MELOCHE MONNEX COMMENTS ON THE REVIEW OF AUTOMOBILE INSURANCE IN NEWFOUNDLAND AND LABRADOR Presented to the Board of Commissioners of Public Utilities February 2005
TABLE OF CONTENT PREAMBLE... 3 INTRODUCTION... 4 MELOCHE MONNEX COMMENTS ON THE AUTO INSURANCE REVIEW IN NEWFOUNDLAND AND LABRADOR 1. RATING FACTORS AND ALTERNATIVES FOR CURRENT RATING MODEL... 5 Elimination of age, gender and marital status as rating factors... 5 Affordable Insurance for young drivers... 5 Alternative rating model and All comers rule... 6 Auto Insurance Access Office... 6 2. ADDITIONAL COSTS SAVINGS MEASURES... 7 Implementation of a cap on minor personal injuries... 7 Direct Compensation Arrangement... 7 3. GROUP RATING... 8 4 MANDATORY ACCIDENT BENEFITS... 9 Page 2
Preamble Founded in 1949, Meloche Monnex Inc. is a member of the TD Bank Financial Group (TDBFG), one of the largest financial services organizations in Canada. Meloche Monnex is the largest direct-response insurer and one of the country s top four property and casualty insurers in personal lines, serving more than 1,400,000 policyholders with a total of $1.5 billion in written premiums for 2004. Meloche Monnex Inc. provides home and auto insurance services to individuals, operating under two major brands TD Meloche Monnex and TD Insurance Home and Auto. The company is also the leading organization in affinity marketing in Canada, offering its services to members of professional, university alumni organizations and employer groups. The company operates with a direct-response model, providing services directly to clients through client service centres. Meloche Monnex now employs 3,000 people across Canada with offices located in Alberta, Ontario, Quebec, Nova Scotia and New Brunswick. Although we are the largest provider of group home and automobile insurance in Canada, we also offer our products and services to the public. Our range of products includes home and automobile insurance, international assistance, travel insurance, insurance for self-employed professionals and their micro-enterprises. Our home and automobile insurance products are provided through four wholly owned insurance companies, Security National Insurance Company, TD General Insurance Company, Liberty Insurance Company of Canada and Primmum Insurance Company. Meloche Monnex is the 10th largest auto insurer in Newfounland with over $5.1 million in premiums for 2004. Our number of automobile policyholders has not significantly increased; in fact, it is the only market where we have not experienced a sustain growth during the last few years. We now insure 3,400 drivers throughout Newfoundland and Labrador. Our processes and technology allow us to provide quality services on a timely and efficient basis. This shows in our expense ratio, which is the best in the Industry. Page 3
INTRODUCTION Meloche Monnex is pleased to participate in the review of auto insurance issues undertaken by the Board of Commissioners of Public Utilities (the PUB ). Meloche Monnex supports the government s initiatives to review the province s automobile insurance system. We encourage the Newfoudland government and the PUB to continue its reform of the current system, as further changes are necessary to adequately address problems associated with increasing claim costs and affordability of auto insurance products. There is no perfect insurance system. Each system has inherent strengths and weaknesses. The PUB recommendations as to what changes should be made in the system depends on the government s objectives. It is critical that theses objectives are clearly established before solutions are designed. Any auto insurance system reflects a choice, implicit or explicit, as to the balance between first the conflicting objectives of affordability and compensation, and then as to how the available money will be allocated between the various types of victims and injuries. The PUB s mandate to review the issues included in the document entitled Terms of reference all relate to the establishment of a fair, accessible and affordable automobile insurance system. This objective can more particularly be achieved by addressing the rising bodily injury costs that leads to increase premiums. However, control over rising bodily injury costs and other claims costs will impact the level of compensation. The government s goal will be to achieve the appropriate balance between both compensation and affordability. We appreciate the opportunity of commenting on these important topics and hope our submission will be of some assistance to your review. Page 4
MELOCHE MONNEX COMMENTS ON THE AUTO INSURANCE REVIEW IN NEWFOUNDLAND AND LABRADOR 1. RATING FACTORS AND ALTERNATIVES FOR CURRENT RATING MODEL The Terms of reference suggest that the implications of eliminating rating factors such as age, gender and marital status as well as alternative rating systems such the Alberta rating grid with an All comers rule, should be reviewed. Again, we must emphasize that before implementing any changes, the PUB and the government must identify the objectives of the reform. If the objectives of the reform are to make auto insurance products more affordable and more accessible to young drivers, the elimination of these rating factors will not necessarily achieve this objective and the consequences of eliminating these factors will cause significant rate dislocation. Elimination of age, gender and marital status as rating factors Age, gender and marital status are amongst the strongest auto insurance risk predictors. To do away with those factors could have a significant impact on rates that consumers currently pay. Depending on what alternative criteria