;

8 -8- Staff Indications [26] Board staff recommended indications against which the Board should assess whether the changes proposed by Economical will result in just and reasonable rates. Those indications use the target ROE, loss trends and expenses discussed above. Proposed Rate Changes [27] Board staff compared the proposed changes with and without the proposed fixed expense charge, and concluded that the changes would produce the same result, i.e., a 15.9% increase. [28] The proposed rates match the Board staff indications and, therefore, result in a target ROE of 12%. As discussed earlier in this Decision, the Board approved this ROE, which is at the highest percentage of the range the Board considers reasonable, in the circumstances of this Application. [29] As a result, the Board finds that the proposed changes will result in just and reasonable rates, and approves them. Territorial Changes and Territorial Differentials [30] The Company proposed to make no changes to its seven territories in the Application. [31] Economical undertook a Generalized Linear Model (GLM) analysis of its territorial indications for each coverage, except Specified Perils and Uninsured Automobile, which produced indicated differentials. Based on this analysis, it proposed changes to differentials after weighing the indications and current differentials, and then

9 -9- revising them, taking into account dislocation, rate adequacy and its competitive market position. [32] The Company off-balanced the impact of these changes. [33] The Board accepts the recommendation of Board staff and approves the proposed territorial differentials. Differential Changes [34] After undertaking a GLM analysis of several differentials, Economical proposed changes to differentials used in the following rating variables: Annual Distance; Driver Years Licensed; Deductible; Driving Record; Gender; Operator Type; Type of Use; Vehicle Age; and, CLEAR Rate Groups. [35] Board staff obtained clarification on some of the selections for the variables from the Company and recommend approval of the revised differentials. The Board accepts this recommendation. Other Changes New Rating Variables [36] Economical proposed to introduce eight new rating variables, together with a tier factor by which it would distinguish the non-standard or substandard business that

10 -10- Perth has typically underwritten. The new variables were based on the results of the GLM analysis undertaken by the Company. Airbag [37] According to Economical, its GLM analysis indicated this as a significant variable for Bodily Injury and Property Damage-Tort coverages. The Company said that drivers who purchase vehicles equipped with additional airbags are likely to be more cautious. These airbags provide greater protection and would reduce the likelihood of a claim. The Company proposed categories for the variable, and depending on the number and location of the airbags, the differential may be reduced. Vehicle Drive Train [38] Economical said that there is a difference in collision experience between two-wheel drive and four-wheel drive vehicles, based on its GLM analysis. It proposed a higher differential, or premium, for Collision coverage for four-wheel drive vehicles as the Company said they have higher replacement costs. Vehicle Fuel Type [39] Economical said that its GLM analysis showed that the type of fuel (Gas, Electric, or Diesel) is a significant variable for Comprehensive coverage, although not for Collision or Direct Compensation Property Damage coverages. It proposed to treat gasand electric-fueled vehicles the same, but would use a higher differential, and thus a higher premium, for diesel-fueled vehicles. The reasons given for this were that they are

11 -11 - generally heavier and larger and, therefore, more expensive to repair, and replacement parts would be heavier, and more expensive, including shipping costs. Leased Indicator [40] Economical considered that an owner of a vehicle will take better care of it than a lessee and, therefore, Comprehensive coverage claims would be less frequent. It claimed support for this from its GLM analysis, and proposed a lower premium for owned vehicles. Vehicle Make Region [41] This variable relates not to the place of manufacture of the vehicle, but to the location of the head office of the manufacturer. It matches the manufacturer to one of three regions: Asia, America, or Europe. The Company said that the GLM analysis suggests that the region represents a significant variable for Direct Compensation Property Damage and Comprehensive coverages. [42] Economical said that European vehicles are more expensive to purchase, and more expensive to repair and, therefore, should attract a higher premium. The differentials for each of the coverages are slightly different but, in both cases, result in higher premiums than American manufactured vehicles. For Comprehensive coverage, Economical said that both Asian and European vehicles pose greater theft risks and, therefore, they have a common higher differential.

