REPORT REPORT OF THE TASK FORCE ON AUTOMOBILE INSURANCE ISSUES. MARCH Canadian Institute of Actuaries

Transcription

1 REPORT REPORT OF THE TASK FORCE ON AUTOMOBILE INSURANCE ISSUES MARCH Canadian Institute of Actuaries Document Ce document est disponible en anglais Canadian Institute of Actuaries Institut canadien des actuaires

2 Canadian Institute of Actuaries Institut canadien des actuaires MEMORANDUM TO: FROM: All members of the Canadian Institute of Actuaries interested in P and C issues David Oakden, Chairperson Task Force on Automobile Insurance Issues DATE: March 2, 2005 SUBJECT: Report of the Task Force on Automobile Insurance Issues The Task Force on Automobile Insurance Issues is pleased to present its Report on Automobile Insurance. The purpose of the report is clearly set forth in the Summary section. This report offers members and other interested readers an overview of comparative average claim costs among provinces. Average claim costs form the largest single component in determining premium rates {the other major components of premium rates are expenses and profits}. The report describes actuaries roles in determining premium rates. The report clearly shows that it is the cost of claims that determines what premium rate levels are appropriate. Thus, the report serves as a basis for examining a number of auto insurance cost issues. The report is intended to provide factual information rather than to respond to allegations and misperceptions in the media and issues of perceived fairness or value for money. It does not provide recommendations on product reform or the role of government. Nevertheless, the report can provide value in other ways including: It can be provided to inquiring bureaucrats and politicians who are looking for facts regarding the factors that influence; o Premium levels, and o The actuary s role in auto insurance. It can be provided to the media who inquire about; o How premium levels are set, o Comparative claim costs by province, and Secretariat : Metcalfe, Ottawa ON K2P 1P1 (613) FAX: (613)

3 o The role of the actuary. It can be used as a source document from which the Canadian Institute of Actuaries may choose to develop a position statement regarding premium rate determination, which could then be referred to in guiding responses to relevant queries from government and the media on these subjects. DO

4 SUMMARY The cost of automobile insurance has become a major issue in virtually every Canadian province. Often, premium levels are the only basis upon which consumers and others make comparisons of automobile insurance rates across jurisdictions, and impressions abound as to what drives premium costs. We believe that a more appropriate basis for comparing insurance regimes lies with an examination of the largest cost component of any insurance system: the cost of claims. Against this backdrop, the CIA established a task force to study the issue, and work to substitute facts for impressions. Members of this task force are Hugh White, Ron Miller, Paula Elliott, Don Palmer, Alain Lessard, Claude Désilets, Andrew Cartmell and Dave Oakden (Chair). This report is intended to accomplish two things: 1) Provide readers with a provincial comparison of average claims costs, the largest single component in setting premium rates, and to provide a useful starting point for comparing rates; and 2) Clarify the role actuaries play in setting insurance rates. In examining these issues, this report focuses on two areas: Provincial Claims Costs; and Pricing Automobile Insurance. The Provincial Claims Costs section includes a table showing average claims costs by province. We have included the claims costs comparison rather than a premium comparison in our report because premium comparisons depend on the characteristics of the driver and car selected. For example, comparisons involving young male drivers or drivers with several accidents or convictions may favour provinces with public insurers. This is due to the fact that private insurers normally charge much higher rates for young male drivers and often have larger surcharges for drivers with several accidents and/or convictions. Provincial automobile insurers usually have a lower variation in rates and smaller surcharges. Another problem with rate comparisons is the selection of the insurance companies. In Ontario, there are more than 50 insurance companies providing private passenger automobile insurance. In many cases, the difference between the highest and lowest rate is large. We believe that our table showing average claims costs by province will provide a good indication of the basis from which companies start in setting premium rates which then take into account specific factors surrounding the insured. As noted above, projected claims costs are the largest component of price: typically they comprise more than three quarters of the final premium. Although we are not able to explain all the reasons for the cost differences by province, the level of benefits is a very important element in this. Other contributing factors are: traffic density; weather patterns; physical road infrastructure; and public versus private insurance. 4