are adopted, consumers (young females and more experienced drivers) will pay more and others (young males) could pay significantly less than today.we believe that age remains a very useful rating factor. However, should the government and the PUB feel that it has to be replaced, then it should be replaced by years of driving experience. This would still result in premium levels roughly comparable with today s premium. Furthermore, we don t believe that marital status is necessary. On the other hand, gender is an essential rating factor. If the government s objective is to reduce insurance premiums for young drivers, we suggest that there are other alternatives than eliminating gender as a rating factor. Affordable insurance for young drivers We believe that implementing a system similar to the New Brunswick First Chance Discount for new drivers, supported by a risk sharing pool would provide insurers additional flexibility to handle the cases of drivers whom they perceive to be priced at less than a sufficient actuarial level. A new driver could be defined as anyone with less than 5 or 6 years of driving experience. In order to be eligible for the discount, new drivers must have and maintain a clean driving record (i.e. no at-fault accidents or motor vehicle violations). The new driver would be credited with a number of years of claim Page 5
free driving experience (6 years in New Brunswick). The discount would only apply to private passenger automobiles. The risk sharing pool would allow insurers to serve new drivers placed under the pool as any other client. There would be no distinctions between their coverage and level of service. The advantage of the risk sharing pool mechanism is that it is invisible to the public and does not carry the stigma attached to the Facility Association (FA). The establishment of a risk sharing pool involves a subsidy from good drivers in favour of more risky drivers because the deficits incurred by the pool need to be shared among insurers. Proper funding mechanisms of the pool would need to be set in place to insure that it fulfils the role for which it was intended. Generally, the risk sharing pool approach has proven to be effective in the Quebec auto insurance market. A risk sharing pool was also implemented in Ontario and Alberta and is managed by FA. We would be pleased to discuss this matter further with the government in view of developing an efficient mechanism that will guaranty that auto insurance remains accessible and affordable for young drivers in Newfoundland and Labrador. Alternative rating model and All comers rule The Terms of reference suggest that alternative rating systems such as the Alberta grid rating system should be examined. The Alberta grid rating system was implemented mainly to deal with the issue of accessibility to affordable auto insurance for young male drivers. Meloche Monnex was actively involved in the discussions leading to the implementation of the grid rating system in Alberta. In our opinion, this system is very complex, expensive to implement and will not necessarily deal effectively with the issue of providing affordable premiums for young drivers. Another problem with the Alberta grid-rating system is that it allows for too many risks to be actuarially subsidized (more or less 15% of the market). At the moment, the grid-rating system is not only contributing to the subsidization of young drivers, but also high risk drivers, which we believe was not the objective when the process was developed. Newfoundland and Labrador is a relatively small market and we do not think that the Alberta approach, which has not yet proved itself, should be implemented in Newfoundland and Labrador. We believe that the New Brunswick approach is more reasonable and more suitable for a small market like Newfoundland and Labrador. Although we prefer to operate in a file and use rating environment, we do not mind operating in the current benchmark system. The advantage of a file and use system however, is that the government only need to intervene when rates are excessive or inadequate and in the long-run, more effective companies would most probably be able to reduce rates below their current level. This would in turn enhance competition to the benefit of Newfoundland and Labrador consumers and trigger a shift in the market from less effective insurers to more effective and more competitively priced insurers. Page 6
On the other hand, we do not perceive a need to implement an all comers rule in the Newfoundland and Labrador market if the accessibility issue can be effectively handled otherwise. The non-sense of an all comers rule is that some insurers would be compelled to accept to insure more consumers than their capital structure would normally allow and/or even if they do not have the resources available to service them. This would certainly represent a challenge for some insurers currently operating in the Newfoundland and Labrador market. Auto insurance Access Office Other mechanisms can also be set in place to facilitate further access to auto insurance for Newfoundland and Labrador drivers. One solution would be to create a central office where drivers unable to find insurance could phone and be re-directed to one of the various insurers providing automobile insurance in Newfoundland and Labrador. The assignment to the automobile insurer would be made on a market share basis. The insurer would be required to insure the risk but then would be able to cede it to a risk sharing pool. Drivers with the most severe driving records would be referred to a FA servicing carrier. The administration and delivery issues associated with this mechanism would be resolved through discussions with the industry. 