12 -12- Vehicle Price [43] Economical said that the higher the Manufacturer s Suggested Retail Price of a vehicle, the higher the cost of repair. It said the GLM analysis showed this to be a significant variable for Comprehensive coverage. The Company proposed different levels of differential than indicated for vehicles priced at less or more than $65,000, and adjusted the differentials further for vehicles priced at more than $85,000. Vehicle Size [44] The GLM analysis undertaken by Economical suggested that vehicle size, as measured by the wheelbase, is a significant variable for Bodily Injury and Property Damage-Tort coverages combined. The Company said that larger vehicles may have the potential for higher damages under these coverages because they may weigh more, and may cause greater damage both to persons and/or property, in a collision. [45] The Company proposed to use two categories for each of small, medium and large vehicles. The small vehicles and the first of the medium vehicle categories would have a slightly reduced premium. Vehicle Years Owned [46] Economical said that in addition to ownership compared to leasing, the length of time an insured has owned a vehicle is a significant variable for Comprehensive coverage. It said that the longer it is owned, the likelihood of small claims under this coverage decreases. Therefore, it concluded that the Comprehensive premium should reduce the longer the vehicle is owned. The Company proposed to use 12 categories of

13 - 13- years owned: 0-9, 10 or more, and unknown. The differentials will decrease each year from Tier Factor [47] Perth currently underwrites substandard or non-standard risks. As the policies will all now be underwritten by Economical, the Company proposed to introduce a 10% tier factor to apply to risks it considers substandard, resulting in a higher premium than a standard risk. [48] The Company proposed to off-balance the impacts of the introductions of the rating variables as well as the changes to the existing differentials and endorsements, so that all the changes would be revenue-neutral in combination. [49] Board staff advised that the Company has supported the proposed new variables and the changes to existing differentials, and recommended approval of them. The Board accepts that recommendation and approves them. Group Discount Program [50] Waterloo has offered a group discount program in all Canadian provinces. Economical reviewed the program, and through GLM analysis identified the following rating variables as significantly predictive of loss experience: Percentage of Professional Degrees; Percentage of Pink Collar-Non-Unionized; Percentage of Government Employees, Professionals; Percentage of Health Care Professionals; Percentage of Manufacturing; Percentage of Administrative and Support; and, Percentage of Retirees.

14 -14- [51] The GLM analysis relied heavily on data from Ontario, where Waterloo underwrote more group policies. [52] To establish the differentials, the Company blended current and indicated differentials, giving greater weight to the indications, as it considered its current discount program to be unprofitable. The Company further considered a base discount to address the differences between group business and standard business loss costs, as well as an additional discount for groups where expenses are lower due to lower administration or acquisition costs. [53] The Company also wanted to ensure that where the same group operates in more than one province, the same discount would apply, so it used a weighted average of the provincial discounts. The final group discount will be rounded to the nearest 5% and is capped at 25%. [54] Board staff concluded the proposed changes are supported and recommended the approval of the revised Group Discount Program. The Board agrees and accepts the recommendation. Discount Changes [55] The Company proposed several changes to its Discounts, based on its GLM analysis: Increase of its Conviction Free discount. The current discount of 15% on all coverages, excluding endorsements, when all drivers insured under the policy have no convictions would increase to 25% for Bodily Injury and Property Damage-Tort coverages and 22% for Collision coverage; Modification of the Multi-Vehicle Discount to vary with the number of vehicles insured, rather than the years licensed of the operator, and to offer it only for

