DECISION 2016 NSUARB 96 M07375 NOVA SCOTIA UTILITY AND REVIEW BOARD IN THE MATTER OF THE INSURANCE ACT. - and - CO-OPERATORS GENERAL INSURANCE COMPANY

Transcription

1 DECISION 2016 NSUARB 96 M07375 NOVA SCOTIA UTILITY AND REVIEW BOARD IN THE MATTER OF THE INSURANCE ACT - and - IN THE MATTER OF AN APPLICATION by CO-OPERATORS GENERAL INSURANCE COMPANY for approval to modify its rates and risk-classification system for private passenger vehicles BEFORE: Murray E. Doehler, CPA, CA, P.Eng., Member APPLICANT: CO-OPERATORS GENERAL INSURANCE COMPANY FINAL SUBMISSIONS: May 11, 2016 DECISION DATE: June 7, 2016 DECISION: Application is approved, except for the Member Benefit Program.

2 -2- I INTRODUCTION [1] Co-operators General Insurance Company ( CGIC or Company ) filed supporting documents and materials ( Application ) with the Nova Scotia Utility and Review Board ( Board ) for approval to modify its rates and risk-classification system for private passenger vehicles ( PPV ). The Application, dated March 18, 2016, was filed electronically on the same date, and the original documents were received on March 21, [2] Information Requests ( IRs ) were sent to the Company on April 15, 2016, and responses to all questions but one were received on April 27, 2016, with the final response on May 9, [3] As a result of a review by Board staff, a staff report dated May 11, 2016 ( Staff Report ) was prepared. The Staff Report was provided to the Company for review on May 11, 2016, and the Company responded on the same day, indicating that it had reviewed the Staff Report and had no comments. [4] The Board did not deem it necessary to hold an oral hearing on the Application. II ISSUE [5] The issue in this Application is whether the proposed rates and changes to the risk-classification system are just and reasonable and in compliance with the Insurance Act ( Act ) and its Regulations.

3 -3- III ANALYSIS [6] The Company sought approval to change its rates and its risk-classification system for PPV. The Application was made in accordance with the Board s Rate Filing Requirements for Automobile Insurance - Section 155G Prior Approval { Rate Filing Requirements ). The Company s mandatory filing date was March 1,2017. [7] The proposed effective dates are September 1,2016, for new business and, October 31,2016, for renewal business. Rate Level Changes [8] The Company proposed to change its base rates and differentials that vary by territory and coverage as well as to make changes to its risk-classification system. The proposed change represents an overall rate level increase of 2.9%. These changes are based upon an indication for an all coverages combined rate increase of 7.9%. [9] CGIC received approval to split its Third Party Liability rates into Bodily Injury ( Bl ), Property Damage-Tort ( PD-Tort ) and Direct Compensation Property Damage ( DCPD ) effective April 1, Due to lack of data, the indications for this application were prepared for Third Party Liability ( TPL ) combined. They were developed, however, by breaking down TPL experience into Bl and property damage (i.e. PD and DCPD combined) but the indicated change was determined for the combined TPL. As more data with DCPD emerges, eventually CGIC should be able to separate the indications for the coverages.

4 -4- [10] In considering the Company s Application, Board staff reviewed all aspects of the ratemaking procedure, including the following: Loss trends; Impacts of 2010 Minor Injury and 2012 Accident Benefits ( AB ) Reform; Loss development; Premium (rate group drift) trends; Expense provisions including Unallocated Loss Adjustment Expense provisions; Credibility standards, procedure and the complement of credibility; Experience period and weights; Premium to surplus leverage ratio; and Target and proposed Return on Equity ( ROE ). [11] The Staff Report indicated that all aspects were satisfactory except for the profit provision or ROE. Profit Provision [12] CGIC uses a target return on equity of 12% and a premium to surplus ratio of 1.85:1 in its indications. Both of these assumptions are consistent with the last application made in March 2015 by CGIC for these vehicles. Coupled with assumption for investment return on surplus, these assumptions produce a profit provision of 5.7% of premium. [13] The Board, having grown concerned over the level of profit observed in the industry as a whole despite the levels approved, as supported by recent General Insurance Statistical Agency Financial Information reports, has ordered some companies to lower the target ROE to 10%. [14] CGIC provided indications with all original assumptions except for the use of a 10% ROE. The result was an indicated increase of 6.2% (down 1.7% from the original indication of +7.9%).

