2013 Revenue Requirements Application Public Workshop OPENING REMARKS

Transcription

1 2013 Revenue Requirements Application Public Workshop September 24, 2013 OPENING REMARKS 1 1

2 ICBC S Application Two main components of Application Basic rate increase of 4.9% Proposed new Basic Capital Management Plan 2 ICBC S Application Most significant pressure on rates is due to rising cost of bodily injury claims Offset by: Containment of costs through measures under its control Operating expenses Management of claims costs Expected investment income 3 2

3 ICBC S Application Reflects new legislated rate smoothing framework which requires: Exclusion of the unfavourable loss cost forecast variance (the largest part of the rate) to reduce rate change for 2013 Use of the current Capital Management Plan for 2013 For 2014 and beyond a new Basic Capital Management Plan 4 Agenda About ICBC Basic Regulatory framework 2013 components of rate indication Operating expense impact 5 3

4 Agenda Claims Costs impact on rate indication Claims Costs Management Other components of the rate New Capital Management Plan for 2014 and beyond 6 ABOUT ICBC 7 4

5 About ICBC ICBC operates on an integrated basis, providing both Basic and Optional insurance products and services as well as driver licensing and vehicle registration & licensing Benefits to customers Ease of service Economies of scale Cost efficiencies 8 9 About ICBC Basic insurance rates under BC Utilities Commission (BCUC) jurisdiction since 2003 The BCUC regulates Basic rates Basic capital level The BCUC does NOT regulate Product Optional rates The BCUC must ensure there is no crosssubsidization 5

6 Revenue Requirements - History Application Year Proposed Rate Change BCUC Approved % + 0.4% % + 0.0% % + 6.5% % + 3.3% % + 0.0% % + 0.0% % - 2.4% % + 0.0% % % % 10 Elements of Basic Costs Claims Costs Operating Expenses Acquisition Costs 11 6

7 Elements of Basic Costs Claims Costs Operating Expenses Acquisition Costs 12 ICBC Claims Costs Claims costs estimated quarterly by the actuaries Used for both actuarial analysis and for financial statements Year-end claims costs subject to external reviews and therefore added level of assurance 13 7

8 Elements of Basic Costs Claims Costs Operating Expenses Acquisition Costs 14 Operating Expenses Corporate operating expenses include all compensation and other costs to run ICBC s lines of business Basic portion used to determine rate indication allocated per Commission approved financial allocation methodology Basic portion excludes costs for Transformation Program which is funded 100% by Optional per Government Directive 15 8

9 REGULATORY FRAMEWORK 16 ICBC s Regulatory Framework Special Direction IC2: set Basic rates on basis of Accepted Actuarial Practice to collect sufficient revenue to cover costs as listed to meet at least 100% Minimum Capital Test (MCT) in a manner that recognizes & accepts action taken by ICBC in compliance with government directives to ensure rates remain relatively stable and predictable 17 9

10 ICBC s Regulatory Framework Government Directives: Defined in IC2 as given by minister and approved by LGIC Past Government Directives pertaining to capital: transfer of capital from Optional business to Basic 2005 transfer $530M 2007 transfer $100M 2012 transfer $373M how to manage Basic excess capital for rate stability 2010 regarding Basic Excess Capital 2011 regarding Basic Rate Stability and Capitalization 18 ICBC s Regulatory Framework Basic business operates in a closed system If the rates are too high capital will grow Favourably impacts rates in subsequent year If the rates are too low capital will be eroded Unfavourably impacts rates in subsequent year Per IC2 ICBC needs to maintain capital above the regulatory minimum 19 10

11 2010 Q Q Q Q Q Q Q Q Q4 (Bef trsf) 2012 Q4 (Aft trsf) 2013 Q Q Q4 Current Capital Management Plan BCUC approved Capital Management Target = 130% Regulatory Minimum= 100% per IC2 Margin for normal Risk Margin to volatility respond to normal volatility Regulatory Intervention Capital Release if MCT > 130% Capital Build if MCT < 130% 20 Capital Levels (MCT) are Volatile 170% 160% 153% 150% 140% 130% 120% 115% Optional transfer of $373m for end of % 123% 110% 100% 102% 90% MCT Actual MCT Outlook 21 11

