MANITOBA PUBLIC INSURANCE

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1 MANITOBA PUBLIC INSURANCE AI.15 OPERATING EXPENSE AND STAFFING LEVEL BENCHMARK REPORT In Order 162/11, the Public Utilities Board recommended that: MPI conduct a benchmarking study with respect to operating expenses and staffing levels, and file the result in next year s GRA. AI.15.1 Introduction Manitoba Public Insurance s operating expenses and staffing levels are directly correlated to, and predicated on, the Corporation s business model and value equation. The value equation represents the social contract that the Corporation has not just with its customers, but with all Manitobans. This contract cannot be compared to contracts within the private insurance model given their inherent differences in mandate and ownership structure. This makes a direct comparison of Manitoba Public Insurance to other jurisdictions complicated and inconclusive. The Corporation instead, has consistently chosen to ensure it meets three specific benchmarks as a way of gauging its ongoing and year-over-year success in terms of operating efficiency and providing value to Manitobans. Firstly, as expressed in Manitoba Public Insurance s corporate goals, the Corporation will charge rates that are, on average, lower than those charged by private insurance companies for comparable price and coverage. On this measure, Manitoba Public Insurance continues to excel; the yearly comparison of rates within Canada bears this out. Page 1

2 * Manitoba Public Insurance Annual Report 2010 The second key metric for the Corporation is that the Basic plan return at least 85 percent of premium revenue to Manitobans in the form of claims benefits. One of the simplest and most effective ways of comparing public auto insurance programs is to look at how much of every premium dollar was returned to the ratepayer in the form of claims payments/benefits. This provides an apples to apples comparison and removes the impact of variables, such as: Different levels of coverage Different pricing and claiming practices Different governance and ownership models Different marketing and underwriting methods From , Manitoba Public Insurance returned more than 96.8 percent of every premium dollar to its customers. The national average over this time was dramatically less, at 76.5 percent. Page 2

3 The third key metric is that the Corporation s annual increases in the Consumer s Price Index (CPI) for auto insurance be less than the rest of Canada. Manitoba s auto insurance cost has grown at a consistently lower rate compared to the national average since 1994 (1.9 percent each year for Manitoba versus a 4.6 percent national annual average). Also, after 2002, Manitoba s auto insurance cost has increased at the much lower rate of 1.5 percent each year, compared to the country-wide performance of 5.3 percent yearly, less than one-third the national average. Page 3

4 Consumer Price Index (1992 = 100) Auto Insurance Premiums Manitoba Canada The Corporation believes that these are the three key benchmarks against which it defines success, and meets its mandate and obligations to Manitobans with respect to operating efficiency. The Corporation has visited the issue of benchmarking from time-to time, but continues to reach the same conclusions, namely that given its unique system and universal mandate, true benchmarking against industry standard benchmarks is limited and/or misleading in terms of providing a true picture of its operating expense framework. Notwithstanding this approach, however, the Corporation continues to be fully prepared to be accountable for the key benchmarks that were established for the Corporation in Page 4

5 AI.15.2 Manitoba Public Insurance s Value Equation Manitoba Public Insurance s business model is designed to support the value equation and administer The Manitoba Public Insurance Corporation Act which provides Manitobans with guaranteed access to superior products, coverage and service at the lowest possible cost. The Corporation is dedicated to offering province wide accessibility and, in co-operation with its business partners, performs at the highest attainable levels of economy, efficiency and effectiveness. Manitoba Public Insurance also works to make the province s roadways and communities safer by ensuring vehicles on the road are safe and by undertaking road safety initiatives to reduce roadway risk. The value equation therefore demonstrates the broad universality of the Corporation s mandate. With respect to issuing insurance, this mandate means that Manitoba Public Insurance must take all comers, and not be selective in the risks it assumes. This increases the Corporation s risk profile relative to other insurers, both public and private, and by extension, its operating expense framework. AI.15.3 Manitoba Public Insurance Service Delivery Model In 1971, Manitoba Public Insurance was created with the primary purpose of administering the basic compulsory, universally available auto insurance program. Basic insurance was charged to both vehicle owners and drivers in an integrated manner, along with vehicle registration and driver licensing. Page 5