15 -15- Bodily Injury and Property Damage-Tort, Direct Compensation Property Damage, and Collision coverages; Renaming the Farmer Discount as the Farmer s Automobile Discount and reducing it from 25% to 5%. It applies where the principal operator resides and works on the farm and it is the sole source of income for the insured; Renaming the Personal Insurance Account Discount as the Multi-Policy Discount of 5% which applies, when the principal operator has an Economical or Waterloo homeowners or condominium policy, to all coverages excluding endorsements. The discount will be increased to 10% for Collision and Comprehensive coverages; and, Removal of its Driver Training Discount to harmonize with offerings in other provinces. The discount was 10% when the rated operator was licensed for less than three years, had completed an eligible driver training course, and all operators were conviction-free for three years, and accident-free for six years. [56] Board staff recommend approval of these discount changes, and the Board accepts the recommendation. Surcharge Changes [57] Economical proposed some changes to its surcharges, based on its GLM analysis: Renaming the At-Fault Accident Surcharges as Chargeable Accidents and proposing a new differential for Direct Compensation Property Damage coverage, increasing the levels of the differentials where there are two or more such accidents; Renaming the Cancellation for Non-Payment Surcharge as Cancellations for Non-Payment and increasing the current surcharge from 25% to 100% for all coverages. Perth had been applying a 10% surcharge, and it had applied to most of its policies. It applies where the insured has had a contract of automobile insurance cancelled for non-payment of premium within the 36 preceding months; Renaming the Multiple Operator Surcharge as the Driver Count (per policy). It currently is a 10% surcharge and applies to all coverages where there are three or more drivers assigned to a single vehicle. Economical proposed to remove it for all coverages except Direct Compensation Property Damage and Collision; and, Removal of the US Exposure Surcharge.

16 -16- [58] The recommendation of Board staff to approve the surcharge changes is accepted and the changes are approved. Endorsement Changes [59] In this Application, Economical proposed several changes to its endorsement offerings, some of which involve changes in standard wording to create new, non-standard endorsements. Those changes require the approval of the Superintendent of Insurance (SOI), which has not yet been granted. The Board is unable to approve those changes unless they are approved by the SOI and proposes that the Company may use an expedited approval process with the Board, once the SOI approval is received. Board staff have recommended the approval of them, if the SOI approves the non-standard endorsements. Those endorsements are for: Introduction of a new non-standard endorsement, NPCF-HRD - Hit and Run Deductible Waiver as part of the Company s Protection Plus Bundle of Endorsements; The introduction of a new endorsement, NPCF TR - Transportation Replacement in place of the NSEF#20 - Loss of Use Endorsement; The replacement of NSEF 43R/43R(L) - Limited Waiver of Depreciation/Limited Waiver of Depreciation (Specified Lessee) with NPCF DW/NPCF DW(L) which would expand the coverage terms; The introduction of NPCF EDW/EDW(L) - Extended Depreciation Waiver/Extended Depreciation Waiver for Specified Lessees to purchasers of a used vehicle that is within one model year old, or a demonstrator vehicle; The introduction of NPCF CRP - Conviction Rating Protector which would be like an accident forgiveness waiver; Combining NSEF#16 - Agreement for Suspension of Coverage and NSEF#17 - Reinstatement of Coverage into a single non-standard endorsement NPCF CS- Coverage Suspension. The client will be allowed to select the time for suspension rather than the 60-consecutive day suspension clause;

17 -17- Replacement of NSEF#27 - Legal Liability for Damage to Non-Owned Vehicles with NPCF DN for light commercial vehicles. The dollar cap on the coverage will be removed and the premium will vary by rate group of the vehicle with the highest Collision rate group; and, The introduction of the Protection Plus bundle, which packages endorsements NPCF TR, NPCF DN, NPCF HRD and NSEF#35 for a premium that is lower than the premium required to purchase these endorsements separately. The premium is based on the vehicle rated highest for collision. Any additional vehicles on the policy pay a lower premium for the bundle to recognize that the protection from NPCF DN applies on a policy level and not on a vehicle level, unlike the other endorsements in the bundle. [60] Should approval be granted by the SOI, the Board will address these proposed endorsement changes in its decision on the proposed expedited filing. [61] The Company has also proposed the following changes to its endorsements: Removal of NSEF#19 - Limitation of Amount and NSEF#19a - Valued Automobile which are typically applied to Antique vehicles which the Company no longer underwrites; Removal of NSEF#28 - Reduction of Coverage as Respects Operation by Named Person(s) and NSEF#28a - Excluded Driver as future underwriting will require the client to advise which drivers in the household should be added to the policy; Removal of NSEF#37 - Limitation to Automobile Sound and Electronic Communications Equipment as the Company no longer wishes to have this endorsement which restricted coverage; Removal of NSEF#38 - Increased Limit, Automobile Sound and Electronic Communications Equipment as the Company has had no demand for the endorsement; Removal of NSEF#40 - Fire & Theft Deductible as the Company no longer wishes to have this endorsement which restricted coverage; Removal of the $5 per person premium for NSEF#2 - Drive Other Automobiles which is typically added for a child of the insured who resides in the same house without charge. It will be removed for all cases; Increase of the current $20 premium to $50 for NSEF# 3 - Drive Government Automobiles to harmonize with other Canadian jurisdictions;