12 ICBC s Regulatory Framework Amendments in 2013 to introduce new rate smoothing framework For 2013 RRA: Must exclude entire unfavourable Loss Cost Forecast Variance Must use current Basic Capital Management Plan (CMP) 22 ICBC s Regulatory Framework For 2014 and beyond Must apply for rate change annually by May 31 May exclude some or all Loss Cost Forecast Variance Must limit rate change to 1.5 percentage points from prior year s rate change number Must propose new CMP to support rate smoothing 23 12

13 Implications for 2013 RRA Rate change that would be required to cover costs is 11.5% Limited to 4.9% by regulation Therefore capital of up to $130 million per annum used to make up the difference This will result in a lower MCT COMPONENTS OF RATE INDICATION 25 13

14 2012 Compared to 2013 Impact on Rate Level Rate Change Components 14% 12% 10% 8% 1.1 ppt 11.5% 6% 4% 2% 4.4 ppt -6.6 ppt 4.9% 0% -2% -4% 0.0% -0.6 ppt 6.6 ppt 26 FAVOURABLE IMPACT OF OPERATING EXPENSES 27 14

15 ICBC s Operating Expenses 2013 Forecast of $594 million Other $142 Government Initiatives $30 Compensation $391 Unique Items $31 28 Operating Expenses Cost containment program started in 2011 to offset pressure on Basic rates Government Review in 2012 Realization of $51 million savings between 2013 forecast as compared to 2011 plan 29 15

16 Government Review Had some good things to say about ICBC Premium increases have been low in spite of rising bodily injury claims costs Claims forecasts are reasonable Sound practices for managing investments But ICBC Needed to manage BI claims costs Needed to contain costs in management, compensation and operating expenses 30 Operating Expenses $51 million savings comprised of: Staffing strategies ($29 million savings) Detailed budget reviews and containment of discretionary spending ($18 million savings) Prioritization/management of project scope and spending ($10 million savings) Government initiatives and unique items ($4 million lower expenditures) Offset by higher depreciation and computer costs ($10 million) 31 16

17 Operating Expenses Costs which are most under our control have decreased Staffing levels have dropped to below 2008 level Average compensation has grown by only 1% per annum (less than inflation) since 2009 Simultaneously business has been growing as reflected in number of policies 32 FTEs per 1000 Policies Improvement of 10% over 4 year period FTEs per 1000 policies 33 17

18 Operating Expenses ICBC has achieved more than $50 million in operating expense savings Result is a 0.6 percentage point reduction in Basic rates Maintained balance between investment in people and tools with the requirement to maintain good control of claims costs 34 CLAIMS COST IMPACT ON RATE INDICATION 35 18

19 2012 Compared to 2013 Impact on Rate Level Rate Change Components 14% 12% 10% 8% 1.1 ppt 11.5% 6% 4% 2% 4.4 ppt -6.6 ppt 4.9% 0% -2% -4% 0.0% -0.6 ppt 6.6 ppt 36 What is Loss Cost? Provision for Claims Costs in Rate Expected future claims cost per policy Claims Cost per Policy Frequency of claims (e.g., 15 claims per 1,000 policies) Severity (average cost of a claim) (e.g., $40,000) Loss Cost = Frequency x Severity (e.g., $600 = (15/1,000) x $40,000) Approximate loss cost of the bodily injury coverage 37 19

20 Accepted Actuarial Practice Rates must provide for expected future costs ICBC costs differs from utility companies ICBC: current & future claim payments for one-year policies Utilities: rates set to cover forecast costs for coming year 38 Overview of Loss Components Loss cost forecast variance (6.6 ppt): Difference between loss cost provision in previous rate and loss cost that has emerged Loss cost trend (4.4 ppt): Inflation on claims costs Rising claims costs account for 11.0 ppt of the rate change 39 20

21 Loss Cost Loss Cost Loss Cost Forecast Variance (all coverages) Last Year s Loss Cost Provision $800 $750 $700 $650 $600 $550 $500 $ Accident Year Actual (2012 Application) PY 2012 Projection (2012 Application) Actual (Current Application) PY 2012 Projection (Current Application) 40 Loss Cost Forecast Variance (all coverages) Re-estimation of last year s Loss Cost provision $800 $750 $700 $650 $600 $550 $500 $ Accident Year Actual (2012 Application) PY 2012 Projection (2012 Application) Actual (Current Application) PY 2012 Projection (Current Application) 41 21

