Introduction This document provides information on the analysis of Ontario Private Passenger Automobile loss trend rates, as prepared by FSCO s Chief Actuary, Automobile Insurance Division. The document includes a description of the data, methodology and the loss trend benchmark rates adopted for use in FSCO s review of rate filings. The loss trend benchmarks found in Exhibit 2 of the Technical Notes are provided for reference purposes. Insurers who deviate from the benchmark rates are required to submit their own analysis of loss trend factors as part of the actuarial support in rate filings. The scope of our review of the loss trend rates includes the following coverage groups: Third Party Liability -Bodily Injury, Property Damage Direct Compensation, Medical Benefits, Rehabilitation and Attendant Care, Disability Income including Income Replacement and Non-Earners, Uninsured Automobile, Collision, Comprehensive and All Perils. To isolate the effect of the 2010 product reforms, our loss trend analysis has considered the effect of the 2010 reforms on coverage costs. Cost data prior to the 2010 reforms were adjusted based on a review of actual reform impact on costs in the 2010 post-reform period. Cost data for the 2016 reforms are not yet available, and therefore our loss trend analysis is independent of the recent reforms. It is important to note that insurers are expected to use the most recent data in the ratemaking process. The 2010 reform cost adjustments are taking on less significance as actual data experience is available. Industry Loss Development Data for Ontario Private Passenger Automobile Insurance and Estimated Loss Costs We have relied on the most recent industry loss development data from the Automobile Statistical Plan (ASP) that was provided to FSCO in its semi-annual review of the Ontario Private Passenger automobile insurance experience. This data is publicly available in the Ontario Loss Development Exhibit as of December 31, 2015, released by the General Insurance Statistical Agency (GISA). FSCO reviews loss cost data from the ASP on a regular basis and will continue to monitor the rate of changes in loss costs for each major coverage. FSCO Loss Trend Benchmarks are subject to change based on updated loss cost data as it becomes available through the ASP. October 2016 1
As noted in the GISA Actuary Incurred Loss Development Factor Report for Ontario Private Passenger Automobile Insurance business as of December 31, 2015, the impact of a major insurer s loss development data on industry loss development changes for the Accident Benefits coverage had been reviewed. As noted in the last report, the GISA actuary has concluded that exclusion of this major insurer s data is no longer required. As a result, FSCO s Loss Trend Benchmarks are based on the same loss development information that is published as part of the GISA Loss Development Exhibit. Certifying actuaries who are responsible for filings may want to conduct their own loss development factor analysis and include proper actuarial documentation as per rate filing guidelines. Table 1 summarizes the estimated loss costs for the Ontario Private Passenger Automobile Insurance business as of December 31, 2015, as a result of FSCO s loss development review process. These estimated loss costs are used as the basis for the development of FSCO loss trend benchmarks. Reform Loss Cost Adjustments We analyzed the cost impact of the 2010 regulatory reforms by comparing industry loss cost data available from the ASP before and after the 2010 reforms. The most recent estimates are based on Ontario Private Passenger Automobile Experience ultimate incurred loss data as of December 31, 2015. No further analysis has been conducted as the 2010 post-reform data experience is now more fully developed. We applied the 2015 reform cost adjustments due to the effect of the reduced pre-judgment interest rate for non-pecuniary Bodily Injury claims and reduced interest rates for disputed claims in Accident Benefits for accident periods and prior. Cost data for the 2016 reforms are not yet available, and therefore our loss trend analysis is independent of the 2016 reform cost adjustments at this time. Loss Trend Benchmarks Loss trend rate assumptions are part of the actuarial support required in Ontario rate filings. The development of FSCO loss trend benchmarks is based on actuarial standards of practice. However, filing actuaries may undertake various approaches in their independent analysis of loss trends and provide support for their own loss trend assumptions in filings. October 2016 2
