Reform or the Road to Reform or the Road to Government Insurance?Government Insurance?

Reforms Across The CountryReforms Across The Country

All province except Quebec have All province except Quebec have initiated reforms in response to the initiated reforms in response to the hard markethard market

All were designed to lower rates, All were designed to lower rates, some voluntarily, some by decreesome voluntarily, some by decree

All promised some claims relief in All promised some claims relief in return for lower ratesreturn for lower rates

Some were tweaks, other complete Some were tweaks, other complete re-writesre-writes

Have they been successful?Have they been successful?

Depends on your point of view and Depends on your point of view and your timeframeyour timeframe

Consumers have seen lower rates – Consumers have seen lower rates – both governments and clients would both governments and clients would see this as successsee this as success

There should be a reduction in BI There should be a reduction in BI costs – if the caps are effective – costs – if the caps are effective – success from an insurer’s success from an insurer’s perspectiveperspective

Have they been successful?Have they been successful?

Over long term, success – healthy, Over long term, success – healthy, competitive market where product is competitive market where product is available and affordable – everybody available and affordable – everybody winswins

Current set of reforms may lead Current set of reforms may lead away from this goal – everybody away from this goal – everybody losesloses

Most Likely to End Up with Most Likely to End Up with Government Run InsuranceGovernment Run Insurance

AlbertaAlberta Newfoundland & LabradorNewfoundland & Labrador Nova ScotiaNova Scotia New BrunswickNew Brunswick PEIPEI OntarioOntario QuebecQuebec

AlbertaAlberta

Product ReformProduct Reform October 1, 2004 October 1, 2004

• Cap on pain and suffering for minor injuries of Cap on pain and suffering for minor injuries of $4,000$4,000

• Increase limit for med/rehab benefits from Increase limit for med/rehab benefits from $10,000 to $50,000$10,000 to $50,000

January 1, 2005January 1, 2005• Consideration of collateral sourcesConsideration of collateral sources• Determination of wage losses using net rather Determination of wage losses using net rather

than gross incomethan gross income

AlbertaAlberta

Premium ReformPremium Reform October 30, 2003October 30, 2003

• Premiums frozenPremiums frozen October 30, 2004October 30, 2004

• Grid rates introduced as cap on premiums that Grid rates introduced as cap on premiums that could be charged for TPL & ABcould be charged for TPL & AB

• 5% reduction in premium for the remainder of 5% reduction in premium for the remainder of the policy term for non-grid risksthe policy term for non-grid risks

• Take-all comers ruleTake-all comers rule• Two risk sharing pools – one for grid risks, the Two risk sharing pools – one for grid risks, the

other for non-grid risks other for non-grid risks

AlbertaAlberta

July 1, 2005July 1, 2005• 6% mandated premium reduction for 6% mandated premium reduction for

TPL & ABTPL & AB November 1, 2005November 1, 2005

• Further premium reductions for TPL & Further premium reductions for TPL & AB, hearings to be held at the end of AB, hearings to be held at the end of June, MOW report recommends a further June, MOW report recommends a further 8.2% decrease in addition to the 6% 8.2% decrease in addition to the 6% noted abovenoted above

AlbertaAlberta

Have the reforms been effective? Have the reforms been effective?

NO IDEA. IT IS TOO EARLY TO TELL.NO IDEA. IT IS TOO EARLY TO TELL.

AlbertaAlberta

Is the system sustainable?Is the system sustainable?

NO IDEA. TOO EARLY TO TELL. NO IDEA. TOO EARLY TO TELL.

AlbertaAlberta

What we do know:What we do know:• The premiums collected by the industry will The premiums collected by the industry will

decrease due to capping effect of grid – decrease due to capping effect of grid – estimated impact – 7.8% to 8.3%. estimated impact – 7.8% to 8.3%.