6 This integration of licensing and insurance is one of the single-largest advantages of our public insurance system because it significantly reduces the likelihood of uninsured drivers on the roadway by ensuring that all licensed drivers and all registered vehicles are insured vehicles. Until the merger of the Division of Driver and Vehicle Licensing (DDVL) into the Corporation in 2004, work effort and responsibility were shared in the following manner: Manitoba Public Insurance administered vehicle registration and insurance processing DDVL administered driver s licensing and insurance Through the merger, the Corporation became responsible for the administration of The Drivers and Vehicles Act (DVA), as well as vehicle insurance. The government's stated objectives for the 2004 merger were: Improve customer service Save costs and become more efficient by reducing overlap and duplication Create a new model for meeting the licensing, registration and insurance needs of Manitobans Enhance road safety initiatives The Corporation's chosen approach to achieving these objectives was to enhance its customer-centric service model and create a truly holistic approach to serving Manitobans. It took the view that not only did it have an opportunity to significantly improve service, but that it had a responsibility to all Manitobans to enhance and maximize the value of an important public asset, to the fullest extent possible. As part of the equation to enhance value to Manitobans, Manitoba Public Insurance has continually strived to manage operating expenses and align claims costs with customer expectations of value, affordability and fairness. Page 6

7 AI.15.4 Operating Expenses As a public monopoly insurer, Manitoba Public Insurance is able to manage its operating expenses to achieve economies of scale in a number of areas, including infrastructure, promotion, claims processing and repair, and distribution. The economies of scale achieved through Manitoba Public Insurance s market position impacts the bottom line by keeping expenses down and vertical integration of services enables the service delivery model to function efficiently and effectively. AI.15.5 Claims Costs Claims costs is one area in which the Corporation is able to leverage its monopoly position. As part of its claims control strategy to reduce the severity of claims incurred, the Corporation has developed strong relationships with the automotive trades industry. It liaises with vehicle repair trade interest groups including the Automotive Trades Association, Manitoba Car and Truck Rental Association and the Manitoba Motor Dealers Association, and negotiates fair and favourable rates on labour, automotive parts, etc. These partnerships are becoming increasingly more important today as vehicle design, manufacture and repair become increasingly more complex and high tech. Automobile systems and repairs are much more complicated and costly than they were 20 years ago. With technology advancing at a rapid speed, our partnerships will continue to take on added significance in the Corporation s efforts to manage and control claims costs and drive value for ratepayers. Partnership activities centered around cost control with respect to claims management include: Establishment of an accreditation program for the collision repair industry to ensure high quality, safe repairs at a reasonable cost. This requires shops and the technicians within shops to meet standards for facilities, equipment and annual training Delivery of high quality training programs to the collision repair industry to ensure repairs are performed by highly trained technicians to high standards using current technologies Page 7

8 Use of estimating compliance software to ensure all repair estimates are accurate and consistent, and that only required repairs are performed Use of lower cost, high quality aftermarket and recycled parts in vehicle repair Negotiated labour rates that are fair and reasonable Discounted pricing on glass replacement Negotiated non-contract towing and storage charges via a tender process Collection of claims costs owed by other insurers and at fault parties (subrogation) A team-based approach to managing bodily injury claims intended to assist individuals in achieving as full a recovery as possible, as quickly as possible, with appropriate tools, guidelines and controls in place. While being a monopoly public insurer provides Manitoba Public Insurance the opportunity to carry out these activities, it is the focus on the value equation that drives the Corporation to perform these activities. The savings from these initiatives are significant and are passed directly on to customers in the form of lower insurance premiums which currently, are among the very lowest in Canada. AI.15.6 Claims - High Frequency/Low Severity A monopoly public auto insurance company can achieve economies of scale. And by managing its incurred claims through its own system of appraisers, adjusters and quality inspectors, and by working closely with industry partners to reduce the severity of its incurred claims, promotes an affordable system of auto insurance where deductibles can remain low and the Corporation can still return 85 cents on the dollar to its customers in the form of benefits. Customers can make claims without fear of punitive consequences such as inordinately higher rates and surcharges, or outright cancellation of coverage. In short, it makes financial sense for customers to repair their vehicles. While this results in a higher claim frequency, it also allows the Corporation to: Ensure vehicles remain in good working order to perform safely on the road Ensure vehicle repairs are made in accordance to approved standards Page 8

