Submission to the Alberta Automobile Insurance Rate Board Annual Review of Automobile Insurance Premiums for Basic Coverage.

Transcription

1 Submission to the Alberta Automobile Insurance Rate Board 2012 Annual Review of Automobile Insurance Premiums for Basic Coverage May 31, 2012

2 This submission is made on behalf of The Dominion of Canada General Insurance Company ( The Dominion ) to the Alberta Automobile Insurance Rate Board ( The Board ). Firstly, we would like to thank The Board for the opportunity to provide input into the 2012 Annual Review of Automobile Insurance Premiums for Basic Coverage. The Dominion remains committed to working with The Board to ensure the long term success of the automobile insurance system in Alberta. Due to timing, this submission does not consider any content of the 2012 report on industry wide experience being prepared by Oliver Wyman for The Board. Incorporated in 1887, The Dominion is a 100% Canadian-owned insurer operating only in Canada. The Dominion has extensive experience under changing environments over many years across various jurisdictions in Canada. We take pride in the service we have provided to Alberta residents over the many years and the resulting goodwill we enjoy in the province. We currently insure over 56,000 private passenger drivers in Alberta. As an insurer with all of our business solely within Canada, this represents a significant portion of our business. The decisions of The Board are of paramount importance to us, our shareholder and ultimately our policyholders. We appreciate the opportunity for continued dialogue on what constitutes the best system to price automobile insurance in Alberta. As we have noted in our previous presentations to The Board, The Dominion strongly supports a system that allows individual companies to apply to The Board for rate changes that are justified by their unique results, trends and financial performance. It is our opinion that such a system is undoubtedly in the best collective interest of policyholders, government and the industry. The possibility of annual mandated rate changes is an ongoing risk factor which inhibits competitive activity as companies incorporate this risk factor when considering rate changes. As another way to foster competition and choice for consumers, consideration could also be given to a permissive Filed Underwriting Rules approach like that currently used in Ontario and Newfoundland. Under this approach, a company can refuse a risk on the basis of a filed rule, but is not required to and thus can write or retain a risk falling within Page 2 of 6

3 the rules filed. These rules would be subject to approval, comply with Fair Practices regulations and meet a reasonable and justifiable test. The approach works well in these two provinces. Residual Market Eligibility rules could thus be eliminated, and be replaced by the Prohibited Underwriting rules and the filed company Filed Underwriting rules. We would like to share The Dominion s actual experience on loss trends since reforms were implemented in late Note this experience reflects the actual effect of the minor injury regulation on incurred losses, as well as fluctuations in reserve levels due to past uncertainty relating to the minor injury regulation. We have made no adjustment for a change in level due to reforms. The following table summarizes the change in The Dominion s loss cost, as at December 31, 2011, for private passenger automobile business in Alberta for compulsory coverages: Loss Cost Year-to-Year Change Accident Year Bodily Injury Property Damage Accident Benefits 2006 / % 18.4% 10.1% 2007 / % 15.4% -14.4% 2008 / % 2.6% -11.7% 2009 / % -1.7% 17.9% 2010 / % 13.2% -0.1% 2011 / % 14.2% 6.7% The Dominion s Third Party Liability Bodily Injury loss costs have begun to deteriorate after improvements in 2007 and We consider the improvement shown in 2010 to be in response to a fluctuation in loss costs in 2009 and we are considering the combined effect of 2009 and 2010 in our comments. This is consistent with the findings of Oliver Wyman at the 2011 Annual Review. We suspect that the improvement in 2008 was due to uncertainty because of the minor injury regulation court challenge. For Property Damage, loss costs continue to increase. The Dominion s Accident Benefits loss costs had been improving for 2007 and 2008 but have since deteriorated as well. Page 3 of 6

4 The following table summarizes the change in The Dominion s loss frequency, as at December 31, 2011, for private passenger automobile business in Alberta for compulsory coverages: Frequency Year-to-Year Change Accident Year Bodily Injury Property Damage Accident Benefits 2006 / % 7.3% 8.5% 2007 / % -3.5% -7.7% 2008 / % 4.7% -14.8% 2009 / % 5.2% -4.9% 2010 / % -3.8% 24.3% 2011 / % 11.0% 9.5% As seen previously in other Canadian jurisdictions, we have observed that post reform trends tend to deteriorate after a period of initial improvement. From the above table it is apparent that the expected increase in claim counts that typically follows after reforms have been in place for a number of years is now evident for all mandatory coverages. As has been clearly demonstrated, the underlying assumptions and parameters of analysis are unlikely to be what actually occurs, and an inherent uncertainty exists in any estimate of future costs. While a considerable amount of the uncertainty around the ultimate cost of minor injuries has been removed, this does not diminish the difficulty in estimating ultimate claims costs for long tail coverages such as Third Party Liability Bodily Injury and Accident Benefits. This challenge is even greater when trying to assess ultimate claims costs on an industry wide basis. The Dominion s ultimate claim costs fully reflect the post-reform impact of the cap. Unfortunately, underlying frequency trends continue to deteriorate, increasing the estimate of ultimate claim cost in total. These changes are fully reflected in the assumptions used to project future claim costs. However, The Dominion s mix of business is different from that of the Industry and as such, may not be reflective of other companies experience. Since 2008, we have seen an increased propensity for injured parties to retain legal representation, presumably because claimants are more financially vulnerable and the Page 4 of 6

5 plaintiff bar perceive opportunity. There continues to be pressure from plaintiff counsel to look for areas that fall outside the cap, with a current push to have certain conditions considered outside of the cap. We are seeing more claims put forth by plaintiff counsel for things like temporomandibular joint disorder (TMD), post traumatic stress and chronic pain syndrome in an attempt to have the cap removed for soft tissue injuries. There is a risk that they may succeed and put more pressure on claim costs. Predicting the economic climate in Alberta, and its effects on auto insurance, can only be described as challenging. There has been a tremendous swing in economic activity over the past few years. In our view, it is almost certain that inflationary pressures will continue to impact ultimate claim cost over and above the current loss trends. While the CPI in Alberta is low compared to the rest of Canada, insurance is subject to a different kind of inflationary pressure. The Alberta economy is strong and wage levels continue to grow creating additional pressure on the cost of coverage for loss of income, as well as inflation on other pecuniary damages. As the unemployment rate continues to be one of the lowest in the country, there is the possibility of a shortage of labour in the vehicle repair sector of the economy. We also anticipate longer wait times and slower repairs which will increase the payouts for rental of replacement vehicles. Pricing of insurance is a prospective exercise that must account for the inflationary pressures despite the inherent difficulty in forecasting. The ultimate effect of the uncertainties noted above on the cost of basic automobile insurance coverage is potentially significant. It is in the best interest of all stakeholders to ensure we maintain a financially stable automobile insurance environment where companies can effectively determine the cost of the product and provide that product at a competitive, yet adequate price. As we have stated in the past, caution should be applied when considering a mandated rate change. Allowing companies more flexibility in adjustment of rates based on their individual results, reserving practices, economic forecast, competitive position and risk profile strategy will mitigate the need for larger rate corrections in the future. In order to Page 5 of 6

6 maximise the opportunities for a competitive marketplace, the Board should quickly adopt a system of company-initiated rate filings rather than the one size fits all approach of mandated rate changes. We would like to thank The Board for their time and for the opportunity to share our comments. There are many elements within the current automobile system in Alberta that are working. The Dominion remains strongly committed to supporting efforts that ensure a successful, sustainable automobile insurance market place for Alberta automobile insurance consumers. Page 6 of 6