5 An appendix to this report provides a table illustrating selected coverage levels across Canada which take into account some of the most recent changes enacted by provincial governments. The section on Pricing Automobile Insurance describes how actuaries calculate premium rates. This section is included to show the role actuaries play in estimating prices and to indicate the professional standards the actuary is subject to when setting rates. It should be noted, however, that not all companies employ actuaries to establish rates. Ultimately, we believe this report will contribute to an informed debate on auto insurance costs by providing a clearer understanding of the role of claims costs and other factors in determining premium rates. CONTEXT The cost of automobile insurance has become a major issue in virtually every Canadian province and many reforms have been enacted by governments in an attempt to address this concern. An illustration of some of these provincial initiatives follows: The 2003 election in New Brunswick was dominated by this issue. As a result, the government capped damages for non-pecuniary loss on claims for minor soft-tissue injuries at $2,500. It anticipates that this change will reduce overall claim costs for personal automobile insurance by 20%. Effective January 1, 2005, the government announced the introduction of a First Chance discount to provide rate relief for new drivers with clean driving records, and the introduction of an optional buy-down to a No Frills package which would impose a $1,000 deductible on all vehicle damage claims and scale back maximum Accident Benefits coverage, and the elimination of age and marital status as rating variables. Nova Scotia (effective November 1, 2003) and Price Edward Island (effective April 1, 2004) introduced similar measures. In addition, Nova Scotia introduced further minor tort reforms and mandated a 20% rate reduction, on rates frozen since May 1, 2003, followed by a oneyear rate freeze until November 1, Their definition of minor injury is more restrictive than that in New Brunswick, however, Nova Scotia has also included some other minor tort reforms which are expected to provide some further cost savings. Nova Scotia has also banned the use of age and marital status as rating variables effective November 1, 2004, and is reviewing the use of sex. A recent report from the new NS Insurance Review Board to government has recommended the further elimination of sex as a rating variable. Newfoundland (effective August 1, 2004) passed legislation introducing a deductible on damages for non-pecuniary loss on all bodily injury claims together with other minor tort reforms, and required a mandatory reduction in private passenger rates, estimated at 15%, with a further rate freeze continuing until March 17, The new government in Ontario, elected in 2003, froze rates in October 2003, introduced further product reform beyond that implemented by the previous government in January 2004, and required insurers in late January to file revised personal automobile insurance rates to be effective after mid-april 2004, with the expectation that the new rates would reflect a 10% reduction in claim costs on account of the reforms. Effective October 1, 2004, Alberta introduced measures to cap damages for non-pecuniary loss for minor strains and sprains and whiplash at $4,000. Maximum premiums for compulsory coverages are capped by a new grid whose rates do not vary by age, sex or 5

6 marital status, but do vary by experience and claim and conviction record along a bonus/malus scale not unlike that in British Columbia. Measures also include an increase in the medical/rehabilitation limit under Accident Benefits coverage, the introduction of treatment protocols, other minor tort reforms, and a 5% rollback of private passenger rates. The issue of insurance rates has also been examined by a number of national organizations, including: The Consumers Association of Canada (CAC) released a study in 2003 that showed that insurance rates in Ontario are twice as high as similar rates in British Columbia. It is interesting that the Ontario branch of the CAC has publicly disagreed with this study. Not surprisingly, private insurers have dismissed this study. The Fraser Institute released three studies in 2003 and The first claims that insurance rates are higher in provinces with government plans, with British Columbia the most expensive province in Canada. The second claims that provinces with government automobile insurance plans have higher death, injury, and property damage rates from automobile accidents than those with market-based insurance. The third claims that overall claim frequency is higher and average size of claim lower in provinces with government plans, concluding that a higher ratio of average size of claim to average premium per vehicle demonstrates higher insurance value. Not surprisingly, the public insurers have rejected the findings in these studies. Against the backdrop of these initiatives, what follows is an examination of provincial claims costs, followed by a discussion of the role played by the actuary in pricing automobile insurance. PROVINCIAL CLAIMS COST As indicated earlier, the largest cost component of any insurance system, either private or public, is the cost of claims. This includes not only the payments to the insured, but also the cost of defending the insured against third party claims, payment of third party claims, and the administrative costs of handling all claims. The following table shows the average claims cost per car (private passenger only) for all provinces in Canada, with the exception of BC. It represents the total claims cost incurred by the insurance companies (both private and public) divided by the number of vehicles insured. The table also shows the five-year average (1998 to 2002), the results for 2002 and the average annual increase in costs over the five-year period. In the farthest left hand column, it also describes the primary features of each province s automobile insurance scheme i.e., whether it is government-run or private, and tort-based versus no fault. As this is intended simply to be a broadly-based description, please see the table included in Appendix A for more details. 6

7 Average Claims Costs ( ) (see Appendix A for more detailed information) Québec (Government/private; no fault/ fault) Saskatchewan (Government; no fault) 5-year Average Claims Cost per Car 2002 Claims Cost per Car Average Yearly Cost Increase % % Prince Edward Island (Private; tort) % Manitoba (Government; no fault) Newfoundland and Labrador (Private; tort) % % Nova Scotia (Private; tort) % Alberta (Private;tort) % Ontario (Private; hybrid no fault/tort) % New Brunswick (Private; tort) % The first thing that strikes us when we look at these numbers is that there is a lot of variation in claims costs from province to province. For the latest available year, costs in the highest-cost province (Ontario) are 80% higher than the costs in the lowest-cost province (Québec). Much of this difference is due to differing coverages and benefits by province as described below. The table also illustrates that in most provinces, claims costs have risen well in excess of inflation over the timeframe cited. 7