22 Loss Cost Loss Cost Loss Cost Forecast Variance (all coverages) Difference is the Loss Cost Forecast Variance $800 $750 $700 $ ppts of rate change $600 $550 $500 $ Accident Year Actual (2012 Application) PY 2012 Projection (2012 Application) Actual (Current Application) PY 2012 Projection (Current Application) 42 Loss Cost Trend (all coverages) $800 $750 PY 2013 $700 $650 $600 $550 $500 $ Accident Year Actual (2012 Application) PY 2012 Projection (2012 Application) Actual (Current Application) PY 2012 Projection (Current Application) 43 22

23 Loss Cost Loss Cost Trend (all coverages) $800 $750 $700 $650 $600 $550 $500 PY Months +4.4 ppt $ Accident Year Actual (2012 Application) PY 2012 Projection (2012 Application) Actual (Current Application) PY 2012 Projection (Current Application) 44 Main Driver: Bodily Injury In the past, the severity or average cost of a claim has increased and continues to increase by about 6% In the past, the frequency had decreased about 3-4% per year The declining frequency rate helped offset the increasing severity rate 45 23

24 Frequency BI Frequency BI frequency has flattened from a previously downward trend No more offset to severity Main driver of loss cost forecast variance of 6.6 ppt 46 BI Frequency 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Accident Year Actual (2012 Application) 47 24

25 Frequency Frequency BI Frequency 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Accident Year Actual (2012 Application) Long-term trend PY 2012 Projection (2012 Application) 48 BI Frequency 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Accident Year Actual (2012 Application) PY 2012 Projection (2012 Application) PY 2012 Projection (Current Application) Long-term trend Actual 49 25

26 BI Basic Frequency Penetration BI Frequency BI frequency flattened concurrent with Mass adoption of smartphones Depressed new vehicle sales Number of vehicles per household no longer increasing 50 Smartphone Penetration Increase in the usage of smartphones is concurrent with the flattening of frequency 2.5% 250% 225% 2.0% 200% 175% 1.5% 150% 125% 1.0% 100% 75% 0.5% 50% 25% 0.0% 0% Year Actual Frequency Pre-Recession Frequency Est'd Smartphone Penetration 51 26

27 Percentage of New Vehicles Vehicles Per Household New Vehicles Sales Percentage of new vehicles dropped during the recession and has not recovered by the end of % 8% 7% 6% 5% 4% 3% 2% 1% 0% Year 52 Vehicles Per Household The number of insured vehicles per BC household is no longer increasing Year Actual Trend 53 27

28 Frequency BI Frequency Forecast Going forward Smartphone adoption approaching saturation Young drivers waiting longer to get licences Growing awareness of dangers of texting New generation of crash avoidance technology BI frequency assumption Stays flat through 2013 Resumes slower downward trend (half that of historical) 54 BI Frequency Forecast 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Accident Year Actual (2012 Application) PY 2012 Projection (2012 Application) PY 2012 Projection (Current Application) Long-term trend Actual 55 28

29 Frequency BI Frequency Forecast 2.5% 2.0% 1.5% PY % 0.5% 0.0% Accident Year Actual (2012 Application) PY 2012 Projection (2012 Application) PY 2012 Projection (Current Application) Long-term trend Actual PY 2013 Projection (Current Application) 56 BI Severity Key driver of increase in loss cost trend 5.7% severity trend Reflects inflation on claims costs Consistent with past Accelerating legal representation adds further pressure Claims cost management helps to mitigate new pressure 57 29

30 Severity Severity BI Severity $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $ Accident Year Projection (2012 Application) PY 2012 (2012 Application) Modelled (2012 Application) Actual (2012 Application) 58 BI Severity $50,000 $45,000 $40,000 PY 2013 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $ Accident Year Actual Projection (2012 Application) Modelled (2012 Application) Projection (Current Application) Modelled (2013 Application) PY 2012 (2012 Application) 59 30

31 Legal Representation Rate Accelerating Rate of Representation 50% 45% 40% 35% 30% 25% Calendar Year Long-term Trend ( ) Original 2013 Forecast 60 Prospective Adjustments Claims Transformation New initiatives to address claims cost pressures Other adjustments 61 31

32 Summary of Claims Cost Rising claims cost environment New cost pressures Claims cost management helps to mitigate new pressure 62 CLAIMS COST MANAGEMENT 63 32