5 -5- [15] When asked why CGIC should not be ordered to use a lower rate, the Company responded: Co-operators historical ROEs (as provided in Question 8b, Section 4) have been lower than the 12% internal target in 4 of the last 5 years. With this filing, the return on equity underlying the proposed rates is also well below the 12% target at 6.5%. Further, more specific to Nova Scotia, combined ratios for private passengers vehicles in the last 5 years have all been over 100% and were also higher than the national average for all years (see table below). So, while ROEs specific to Nova Scotia are not readily available (equity is not allocated by province), it is reasonable to believe that Nova Scotia returns would be even lower than those based on countrywide ROEs. Nova Scotia & Countrywide Private Passenger Vehicles Combined Ratios Calendar Year Combined Ratio Nova Scotia Countrywide % 102.5% % 98.1% % 104.7% % 103.6% % 100.9% Source: P&C Annual Return, provincial loss ratios from pages and and countrywide loss ratios and expense ratios from page For these reasons, even if the Board s concern about industry profits is justifiable, it is clear that Co-operators have not experienced such profitability in the last years and we think that we shouldn t be forced to use a 10% ROE. [Response to question 2 of IR-1] [16] The combined ratio is the sum of the loss ratio (i.e. claims) and the expense ratio. A value in excess of 100% indicates that profit if any must come from investment return. Based upon this information, it does not appear that CGIC is overearning. Board staff recommend, therefore, that the Board allow the use of the 12% ROE in the indications rather than replacing it with 10%. [17] The Board accepts using the Company indications as the basis to compare proposed rates.

6 -6- Comparison of Proposed Rates to Indications [18] In all cases, except All Perils where no change is proposed, CGIC proposes changes that are in the direction of the indicated changes. Only the magnitude of the changes differs. CGIC proposes smaller than indicated increases for all coverages, where an increase is indicated. For Collision, the Company proposes a decrease that is smaller than indicated. The overall change, as expected, is for a lower increase than indicated. [19] Given the proposal is for a smaller overall all-coverages combined increase than indicated, the proposed rates produce an ROE of 5.9%, well below both the CGIC 12% target and the low end of the Board s 10-12% range of reasonability for ROE. [20] CGIC explains, in its Application that it chose not to take the full indicated increases or decreases because the Company goal is to move smoothly to rate adequacy. CGIC also states that given that the number of policies is relatively small, underwriting results could be volatile and to adjust to the full indicated changes may cause undesirable swings in rates. CGIC also suggests that other changes proposed in this Application may result in an improved mix of business, leading to better experience in the future and reducing the need for some of the increases. [21] Board staff comment that CGIC has adequately supported its selected changes in rates. [22] The Board approves the rates as filed.

7 -7- Other Proposed Rating Changes Territorial Definitions and Territorial Differentials [23] As part of its indications, CGIC undertook a generalized linear models ( GLM ) analysis of its territorial differentials and determined credibility weighted indicated changes. Based upon these indicated changes, CGIC proposed changes to its differentials that followed the indications but the impact was capped. In most cases the cap was set so that the change was no more than 10%. The cap for some coverages in some territories was allowed to exceed 10% where the indicated changes was very large. In these cases, half of the indicated change was taken. [24] In this Application, CGIC proposes to change its territory definitions. While the number of rating territories used will not change under the proposal, how the Forward Sortation Areas ( FSAs ) are assigned to the rating territories will change. To do this, CGIC ran its GLM model for TPL with all rating variable differentials fixed except for territory. In this manner, any signal from the model not captured by the other variables would be attributed solely to territory. Once this analysis was completed, the Company mapped its GLM residuals to the FSAs in the province. A negative residual indicated the loss costs are lower than the modeled results and vice versa for positive residuals. Using this map of residuals and considering proximity of the FSAs, like residuals were grouped together to produce new territory definitions. These new definitions were fed into the GLM model and differentials were developed. By establishing the territory definitions and differentials for TPL only, CGIC was able to simplify the model while accommodating the use of a single set of definitions and differentials