In general, development of our loss trend benchmarks is based on a review of changes in loss costs, claims frequencies and claims severities over a period of 5-8 years. We perform statistical regression analysis on estimated loss costs at semi-annual intervals, separately for claims frequencies and claims severities. Due to the interdependency of the results, consideration is given to the changes in both claims frequency and claims severity in our loss trend estimates. To isolate the effect of product reforms, reform adjustment factors are determined to adjust historical costs to a common cost level before performing statistical regressions. For Accident Benefits, we have relied significantly on the 5 years (015) of post-reform experience. We reviewed the statistical significance of the variables such as Time and Seasonality, as well as the goodness of fit from the regression results in our selection process. The following table is a summary of the FSCO 2010 and 2015 reform cost adjustment factors and loss trend results for the Bodily Injury and Accident Benefits sub-coverages. Coverage 2010 Reform Cost Adjustment Factor 2015 Reform Cost Adjustment Factor Past Trend To October 1, 2015 TPL - Bodily Injury 0.93 0.95 0.6% 0.6% AB- Medical Benefits 0.39 0.955 5.6% 5.6% AB- Rehab/LTC 0.72 0.955 1.9% 1.9% AB- Disability Income 0.58 0.955 6.4% 6.4% AB - Total 0.49 0.955 4.9% 4.9% Future Trend From October 1, 2015 We provide additional commentary on the selected loss trend benchmark rates for the major coverages in Appendix A. Dennis Chan, FCIA, FCAS, FSA Chief Actuary, Automobile Insurance Division October 2016 3
Table 1. Estimated Loss Costs for Ontario Private Passenger Automobile Insurance Accident Year BI DCPD Med Reh/LTC Med/Reh Disability Death Funeral Quebec X UA Coll. Comp. AP SP OPCF44 2009-1 246.5 133.1 302.8 72.4 375.2 87.4 1.5 0.4 0.1 13.4 144.0 66.8 245.8 32.1 5.1 2009-2 305.1 135.3 404.9 103.5 508.4 109.9 1.6 0.5 0.1 18.0 138.1 59.2 225.4 22.3 9.8 2010-1 282.0 130.4 423.0 91.4 514.5 108.5 1.3 0.4 0.0 16.0 135.3 45.7 203.7 26.0 6.6 2010-2 295.7 143.3 278.3 76.6 354.9 89.2 1.7 0.5 0.0 17.8 146.8 51.9 218.5 19.8 7.2 235.3 132.3 164.3 64.3 228.6 64.4 1.3 0.4 0.0 15.1 145.8 61.0 221.5 26.8 7.7 265.3 134.9 160.2 74.4 234.6 68.7 1.7 0.5 0.0 15.9 141.8 56.9 219.6 20.8 7.9 228.6 123.1 146.9 68.1 215.0 62.1 1.5 0.4 0.0 11.8 134.4 45.8 192.3 11.8 5.3 264.4 136.3 166.0 76.2 242.1 72.1 1.6 0.5 0.0 13.1 143.5 68.5 230.5 33.0 6.6 228.1 134.3 158.8 65.5 224.3 64.6 1.4 0.4 0.0 13.6 145.2 45.6 208.7 25.1 6.6 275.2 153.6 188.8 76.9 265.8 78.9 1.6 0.5 0.0 16.2 161.5 72.1 265.1 46.3 7.3 222.2 154.6 167.8 60.2 228.0 68.9 1.2 0.3 0.0 13.4 167.0 51.2 247.1 36.8 10.0 269.4 152.6 190.3 80.3 270.6 79.9 1.7 0.5 0.2 15.9 156.7 57.3 255.3 40.6 6.4 229.3 164.3 176.2 63.0 239.3 75.9 1.2 0.4 0.0 13.8 171.4 49.1 253.1 17.7 11.2 253.1 170.6 187.2 81.2 268.4 79.2 1.6 0.4 0.0 11.3 166.6 62.1 265.8 20.2 9.4 Past Loss Trend 0.6% 4.5% 5.6% 1.9% 4.5% 6.4% -1.4% -3.1% 0.0% -3.5% 4.0% 1.1% 4.5% 3.2% 6.6% Future Loss Trend 0.6% 4.5% 5.6% 1.9% 4.5% 6.4% 0.0% 0.0% 0.0% -3.5% 4.0% 1.1% 4.5% 3.2% 6.6% * Cut-off date for the past and future trends is October 1, 2015. October 2016 4
Appendix A Commentary on Loss Trend Estimates and Benchmarks by Sub-Coverages for Ontario Filings Third Party Liability Bodily Injury We selected a loss trend rate of 0.6% for the Bodily Injury sub-coverage. Our loss trend estimates fall in the range of -1.4% to 0.6% based on a review of 5-8 years of data. Our regression analysis indicates that both the Time and Seasonality variables are statistically significant. The R-squared value indicates a reasonable fit of the model, while higher R-squared values are observed for lower loss trend rates. accident periods of 2008 to 2015 in semi-annual intervals. 320 300 Loss Cost 280 260 240 220 275.2 269.4 264.4 228.6 228.1 222.2 229.3 253.1 200 180 2008-1 2008-2 2009-1 2009-2 2010-1 2010-2 As compared to our previous estimates (as of December 31, 2014) of the Bodily Injury loss costs, our current estimates of the actual loss costs have been revised downward due to significant favourable development in costs during 2014. As a result, the slope of the trend line has continued to decrease. October 2016 5