18 -18- Modification of NSEF#6a - Permission to Carry Passengers for Compensation to change the current charge of 10% of the Bodily Injury and Property Damage-Tort premium by adding 10% of the Accident Benefit premium to harmonize with other Canadian jurisdictions; The pricing for NSEF#13c - Comprehensive Cover - Deletion of Glass changes to a percentage of the Comprehensive premium which was previously based on a grossed-up percentage of the Specified Perils premium; Addition of NSEF#35 - Emergency Service Expense for a $10 premium to provide up to $50 per occurrence for towing and emergency service expenses if the insured vehicle is disabled, for up to four occurrences per year; and, Removal of its Driving Record Protector endorsement which provides accident forgiveness for a $45 premium. In its place, the Company will provide the same protection automatically, at no additional premium, to all risks eligible for Driving Record 6. [62] Board staff have recommended the approval of these endorsement changes, and the Board accepts the recommendation. Premium Dislocation Capping/Cupping [63] Economical recognized that the proposed changes will result in some dislocation for its clients and, therefore, proposed the introduction of a premium dislocation cap which will apply on a per exposure, i.e., per vehicle basis to the premiums for all coverages including SEF#44 (Family Protection Endorsement), but not to endorsement premiums. [64] The proposal is to cap increases at renewal unless any of the following apply: The client has a new at-fault accident in the last 14 months; or The client has had a conviction in the last 14 months. [65] The Company had said in response to IR-1, Q.17 in the recent CV application, that it had chosen the 14-month period to capture relevant information in the

19 - 19- period prior to policy renewals as it receives motor vehicle reports approximately two months prior to renewals. The same reasoning would apply to this Application. [66] Economical said that the proposed increases will be capped at a varying rate, depending on the size of the increase. For increases of more than 20% up to 35%, the cap applied will be 20%; for increases of more than 35% up to 50%, the cap will be 25%; and for increases over 50%, the cap will be 30%. [67] The Company also proposed to apply a negative premium cap, or in their words, a cup whereby premium decreases would not be any lower by a maximum of 5% at renewal. As required by the Board, the Company provided evidence to show that the premium foregone under the capped increases exceeds the extra revenue from the capped, or cupped (in the Company s terms), decreases. [68] Board staff have recommended approval of the proposed capping of increases and decreases as outlined in the Application. The Board accepts the recommendation and notes that the Company anticipates that the capping program will progress to a relatively quick removal based on the information provided. Manual Review [69] Board staff have reviewed the Automobile Insurance Manual (formerly, Rate Manual) on file and found no instances where the Company is in violation of the Regulations. As Economical, Waterloo and Perth will become one insurer, the Company proposed changes to its Automobile Insurance Manual in addition to those necessary to effect the changes noted in this Decision. Board staff found no issues with the proposed changes.

20 -20- IV FINDINGS [70] The Board finds that the Application complies with the Act and Regulations, as well as the Rate Filing Requirements. [71] The financial information submitted by the Company satisfies the Board, pursuant to Section 1551(1 )(c) of the Act, that the proposed changes are unlikely to impair the solvency of the Company. [72] The Board finds the proposed rates are just and reasonable. [73] The Application included full actuarial indications and the required territorial analysis; therefore, it qualifies to set the new mandatory filing date for PPV for the Company to November 1, [74] The Board approves the effective dates of July 4, 2018, for new business and August 1, 2018, for renewal business. [75] The Company is required to file an electronic version of its updated Automobile Insurance Manual within 30 days of the issuance of the Order in this matter. [76] An Order will issue accordingly. DATED at Halifax, Nova Scotia, this 1st day of February, 2018.