8 -8- [25] Board staff supports CGIC s proposed changes to territory definitions and the associated differentials. [26] The Board approves the proposed changes to the territory definitions and differentials. Adoption of 2016 CLEAR Table [27] CGIC currently uses the 2015 Canadian Loss Experience Automobile Rating ( CLEAR ) (AB Alberta & Atlantic) tables separated by coverage for Collision, DCPD, Comprehensive & Specified Perils, and Accident Benefits to assign rate groups to vehicles. In this Application, CGIC proposes to update this table to the 2016 CLEAR (AB Alberta & Atlantic) table approved by the Board for use in Nova Scotia. [28] The Company off-balanced the impact of this change along with other classification changes (noted later) in order to make these changes revenue neutral. [29] The Board approves the proposal to adopt the 2016 CLEAR Table, as filed. Other Differentials [30] The GLM analysis was also used to determine the indicated differentials for use of vehicle and for exposure (i.e. annual distance driven) for Third Party Liability, Collision, and Comprehensive & Specific Perils and for Years Licensed for the last two only. For Use, the indicated changes, capped at +/- 10% were selected with a few adjustments to make the transition between the groups more understandable. Similarly for exposure, differentials generally followed the indications, capped at +/-10, with a few deviations.

9 -9- [31] For Years Licensed/Gender Interaction variable, a new methodology involving advanced mathematical modeling ( cubic splines ) was used. A separate graph or spline was created for males and females and these were used to produce differentials. CGIC indicates that through this approach, the data was almost fully credible so the Company relied only on the model indications to establish the differentials. While this advanced modeling approach produces smoother transitions between years licensed, some adjustments were made to avoid counter-intuitive results or inversions or to temper potential unfavorable dislocation results. CGIC outlines all those places where such deviations were made in the Application. [32] For Gender, CGIC is making some changes. In the current rating system, CGIC only reflects gender where years licensed is less than 9 years. In this Application, the Gender rating variable will apply to all years licensed. The inclusion of all years licensed results in a switch of the differential from having male differential larger than the female to the reverse. CGIC provided support that this relationship is consistent with Company experience. [33] With the expansion of Gender to all years licensed, the current Class variable becomes redundant. That is, the signal from the model captured by this variable is already captured in the existing variables and the application of Gender to all years licensed. To recognize this, CGIC proposes to remove, effectively, the variable by settling all differentials to but the Company wants to leave the variable in the model for future use if it should become important. [34] To establish its differentials for Years Claims Free given the correlation between this variable and the Years Licensed variable, the Company first determines its

10 - 10- model differentials for Years Licensed and having set these, determines the differential arising solely from this variable. CGIC explains, however, that this approach essentially applies Years Claim Free surcharges to claim-free drivers with little experience. To address this, the Company made manual adjustments to some of the differentials. [35] CGIC also proposes to introduce a Years Claim Free rating variable for Accident Benefits as the GLM model indicates it is statistically significant. Because this is essentially a new variable, CGIC relied more heavily on the GLM indicated differentials rather than the credibility weighted differentials. [36] The impact of all of these differential changes, along with the impact of the adoption of the 2016 CLEAR table noted earlier, was off-balanced through base rates to make the changes revenue neutral. [37] Board staff agrees with the approach taken by CGIC and believes the Company has provided sufficient support for the proposed changes to these differentials. [38] The Board approves the proposed changes as filed. Discounts and Surcharges [39] CGIC proposes changes to its discounts and surcharges. In each case, the estimated impact of the discount/surcharge changes were off-balanced through base rates to make them revenue neutral. [40] The Board approves all of the following discounts and surcharges, except for the Member Benefit Program, on the direction that the impacts are off balanced.