33 Claims Cost Management Key elements Claims Cost Management Strategies Claims Transformation 64 Three Claims Cost Management Strategies 1. Claims Handling 2. Management Accountability 3. Claims Analytics 65 33

34 Three Claims Cost Management Strategies Strategy #1 Claims Handling: Segmentation/classifying claims by risk: Functional organizational model & Claims hierarchy Alignment by risk & complexity: Unrepresented/Centralized Claims Injury Centre (CCIC) Enhancements building on Litigation Centre concept Improved handling of other represented claims 66 Three Claims Cost Management Strategies Strategy #1 - Claims Handling, continued: Customer service initiatives: Improvements related to segmentation Streamlined processes for accident benefits Additional initiatives: Improved handling of minor damage claims Better alignment of taxable costs & disbursements Appropriate & efficient use of services & resources 67 34

35 Three Claims Cost Management Strategies Strategy #2 - Management Accountability: Improved alignment with segmentation: Operations, management & employees aligned based on claim risk and complexity Revised payment authorities Strategy #3 - Claims Analytics: Continuing & refining existing reports leveraging segmentation Preparing for new claims systems 68 Claims Transformation Claims Transformation will help manage claims costs by: New systems & business processes Functional organizational model & Claims hierarchy Benefits Transition 69 35

36 Claims Cost Management Conclusion Key elements: Claims Cost Management Strategies Claims Transformation Appropriate steps to effectively and efficiently address claims costs 70 OTHER COMPONENTS OF RATE 71 36

37 2012 Compared to 2013 Impact on Rate Level Rate Change Components 14% 12% 10% 8% 6% 1.1 ppt 11.5% 4% 2% 4.4 ppt -6.6 ppt 4.9% 0% -2% -4% 0.0% -0.6 ppt 6.6 ppt 72 Other Comprised of Investment Income (-1.1 ppt) Premium trend (+1.0 ppt) Capital maintenance provision (+0.9 ppt) Miscellaneous small impacts (+0.3 ppt) 73 37

38 2012 Compared to 2013 Impact on Rate Level Rate Change Components 14% 12% 10% 8% 1.1 ppt 11.5% 6% 4% 2% 4.4 ppt -6.6 ppt 4.9% 0% -2% -4% 0.0% -0.6 ppt 6.6 ppt 74 Forecast Variance Exclusion IC2 requires ICBC to exclude all loss cost forecast variance from the PY 2013 rates Significant offset to the rate change to cover costs 75 38

39 Loss Cost Loss Cost 2013 Forecast Variance Exclusion $800 $750 PY 2013 $700 $650 $600 $550 $500 $ Accident Year Forecast Variance Exclusion $800 $750 $700 PY ppt $650 $600 $550 $500 $ Accident Year 77 39

40 Rate Smoothing Going Forward Government directs the development of a new Commission approved capital management plan that promotes rate smoothing 78 NEW CAPITAL MANAGEMENT PLAN FOR 2014 & BEYOND 79 40

41 Government Directive Propose new Capital Management Plan for Commission approval that Continues to protect the solvency of Basic Insurance Improves ability to use capital to promote more stable and predictable rates Includes concept of a customer renewal credit When capital is well in excess of capital management target Is cost effective to implement 80 IC2 Amendments Re-definition of capital management target to include margin for rate smoothing Rate smoothing requirements Conditions for customer renewal credit 81 41

42 Proposed New Capital Management Plan Includes New capital management target New capital provisions Rate exclusion (capital release) Capital build Continuation of capital maintenance provision Customer Renewal Credit 82 Proposed New Capital Management Target New management target: 150% Solvency target : 130% Regulatory Minimum: 100% Rate Smoothing Margin ICBC s Risk Margin 83 42

43 Proposed New Capital Management Target Proposed rate smoothing margin = 20 additional points of MCT Purpose: Provide capital protection to enable rate smoothing Limited impact on customers 84 Proposed New Capital Management Target Absorbs up to 10 ppts of rate exclusion E.g., Rate exclusion of 5 ppt lasting 2 years Revenue Requirements Application Rate change to cover costs 2005/6 +6.5% +4.0 ppt % +1.2 ppt % -0.7 ppt % -3.0 ppt % -1.5 ppt 2011/ % +5.5 ppt % +6.6 ppt Loss cost forecast variance 85 43