2. ADDITIONAL COSTS SAVINGS MEASURES Implementation of a cap on minor personal injuries Four provinces, Nova Scotia, New Brunswick, Prince Edward Island and Alberta, have successfully implemented a cap on minor personal injuries. We believe that a cap on minor personal injuries is a more effective approach to the reduction of claim costs than a deductible. Deductibles tend to erode over time. Such erosion results from the inflation of injuries and damages. Therefore, the long term impact on rates will be more significant with a cap than a deductible. Furthermore, the use of deductibles creates more administrative costs in the claims system because more victims are inclined to file a claim. A cap is more effective than a deductible from an administrative perspective. Changing the deductible approach for a cap would also present the advantage of harmonizing Newfoundland and Labrador s approach with the other Atlantic Provinces. Direct Compensation Arrangement A Direct Compensation arrangement for property damage claims provides that the consumer s own insurer pay for the damage to his/her vehicle and for the expenses to rent a car while repairs are done. This arrangement means that the consumer only deals with his/her own insurer to collect reimbursement for damage to his/her vehicle. It further eliminates administrative costs of subrogation that insurers would otherwise Page 7
incur to recover payment from the at-fault insurer. Quebec, Ontario and New Brunswick have also implemented a Direct Compensation arrangement. Another important feature for consumers is that, under Direct Compensation coverage, the premium for the mandatory liability coverage is tied to the type and age of the vehicle insured and reflects the expected claim frequency and damageability of this particular vehicle. This generally results in a lower premium for older vehicles, while consumers with more expensive vehicles pay relatively more. We believe the implementation of a Direct Compensation arrangement in Newfoundland and Labrador would also result in a fairer approach to pricing which is more reflective of the true economic costs associated with driving different types of vehicles. A deductible could also be required under such a regime as is currently the case in Ontario. This would further reduce the costs by eliminating minor claims. We find this is a very effective form of handling large numbers of property damage claims. 3. GROUP RATING At present, Newfoundland and Labrador does not allow insurers to engage in group rating and marketing of auto insurance. The Automobile Insurance Act prohibits application of special group rates but in other jurisdictions insurers are permitted to offer discounted rates to certain groups such as employees, alumni, unions and others. Many jurisdictions, including Nova Scotia and New Brunswick now allow insurers to offer discounted rates to certain groups such as employees, alumni, unions and others. The discounted rates are based on the lower risk profile across all insurance coverage sections for certain groups and the significant administrative cost savings of distributing insurance through an established group. Group rates should be permitted through a clear and strict definition of an eligible group to avoid abuse and we recommend that regulation be adopted on this issue to establish an effective framework. We have enclosed with our document copy of the relevant sections of the regulation recently adopted in Nova Scotia on this issue (Appendix 1). We think that the Nova Scotia approach is valuable except for the provision requiring the insurer, agent or broker to make full and fair disclosure of the group marketing plan s provisions and financial interest of the person that entered into the plan with the insurer. The relevant provision, section 6 (3), provide that the insurer, agent or broker must not accept an application for insurance before making the above disclosure. We believe that making this disclosure before the application is completed, result in a highly ineffective process. Almost all auto insurance business is transacted over the phone these days, and time starved consumers want an effective process and easy access to affordable products. We would ratter have to comply with an obligation to make full and fair disclosure not later than 30 days after accepting the application. This would allow the relevant information to be forwarded to policy holders along with their policy and other material. Page 8
This communication usually takes place a couple of weeks after the application was accepted. Customers would receive the appropriate information and would be invited to contact the insurer, agent or broker for more details. Eliminating the restriction on group rating would allow insurers operating in Newfoundland and Labrador to offer lower rates to many consumers and will enhance pricing competitiveness for consumers. At the moment, the auto insurance market in Newfoundland and Labrador is rather concentrated and the introduction of group rating would allow effective group insurers to play a more significant role in the market place and would increase competition. 4. MANDATORY ACCIDENT BENEFITS The debate on the issue of whether or not Section B - Accident Benefits - of the standard auto insurance policy should be made mandatory, has been going on for almost ten years in Newfoundland and Labrador. According to industry statistics, almost 75% of all auto insurance policies include this coverage. Making Accident Benefits mandatory would certainly eliminate certain situations where the liability for an accident is in dispute and a person has no collateral benefits but, in our opinion, it would be unfair to force every consumer to buy an expensive coverage that not all of them will use. Auto insurance Accident Benefits is a secondary coverage and presumably, consumers who have access to other collateral benefits, like employment related health plans, do not require this type of coverage. At the moment, the Ontario government is looking for ways to allow consumers with collateral benefits to opt-out of this expensive coverage but there is no easy solution to this issue once the coverage is mandatory. We recommend that the PUB carefully assess all the impacts of making Accident Benefits mandatory before making its recommendation to the government. Page 9