11 -11 - Conviction Free Discount/Minor Conviction Surcharge [41] CGIC proposes the introduction of 15% discount where all operators of the vehicle have no minor convictions in the past three years. The Company used a rating variable Number of Minor Convictions in last 3 years in its GLM model. This approach allowed the model to develop both a discount for no convictions and to assess the appropriateness of the current minor conviction surcharge. [42] CGIC indicates that about 95% of its principal operators in its book would qualify for the 15% discount. As a prudent first step, given the discount is new, CGIC set the level of discount lower than the indicated level. [43] At the same time, CGIC increased the minor conviction surcharge from 10% to 20% after considering the model results and competitive information. The surcharge applies to each minor conviction after the first. [44] Board staff believe CGIC has provided proper support for the changes to the minor conviction discount and surcharges. Renewal Discount [45] CGIC proposes to reduce the current 10% discount to 5%. The Company indicates very few competitors offer such a discount at the current level and more offer one at the proposed level. CGIC argues that lowering the discount will help to change the mix of its customers. In conjunction with the proposed new business discount this will help to attract the desired new customers.

12 -12- Administrative Changes New Business Discount [46] CGIC proposes to offer a new business discount to those clients new to CGIC that meet specific criteria. To be eligible for the discount: The vehicle must not be currently insured with CGIC; Continuously insured with the same insurance company for previous five years (subject to allowances for lapses less than 24 months, as per Regulations) - loyalty requirement ; No convictions of any kind (minor/major/serious) in past three years; Licensed for 9+ years; Claims free for 6+ years; and Vehicle has full coverage. [47] Those meeting the qualifications would receive a 10% discount at issue, a 7.5% discount at first renewal, and a 5% discount at the second, third and fourth renewal. After this time, the vehicle will be eligible for the 5% renewal discount and the new business discount is removed. [48] When asked why there is a loyalty requirement, CGIC explained: By looking at loyalty to a previous carrier, we are implicitly making the assumption that previous loyalty is predictive of future loyalty. All else equal, a new client that we expect will stay insured with the Co-operators for many years is more attractive than another client that will stay for only one year. Over a 5 years period, this first hypothetical client will have a lower acquisition cost then the second one, which turns out to be reasonable for the client to benefit from this expense saving on our end. [Response to question 7 of IR-1] [49] The other eligibility criteria are included to attract lower risk or better drivers to CGIC in an attempt to improve the mix of vehicles that CGIC underwrites. The discount will help to overcome the renewal discounts that may be offered at the old company to make CGIC an attractive alternative. [50] Board staff have stated that CGIC has provided sufficient support for the introduction of the new business discount at the proposed levels.

13 - 13- Short Commute Discount [51] CGIC proposes to introduce a 5% discount for those principal operators who are licensed for 9 or more years and have a commute of 8km or less. The discount applies to Bodily Injury, PD-Tort, DCPD, and Collision. As the Company did not have the needed information on its present customers, CGIC relied on data from its sister company, Coseco Insurance Company, to determine the impact of the change. [52] When asked why being licensed 9+ years is required, CGIC indicated the discount was aligned with that offered by its competitors in Nova Scotia which had this requirement limiting the discount to experienced drivers. CGIC also showed that the indicated discount is higher for this group than if it were extended to all drivers. [53] Board staff believes CGIC has provided sufficient support for this proposed discount. Occupational Discount [54] CGIC proposes to introduce a 5% discount where the occupation of the principal operators falls within a list of eligible occupations. CGIC explains that this discount is aligned with that offered by other competitors in NS. [55] The Company indicated that to determine which occupations are eligible: We compared our list of eligible occupations currently approved for use in other provinces, against the list of occupations approved and in use in Nova Scotia by our competitors. Our eligible occupations are in-line with our business practices in other provinces, as well as the occupations currently approved to receive this discount by our competitors in Nova Scotia. The list of occupations will be updated, following the appropriate filing process, on a regular basis. [Response to question 12 of IR-1]