44 Proposed New Capital Provisions Rate Exclusion Replaces Capital Release in current CMP Capital Build Similar in concept to current Capital Build Conform with requirements of IC2 86 IC2 Requirements for 2014 & beyond Requirement (A) may exclude some or all of that year s loss costs forecast variance from the rate in accordance with a capital management plan approved by the Commission Requirement (B) the percentage number of a rate change must differ from the percentage number of the previous rate change by no more than 1.5, and must not decrease existing rates. Capping Requirement 87 44

45 IC2 Capping Requirement Rate Change Band -1.5 ppt +1.5 ppt 3.4% Floor 4.9% PY 2013 Rate Change 6.4% Ceiling 88 Proposed Rate Exclusion Provision A Rate Exclusion is permissible only if the following conditions hold MCT is greater than 130% The loss cost forecast variance is unfavourable Allowable Rate Exclusion some or all of the loss cost forecast variance, subject to capping requirement Subject to Commission approval 89 45

46 Rate Exclusion: Example 1 MCT = 140% 2 ppts of unfavourable FV is part of a 6% rate change to cover costs Rate Change Band Rate Exclusion 3.4% 4% Indicated Rate Change 4.9% Prior year s rate change 6% 6.4% Rate change to cover costs Within band - Satisfies capping requirement 90 Rate Exclusion: Example 2 MCT = 140% 0.5 ppts of unfavourable FV is part of a 7.5% rate change to cover costs Rate Change Band Rate Exclusion 3.4% 4.9% Prior year s rate change 6.4% Indicated Rate Change 7.0% 7.5% Rate change to cover costs Within Outside band band - Satisfies does not capping satisfy requirement capping requirement 91 46

47 Rate Exclusion: Example 3 MCT =140% 3 ppts of unfavourable FV is part of a 6% rate change to cover costs Rate Change Band Rate Exclusion 3.0% 3.4% Indicated Rate Change 4.9% Prior year s rate change 6.0% Rate change to cover costs 6.4% Within Outside band band - Satisfies does not capping satisfy requirement capping requirement 92 Proposed Capital Build Provision Capital Build applies when: There is no rate exclusion MCT ratio is less than 150% Formula calculation 150% 130% Build 1/10 100% Build 1/5 Subject to IC2 Capping Requirement 93 47

48 Capital Build: Example MCT = 120% 1% rate change to cover costs Formula Capital Build Additional Capital Build Rate Change Band 1.0% 3.0% 3.4% 4.9% 6.4% Rate change Indicated Prior year s to cover costs Rate Change rate change Within Outside band band - Satisfies does not capping satisfy requirement capping requirement 94 Impact on Next Year s Rate Change: Rate Exclusion Must include 6.6 ppt Removal of Prior Year's Rate Exclusion Other Components of Rate Change % 11.5% Rate Change to Cover Costs 11.5% % Rate Exclusion -6.6% Indicated Rate Change 4.9% 95 48

49 Impact on Next Year s Rate Change: Capital Build Removal of capital build Removal of Prior Year s Capital Build Removal of Prior Year's Rate Exclusion Other Components of Rate Change Rate Change to Cover Costs Year 1 Capital Build 1.0% Year 2-1.0% Rate Exclusion Indicated Rate Change 96 Customer Renewal Credit (CRC) IC2 requires that: Excess capital is available Paying CRC will not result in MCT falling below target Does not detract from rate stability & predictability ICBC Proposal: CRC threshold is set at 165% MCT 97 49

50 Customer Renewal Credit (CRC) Government directive requires: CRC is cost-effective to implement ICBC Proposal: CRC applies only if average amount is greater than $25 per policy 98 Customer Renewal Credit (CRC) Per IC2 CRC will be payable at time of policy renewal Other proposed rules /details to be provided in 2014 RRA 99 50

51 SUMMARY 100 Summary 11.5% = required rate to cover costs 4.9% = lowest rate possible for customers: Rising Bodily injury claims costs Operating expenses reduced Claims cost management strategies in place Largest component of rate indication is loss cost forecast variance which is excluded as per IC2 Compliance with regulatory framework

52 Summary Proposed new Capital Management Plan New capital management target Capital provisions giving effect to IC2 requirements Concept of Customer Renewal Credit Protects solvency of Basic insurance and improves ICBC s ability to use capital to promote rate stability 102 QUESTIONS

53 THANK YOU