• The premiums collected by the industry will The premiums collected by the industry will decrease due to mandatory 5% reduction for decrease due to mandatory 5% reduction for non-grid risks – estimated impact 4.1% to 3.6%non-grid risks – estimated impact 4.1% to 3.6%

• Loss costs will decrease due to product reform Loss costs will decrease due to product reform – estimated impact -12.9% to -16.3%– estimated impact -12.9% to -16.3%

AlbertaAlberta

What we do know:What we do know:• Non-grid risks will have to subsidize grid Non-grid risks will have to subsidize grid

risks – estimated subsidy 10.1% to risks – estimated subsidy 10.1% to 10.8% per non-grid risk10.8% per non-grid risk

• Likely understates as does not include Likely understates as does not include the impact of bad actors re-entering the impact of bad actors re-entering system now that they can afford system now that they can afford insurance again insurance again

AlbertaAlberta

Auto insurance market was $2.5 Auto insurance market was $2.5 billion in 2004 billion in 2004

68 insurers actively write Alberta 68 insurers actively write Alberta autoauto

Top 5 have 46% of the marketTop 5 have 46% of the market Top 10 have 65% of the marketTop 10 have 65% of the market

AlbertaAlberta

Strategy 1 – Become a niche writerStrategy 1 – Become a niche writer• Sub-standard – There is no more substandard Sub-standard – There is no more substandard

marketmarket• Group – groups have not historically been Group – groups have not historically been

profitable in Alberta – groups are most profitable in Alberta – groups are most profitable with there are significant premiums profitable with there are significant premiums in first party coverages - will be forced to write in first party coverages - will be forced to write non-group risks using group ratesnon-group risks using group rates

Strategy 2 – Write everythingStrategy 2 – Write everything• Will give insurer large share of sharing pool Will give insurer large share of sharing pool

losses without sufficient control over rates to losses without sufficient control over rates to generate sufficient profit to cover lossesgenerate sufficient profit to cover losses

AlbertaAlberta

Strategy 3: CreamingStrategy 3: Creaming• Write with a loyal broker force in more Write with a loyal broker force in more

adequately rated risk areas adequately rated risk areas • To the extent it is possible, write only To the extent it is possible, write only

full coverage – all mandatory coverage full coverage – all mandatory coverage only risks in the pool only risks in the pool

Alberta Alberta Strategy 3 – Likely outcomeStrategy 3 – Likely outcome

• Brokers with historically higher loss ratios or Brokers with historically higher loss ratios or high percentage of insureds with mandatory high percentage of insureds with mandatory coverages only will have great difficulty coverages only will have great difficulty keeping marketskeeping markets

• Pool for non-grid risks will grow - subsidy Pool for non-grid risks will grow - subsidy required from non-grid risks outside pools will required from non-grid risks outside pools will increaseincrease

• Insurers who can not cream or for whom Insurers who can not cream or for whom Alberta is not an important market will leave Alberta is not an important market will leave increasing availability problemsincreasing availability problems

• Government reacts – sees no solutions and Government reacts – sees no solutions and sets up Government owned insurersets up Government owned insurer

AlbertaAlberta

Factors For Government InsuranceFactors For Government Insurance• Auto Insurers have poor image with both the Auto Insurers have poor image with both the

Government and the publicGovernment and the public• Government has excess cash that can be used Government has excess cash that can be used

for establishing a government run insurerfor establishing a government run insurer• Are surrounded by relatively successful Are surrounded by relatively successful

Government-run insurance companiesGovernment-run insurance companies• The industry is not a significant employer The industry is not a significant employer

outside of brokerages – could still use brokers outside of brokerages – could still use brokers as the distribution network.as the distribution network.