9 Stimulate the economy through the claim processing process, and prudent vehicle repair and bodily injury management Low severity of claims goes hand in hand with high frequency of claims. High severity claims will be reported and claimed by individuals since it makes financial sense; however, the Manitoba Public Insurance model encourages customers also to make low severity claims; this is another factor that distinguishes the Corporation from others in the insurance marketplace. Customers in other jurisdictions are less inclined to file low severity claims, and therefore are more likely to drive unrepaired and in some cases unsafe vehicles. The favourable and affordable deductibles offered by Manitoba Public Insurance contribute significantly to a higher than average claims frequency. While automobile insurance companies in Ontario, for example, regularly offer deductibles in the $1,000 range, those offered by Manitoba Public Insurance can be as low as $100. A breakdown of deductible levels for all perils for eligible vehicles in Manitoba for the 2010/2011 year is presented below. Deductible Level $500 $300 $200 $100 % of eligible vehicles 16.0% 4.1% 75.9% 4.0% * Internal Manitoba Public Insurance data AI.15.7 Manitoba Public Insurance Business Model Performance Measurements and Results Given the foregoing, performance measurements and results must be examined within the context of a strong customer-centric service model that permits and encourages high claims frequency with low severity. Key factors of the Corporation s business model which can impact operating expenses and staffing levels include: End-to-end customer service is performed internally by Manitoba Public Insurance employees and results in a better customer experience but Page 9

10 requires more employees than do models based on, for example, out-sourced call centres or damage estimates handled by repair shops. The Service Centre model and the concept of providing convenient access to services province-wide means that Manitoba Public Insurance requires more locations spread throughout the province to service fewer customers. This is very much due to the geographic and demographic realities of Manitoba and requires a sufficient number of employees to fully staff the Service Centres and with more physical space also required there can be a negative effect on occupancy costs. The business model is designed so that customers will use their insurance as needed and not be reluctant to make a claim should they have an accident. However, this increases the number of claims reported and in turn, requires additional claims personnel to administer end-to-end service. There is a direct relationship between the number of employees and Manitoba Public Insurance s business model. The Corporation requires a complement of employees appropriate for making the service delivery model function and to meet customer expectations. The Corporation s business model promotes a high claims frequency with low severity. The Corporation s costs incurred per claim is lower when compared to both SGI and ICBC. Average Dollar Value of Payments/Benefits Per Claim MPI (2009) $2, MPI (2010) 1 $1, MPI (2011) $2, SGI (2010) $5, ICBC (2010) $3, * MPI Annual Reports ( ) / ICBC 2010 Annual Report / SGI 2010 Annual Report 1 Claims incurred affected by decrease in claims reserves of approximately $268 million The data confirms that Manitobans are not reluctant to file a claim and the severity of claims filed is far less than in Saskatchewan and British Columbia. Page 10

11 Given its design, Manitoba Public Insurance s business model requires more employees to provide end-to-end service. In spite of this, the Corporation is still comparable to SGI and ICBC in operating efficiency as demonstrated by the ratios below. Ratio (2010 Fiscal Year) MPI SGI ICBC Number of Claims/FTE Net Premium Written/FTE $486,766 $393,528 $753,351 * MPI Annual Report 2010 / ICBC 2010 annual report / SGI 2010 annual report * FTE data: MPI Internal MPI data / ICBC eluta.ca / SGI - eluta.ca Finally, automobile insurance will be included as part of the provincial government s pledge to ensure Manitobans continue to enjoy the lowest rates for public utilities in the country. A report has been commissioned and it is expected that it will rank Manitoba s automobile insurance premium rates as being among the lowest in Canada. Page 11

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