8 Provincial automobile insurance systems can be classified according to multiple dimensions, but for the purpose of this report we are looking at only two dimensions: who delivers the product: a private insurance company or a public entity; and the level of benefits. British Columbia, Saskatchewan, Manitoba, and Québec all have systems where a single public insurer has exclusive jurisdiction with respect to certain compulsory coverages, but all allow for some form of private industry participation, to a greater or lesser degree. Québec, however, is the only one of these four provinces where there is currently a significant level of participation by the private industry. Automobile policies in all provinces cover: damage to vehicles; and personal injuries to occupants of vehicles and pedestrians. Vehicle damage coverage falls under the property damage liability, collision and comprehensive coverage sections of the automobile policy. These sections of the policy are relatively similar from province to province. It is in the personal injury coverages that we observe large variations from province to province. Indemnification to someone suffering injury in an automobile accident will be provided by the insurance policies under two main forms of coverage: A first party benefit where the victim can claim from his own insurer (Accident Benefit Coverage), generally referred to as no-fault coverage, since it is provided to all covered persons, regardless of their degree of fault. For this coverage, the level of compensation is generally set in the policy but can be subject to interpretation by the court or other regulating organization. A third party benefit which comes into play when the injured person sues the person responsible for the accident. In these cases, the insurer has to defend their insured and indemnify the injured person if their insured is responsible for the accident. The table in Appendix A summarizes some of the coverage differences by province. Most automobile insurance systems in Canada offer a combination of those two coverages, however, Manitoba and Québec are pure no-fault and most insureds in Saskatchewan select the no-fault option. Until recently, Ontario was the only other province with a restriction on third party claims. Prior to the recent changes, the remaining provinces offered full tort with add on no-fault benefits as described in the table. When the table on coverage levels is compared to the table on average claim costs, the provinces with pure no-fault insurance are among the lowest in Canada. Provinces with a right to sue, generally, have higher costs. It is clear, however, that different coverage levels do not account for all the differences. For example, Manitoba and Québec, two no-fault provinces, have similar coverages but the average claims costs in Québec are significantly lower. Nova Scotia and New Brunswick, two provinces which until recently had no restrictions on tort, have significant cost differences in spite of similar coverage levels and close geographic proximity. 8

9 Ontario, which has a partial restriction on tort, has the highest costs in Canada rather than costs somewhere between the no-fault provinces and those with an unrestricted right to sue. The following are some additional factors which explain some, but not all, of the above differences: Traffic density. In areas with higher traffic density, we normally observe an increase in the number of accidents per 100 cars. This can be easily explained by the sheer number of cars present on the road at any given time. Weather patterns. More severe weather means higher claims cost. With weather patterns being different from one province to the other, it is normal that claims costs vary by province. Physical road infrastructure and conditions. Narrower roads, winding roads, hilly terrain, etc. tend to be associated with higher claims costs. In addition to the above factors which affect claims costs, premium levels are also impacted by expense differences. While it is difficult to draw any final conclusions merely by looking at claims costs or premium differences by provinces, it should be noted that when provinces are modifying benefit levels, higher benefits will result in higher premiums. PRICING AUTOMOBILE INSURANCE As indicated earlier, this section is intended to illustrate the role of the actuary in pricing automobile insurance. Actuarial pricing models for automobile insurance are prospective in nature. Their purpose is to determine the overall amount of premium to be charged in a future period that, together with expected investment income earned on the cash flows from the policies written, will be just sufficient to meet anticipated future costs and a target profit/contingency margin. The future costs the premium is required to meet are as follows: claims and claim adjustment costs; commissions and other business acquisition costs; premium taxes; and policy servicing and other operating expenses. It is generally accepted that a person who presents a higher risk of submitting a future claim should be charged a higher premium. For automobile insurance, with literally millions of similar risks (millions of drivers, and millions of vehicles), the process of charging premiums based on risk is done through classification. The premium that is charged to an individual on a personal automobile insurance policy is based on many classification factors, the main ones being: Driving experience and characteristics of the drivers of the vehicle; the number of drivers, the at-fault claim history and conviction history of each driver, age, sex and marital status of the drivers, and 9