Alberta Alberta

Factors AgainstFactors Against• Sends wrong message to industry about Sends wrong message to industry about

Alberta being ‘open for business’Alberta being ‘open for business’• Uncertain of costs under NAFTA – re Uncertain of costs under NAFTA – re

confiscation of business more than $300 confiscation of business more than $300 million written by companies with US million written by companies with US parentsparents

Importance of Alberta Auto Market Importance of Alberta Auto Market to Individual Insurersto Individual Insurers

# of # of CompaniesCompanies PremiumPremium

>12%>12% 28%28% 47%47%

>25%>25% 4%4% 4%4%

>50%>50% 2%2% 3%3%

Newfoundland & LabradorNewfoundland & Labrador

Product ReformProduct Reform• All injuries have a $2,500 deductible on All injuries have a $2,500 deductible on

pain and sufferingpain and suffering• Other minor tort reformsOther minor tort reforms

Newfoundland & LabradorNewfoundland & Labrador

Price ReformPrice Reform• Varied by coverage & territory – as per Bill 30Varied by coverage & territory – as per Bill 30• Goal was 15% overall decrease – loss reforms Goal was 15% overall decrease – loss reforms

worth less than 5%worth less than 5%• Effective August 1, 2005 insurers must reduce Effective August 1, 2005 insurers must reduce

their approved rates by 5% (including FA)their approved rates by 5% (including FA)• Elimination of rating by age, sex, marital status Elimination of rating by age, sex, marital status

– must refund difference for those whose rates – must refund difference for those whose rates are lessare less

• Group insurance ban to be repealedGroup insurance ban to be repealed• Move from benchmark to full prior approvalMove from benchmark to full prior approval

Newfoundland & LabradorNewfoundland & Labrador

Market had written premiums of Market had written premiums of $246 million in 2004$246 million in 2004

52 active writers52 active writers Top 10 – 83% of marketTop 10 – 83% of market Top 5 – 59% of marketTop 5 – 59% of market

Importance of N&L Auto Market to Importance of N&L Auto Market to Individual InsurersIndividual Insurers

# of # of CompaniesCompanies PremiumPremium

>12%>12% 6%6% 39%39%

>25%>25% 4%4% 18%18%

>50%>50% 4%4% 18%18%

Factors in Favour of Establishing Factors in Favour of Establishing Government InsuranceGovernment Insurance

Government and public are very unhappy Government and public are very unhappy with P&C insurerswith P&C insurers

Political issuePolitical issue May be facing significant availability issues May be facing significant availability issues

of insurers who have declared they are of insurers who have declared they are pulling out actually do – 23% of market pulling out actually do – 23% of market has declared that they will leave – more has declared that they will leave – more may leave if they carry through with the may leave if they carry through with the regulation of homeowner’s ratesregulation of homeowner’s rates

Factors AgainstFactors Against

N&L government has no money – N&L government has no money – establishing a new insurer would be establishing a new insurer would be expensiveexpensive

There are no nearby precedence for There are no nearby precedence for moving to government run insurancemoving to government run insurance

Are in negotiation with other Atlantic Are in negotiation with other Atlantic provinces to unify regulatory structuresprovinces to unify regulatory structures

Have writers with a significant stake in the Have writers with a significant stake in the market that may be willing to suffer short market that may be willing to suffer short term losses to gain market control term losses to gain market control

ConclusionConclusion Insurers in Alberta and N&L are largely in a Insurers in Alberta and N&L are largely in a

lose- lose situation – there are few lose- lose situation – there are few strategies for successstrategies for success

Loss of the Alberta automobile insurance Loss of the Alberta automobile insurance market is a real possibilitymarket is a real possibility

Alberta auto represents 14.5% of the Alberta auto represents 14.5% of the Canadian auto market, 6.9% of the total Canadian auto market, 6.9% of the total marketmarket

Loss of the N&L also possible but less Loss of the N&L also possible but less likely – less than 2% of the auto market, likely – less than 2% of the auto market, 0.7% of total market0.7% of total market

ConclusionConclusion

Governments can not treat an Governments can not treat an industry with 50+ players like a industry with 50+ players like a monopoly and not expect availability monopoly and not expect availability issuesissues

What strategy would you recommend What strategy would you recommend to your company?to your company?