Accident Benefits Medical Benefits We selected a loss trend rate of 5.6% for the past period (to October 1, 2015) and a future loss trend rate of 5.6% for the Medical Benefits sub-coverage. Our loss trend estimates fall in the range of 3.2% - 5.6% based on a review of 5-7 years of data. Our regression analysis indicates that both the Time and Seasonality variables are statistically significant. The R-squared value indicates a good fit. accident periods of 2011 to 2015 in semi-annual intervals. 200 190 180 188.8 190.3 187.2 ost s C Los 170 160 150 140 130 120 146.9 166.0 158.8 167.8 176.2 110 100 Medical claim frequency has been quite steady after the 2010 reforms. We also have observed that the severity trend has been moderate in the post-reform period. October 2016 6
Accident Benefits Rehabilitation and Attendant Care We selected a loss trend rate of 1.9% for both past and future periods based on a 5-year regression results. Our loss trend estimates fall in the range of 0.3% - 2.9% based on a review of 4-7 years of data. Our regression analysis indicates that both the Time and Seasonality variables are statistically significant. The R-squared value indicates a very good fit. accident periods of 2011 to 2015 in semi-annual intervals. 85 81.2 80 75 76.2 76.9 80.3 Loss Cost70 65 60 68.1 65.5 60.2 63.0 55 50 We estimated that claim frequency was increasing at the rate of 2.2% in the post-reform period (2011-2015). The claims severity trend line was flat in the same period. October 2016 7
Accident Benefits Disability Income We selected a loss trend rate of 6.4% for both past and future periods for the Disability Income subcoverage. Our loss trend estimates fall in the range of 5.7% - 6.4% based on a review of 5-7 years of data. Our regression analysis indicates that both the Time and Seasonality variables are statistically significant. The R-squared value indicates a very good fit. accident periods of 2011 to 2015 in semi-annual intervals. 85 80 78.9 79.9 75.9 79.2 Loss 75 Cost70 65 60 62.1 72.1 64.6 68.9 55 50 October 2016 8
Direct Compensation Property Damage We selected a loss trend rate of 4.5% for both past and future periods for the Direct Compensation Property Damage sub-coverage. We note that the frequency trend is cyclical and appears to be affected by weather in certain accident periods. In the long run, like the 5-7 year period, the frequency trend was relatively flat. Our estimate of claims frequency trend rate is 1.2% based on a 6-year data period. We estimated that the claims severity trend rate is in the range of 2.8% to 3.9%, based on 5-7 years of data. We consider that a 3.3% severity trend rate is reasonable. accident periods of 2010 to 2015 in semi-annual intervals. 180 170 164.3 170.6 ost 160 150 153.6 154.6 152.6 s C Los 140 130 136.3 134.3 120 123.1 2010-1 2010-2 October 2016 9
Collision We selected a loss trend rate of 4.0% for both past and future periods for the Collison coverage. We note that the claim severity trend fits well in the range of 2-3% but the frequency trend is relatively flat. The actual claim frequency data shows that there was a reduction in the number of claims in the post reform period, followed by an increase in the recent accident period. We estimate a 6-year frequency trend rate of 1.5%. accident periods of 2010 to 2015 in semi-annual intervals. ost s C Los 180 170 160 150 140 130 143.5 134.4 171.4 167.0 161.5 166.6 145.2 156.7 120 2010-1 2010-2 October 2016 10
Comprehensive We selected a loss trend rate of 1.1% for both past and future periods for the Comprehensive coverage. We note that the claim severity trend was changing in the range of -0.3% to 2.8% over the 5-7 year data period. On the other hand, claim frequency had reduced in recent years, as the coverage is moving to a higher standard deductible of $500. accident periods of 2010 to 2015 in semi-annual intervals. 75 72.1 70 65 Cost60 55 68.5 57.3 62.1 Loss 50 45 45.8 45.6 51.2 49.1 40 2010-1 2010-2 October 2016 11