14 -14- [56] Through the IR process, CGIC added Provincial Government Employees- Administration to the eligible list to be consistent with inclusion of such employees for Federal and Municipal Governments. [57] Board staff believe that CGIC has provided proper support for the introduction of the Occupational Discount. Member Benefit Program [58] CGIC proposes to introduce its Member Benefit Program that will provide a 2.5% discount to members of a participating member organization who purchase automobile insurance through CGIC. CGIC explains that the Company itself is a cooperative and a Canadian-owned insurer. The Company is owned by 43 co-ops or likeminded organizations. CGIC further explains that its member organizations are cooperatives or credit unions across the country. The Company cites the goal of seeing all co-operatives be successful and toward that end, principle number 6, which requires Cooperation among Co-operatives, is the rationale for offering the program. The member organizations that are eligible for the discount provided under this program are required to agree with these conditions. [59] CGIC believes that the expense savings afforded by gaining direct marketing access to members warrant the discount. That is, the Company is passing along some of the savings that arise from the various opportunities afforded it by the desire to co-operatives to see others be successful. [60] From an economic standpoint, it appears that the discount is warranted and would be considered reasonable. The Automobile Insurance Rates and Risk-

15 -15 - Classification Systems Regulations allows Membership in an organized group if it is one of the following: (a) a group of employees, which may include retired employees, of the same employer; or (b) a group of persons that is (i) (ii) a labour union, a professional or occupational association, (iii) an alumni association, or (iv) a non-profit organization that has been in existence for at least 2 years, except an organization that is formed primarily for the purpose of purchasing or providing goods or services. [61] When asked to explain how the members of member organizations, who will be eligible for this discount, conform to the definition of eligible group in the Regulations, CGIC provided the following response: Co-operative organizations are formed to address unmet social and environmental needs. While economic benefits and profits are important, they are seen as a necessary means to achieve their original purpose and sustain their ability to meet the needs of their members, not as the primary motivator. Additionally, co-operatives are unique in their democratic nature. Co-operatives are formed so that members have the ability to influence and vote on the strategic direction of the co-operative regardless of their personal financial status or buying ability. All members are equal in the eyes of the co-op. Additionally, some cooperatives will come together to form federations or advocacy groups to amplify their voices and advocate for their shared interests. These organizations are primarily used to help inform government and the sector they work in. Members of The Co-operators can be categorized into four different areas and common purposes: Consumer co-ops: These co-ops are created so members can democratically own or influence the co-op where product selection, services, or access (ie. Location) are concerned. Supplier and marketing co-ops: These co-ops are formed when individuals want to influence the processing or marketing of their products, collectively promote products, and advocate for the group. Worker co-ops: formed by workers who wish to own their jobs and influence their work. Federations: co-ops in a similar industry come together to form federations to amplify their voices or to have more power. This also includes associations who represent the interests of a particular group of individuals and exist to promote their members interests. The Co-operators introduced the Member Benefits Program to bring products and services to the members of their member co-ops. It is an opportunity for us to market to a group that already has an affinity for our way of business.

16 - 16- In summary, co-operatives exist to meet the needs of its members and community. These needs are not financial, but social and environmental in nature. Members will also join a co-operative to have voice and influence on the strategic direction of the co-op and to have them advocate on their behalf. [Response to question 14 of IR-1] [62] The members of member organizations are not a group of employees...of the same employer, nor are the co-operatives operated as a non-profit organization. Accordingly, from the evidence presented, on the balance of probabilities, the Board finds that Members of a participating Member Organization does not comply with the definition in the Regulations of Membership in an organized group. Accordingly, the Member Benefit Program discount is denied. Administrative Changes Change to Proration Calculation [63] In order to automate all proration calculations in its new policy administration system, CGIC proposes changes to the proration calculations required when coverage is added or deleted mid-term or policy changes are made mid-term. The current process uses a table of factors for each day of the year that is calculated by dividing the day of the year by 365 and then rounding the result to 3 digits. For example, July 5 is day 186 and its factor is (186/365 rounded). [64] To do a proration calculation, the difference in these factors between policy expiry day and the effective date of the change would be applied to the premium for the term (if a 6 month term the result is multiplied by 2). [65] In the proposed approach, the full term premium is multiplied by the number of days remaining in the term divided by the actual number of days in the term. There is no rounding until the premium required is determined.