Appendix 1 Page 10
Automobile Insurance Prohibited Risk-Classification Factors Regulations made under Section 159 of the Insurance Act R.S.N.S. 1989, c. 231 O.I.C. 2003-458 (October 31, 2003), N.S. Reg. 183/2003 as amended by O.I.C. 2004-118 (March 12, 2004), N.S. Reg. 30/2004 Citation 1 These regulations may be cited as the Automobile Insurance Prohibited Risk- Classification Factors Regulations. ( ) Membership in an organized group 5 (1) An insurer is permitted to use membership in an organized group as a riskclassification factor for automobile insurance if the group is (a) a group of employees, which may include retired employees, of the same employer; or (b) a group of persons that is (i) a labour union, (ii) 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. (2) A group referred to in subsection (1) may also include (a) spouses and common-law partners of members of the group; and (b) any child of members of the group or of their spouses or common-law partners, if the child is under 25 years of age and who Page 11
(i) resides in the same dwelling as a member of the group or the spouse or common-law partner of a member of the groups, or (ii) attends an educational institution on a full-time basis. (3) An insurer is not permitted to use a risk-classification factor for automobile insurance that results in the exclusion from coverage of a member of an organized group referred to in clause (1)(a) if (a) the insurance is sold under a group marketing plan, as defined in Section 6; and (b) coverage is for a personal use private passenger vehicle, as defined in the plan of operation established by the facility association. (4) An insurer is not permitted to use a risk-classification factor for automobile insurance that results in the exclusion from coverage of a member or associate member of an organized group referred to in subsection (1) if (a) the insurance is sold under a group marketing plan, as defined in Section 6; and (b) coverage is for a private passenger vehicle, as defined in the plan of operation established by the facility association. (5) An insurer is not permitted to use either of the following circumstances as a riskclassification factor for automobile insurance if it would result in a change in the classification of an insured before the next renewal date of the insured s policy: (a) termination of a group marketing plan as defined in Section 6; or (b) the insured ceasing to be a member or an associate member of an organized group referred to in subsection (1). (6) Except as provided in subsection (5), no element of a risk-classification system that uses membership in an organized group referred to in subsection (1) may be applied to an insured who ceases to be a member or associate member of the group. Group marketing plan 6 (1) In this Section, "group marketing plan" means (a) an arrangement between an insurer and a group of employees of the same employer to market automobile insurance to members of the group; (b) an arrangement between an insurer and an employer to market automobile insurance to a group of employees of the employer; or Page 12
(c) an arrangement between an insurer and a group referred to in clause 5(1)(b) to market automobile insurance to members of the group. (2) An insurer is not permitted to sell automobile insurance under a group marketing plan if any person is required to purchase insurance under the plan or is subject to a penalty for failing to purchase insurance under the plan. (3) An insurer, agent or broker selling automobile insurance under a group marketing plan must not accept an application for insurance coverage from a person unless the insurer, agent or broker has made full and fair disclosure to the person of all features of the group marketing plan and the insurance coverage, including (a) the group marketing plan s provisions relating to group discounts, policyholder services, termination of the plan and termination of eligibility; and (b) the financial interests in the group marketing plan of the person or body that entered into the plan with the insurer. (4) A person who collects premiums under a group marketing plan, other than an agent or broker, must provide adequate administrative facilities for the collection of premiums and is deemed to be the agent of the insurer for the purposes of collecting premiums. (5) All premium funds received or receivable by a person under a group marketing plan, other than by an agent or broker, are deemed to be trust funds held for the benefit of the insurer. (6) A person who receives or is entitled to receive premium funds under a group marketing plan must not assign, pledge, mortgage or in any way charge the funds. (7) An assignment, pledge, mortgage or other charge of premium funds contrary to subsection (6) is void. Effective date 7 These regulations come into effect on November 1, 2004. Section 7 replaced: O.I.C. 2004-118, N.S. Reg. 30/2004. Page 13