10 years of licensed driving experience. Characteristics of the vehicle itself; make and model, and year. Where the vehicle is driven or garaged; territory. What the vehicle is used for; pleasure, or commuting to and from work, or business. Many provinces put limitations on the classification factors that companies are permitted to use. What is an acceptable classification factor in one province may be prohibited in another. In most provinces where private sector insurers provide the coverage, insurance companies are required to collect statistics on every policy and every claim, and file them with a registered statistical agency such as the Insurance Bureau of Canada. These statistics, which are publicly available, include detailed classification characteristics, such as those identified above. Insurance companies also maintain their own internal statistics that often contain even more detailed information than that required by the statistical agencies. Actuaries use this data to project future claims costs. For larger companies, including provincial government insurers, the actuary would normally use internal data when determining the average rate requirements. For small- and medium-sized companies, the actuary may need to supplement this data with industry data that has been compiled by external sources such as the Insurance Bureau of Canada. Actuaries normally use several years of data in order to minimize the impact of fluctuations from year to year. When calculating classification relativities, the actuary would normally place greater reliance on industry data. Actuaries often use data from external sources such as demographic data or relevant statistics from other jurisdictions. When calculating rates, actuaries are subject to strict rules of conduct and to general standards of practice promulgated by the Canadian Institute of Actuaries. Not only must the methods and assumptions be reasonable but the actuary is also responsible for reviewing the data for overall reasonableness and accuracy. The actuary must be satisfied the data is sufficient for the pricing exercise. If there are any limitations to the data, the actuary must disclose the data limitations and potential impact on the pricing results. 10

11 APPENDIX A Selected Coverage Levels* Provinces Death benefit for head of household Funeral expense Disability income Medical payments Right to sue for pain and suffering Right to sue for excess economic loss Alberta*** $10,000 plus $2,000 for each dependant after first $2,000 80% gross wage, maximum $300/week, maximum 104 weeks $10,000/person, rehabilitation included, hospital and medical plan excluded Manitoba Min $48,034 to max $320,000 plus $22,815 to $42,030 for each dependant according to age $6,545 90% net wage, maximum gross wage $64,000/year No time or amount limitation including rehabilitation No No Saskatchewan No-Fault 50% of benefit deceased would have received if survived minimum of $52,768 $7,673 90% net wage, maximum insurable earnings $57,825/year Maximum $5,115,000, if responsible driver convicted of impaired driving or intentional act Saskatchewan Tort 45% of net earnings maximum insurable earnings $57,788 minimum $45,000 $7,673 $300 per week (total disability) $150 per week (partial disability) Catastrophic Maximum $150,000 Non-catastrophic maximum $20,000 yes Ontario $25,000 for spouse, $10,000 for surviving dependant $6,000 80% net wage, maximum $400/week,maximum 104 weeks except more if victim is unable to pursue any suitable occupation $100,000/person ($1,000,000 if injury is catastrophic), rehabilitation included, hospital and medical plan excluded, if injury meet verbal threshold, if injury meet verbal threshold 11

12 Québec Min $52,500 to max $262,500 plus $25,026 to $46,104 for each dependant according to age $3,951 90% net wage, maximum gross wage $52,000/year, 3 years for temporary disability, lifetime for permanent disability No time or amount limitation including rehabilitation No No New Brunswick $50,000 plus $1,000 for each dependant after first $2,000 maximum $250/week,104 weeks for partial disability, lifetime for permanent disability $50,000/person, rehabilitation included, hospital and medical plan excluded, 4 years time limit ** Nova Scotia $10,000 plus $1,000 for each dependant after first $1,000 maximum $140/week,104 weeks for partial disability, lifetime for permanent disability $25,000/person, rehabilitation included, hospital and medical plan excluded, 4 years time limit ** Prince Edward Island $10,000 plus $1,000 for each dependant after first $1,000 maximum $140/week,104 weeks for partial disability, to age 65 for permanent disability $25,000/person, rehabilitation included, hospital and medical plan excluded, 4 years time limit ** Newfoundland and Labrador **** $10,000 plus $1,000 for each dependant after first $1,000 maximum $140/week,104 weeks for partial disability, lifetime for permanent disability $25,000/person, rehabilitation included, hospital and medical plan excluded, 4 years time limit * Coverage levels at December 31, 2002 except for Manitoba and Saskatchewan which are at March 1, 2003 levels. ** During 2003, New Brunswick, Nova Scotia and Prince Edward Island introduced legislation to cap damages for non-pecuniary loss on claims for minor soft tissue injuries at $2,500. *** Alberta recently introduced measures to cap damages for non-pecuniary loss on claims for minor strains and sprains and whiplash at $4,000 and to increase the maximum medical/rehabilitation benefits from $10,000 to $50,000. **** Accident Benefits coverage is optional in Newfoundland and Labrador. This province recently passed legislation introducing a deductible on damages for non-pecuniary loss on all bodily injury claims. 12