17 - 17- [66] CGIC provided comparison examples of old formula calculations to new calculations that revealed only minor differences in the amounts as one would expect given the proposed change. [67] The new approach has some allowances for February 29 that are, to Board staff, reasonable in the circumstances. [68] The Board approves the proposed change to the proration calculation, as filed. Removal of Monthly Payment Plan Fees [69] CGIC offers its clients the opportunity to use a monthly payment plan to pay premiums. The Company currently charges clients using this option a fee of $1.50 each month. In this Application, the Company proposes to remove this charge for PPV, as well as Commercial Vehicles and Miscellaneous Vehicles. CGIC indicates that a vast majority of its policyholders make use of the monthly payment plan. [70] CGIC estimated the impact of the lost revenue from those using the monthly payment option and off-balanced the loss of this revenue through base rates. Given that most of the CGIC policyholders make use of this option, the off-balance to effectively move the cost of the payment plan into base rates seems reasonable. [71 ] The Board approves the proposal to remove the Monthly Payment Plan fee, as filed, for PPV, Commercial Vehicles and Miscellaneous Vehicles. Premium Dislocation Cap [72] CGIC indicates that with the proposed changes, a number of its policyholders may experience significant dislocation either in higher or lower premiums.

18 -18- To temper the impact of the proposed changes, CGIC proposes to cap rate increases at a vehicle level so that no vehicle would see an increase in excess of 20%. To offset the cost of this cap, CGIC also proposed to cap rate decreases at 10% (i.e. no vehicle would see a reduction in premium of more than 10%). [73] CGIC estimates that the small number of vehicles that will experience the cap (either positive or negative) will substantially diminish after the second and third renewal. Also, the amount of lost revenue with a cap on the increase is almost offset by the cap on the decrease. [74] CGIC indicates that the cap on the vehicle premium will be removed once the correct level of premium is obtained or if there is any material change to the risks that are insured. The Company lists (a) change in vehicle type, (b) a change in the principal operator assigned, or (c) a change in address, as examples of material changes in risk. [75] CGIC also provided some examples of how the cap would apply in practice. [76] Board staff believe that CGIC has provided sufficient support for the inclusion of the dislocation cap on increases and decreases. [77] The Board approves the cap, as filed. Rate Manual Review [78] Board staff have reviewed the Rate Manual on file and found no instances where the Company is in violation of the Regulations. The Company proposed no changes to its Rate Manual other than those necessary to effect the changes noted in this Decision.

19 -19- IV FINDINGS [79] The Board finds that the Application complies with the Act and Regulations, as well as the Rate Filing Requirements. [80] The financial information submitted by the Company satisfies the Board, pursuant to Section 1551(1 )(c) of the Act, that the proposed changes are unlikely to impair the solvency of the Company. [81] The Board finds the proposed rates are just and reasonable. [82] The Application included full actuarial indications and the required territorial analysis; therefore, it qualifies to set the new mandatory filing date for PPV for the Company to March 1,2018. [83] The Board finds the proposed discounts and surcharges, except for the Member Benefit Program and administrative changes, to be just and reasonable. [84] The Board approves the effective dates of September 1, 2016, for new business and October 31,2016, for renewal business. [85] The Company is required to file an electronic version of its updated Rate Manual within 30 days of the issuance of the Order in this matter. [86] An Order will issue accordingly. DATED at Halifax, Nova Scotia, this 7th day of June, Murray E. Doehler