PUBLIC UTILITIES BOARD AUTOMOBILE INSURANCE REVIEW BACKGROUNDER PUBLIC UTILITIES BOARD WHO WE ARE AND WHAT WE DO The Public Utilities Board is an independent, quasi-judicial regulatory agency. The Board is responsible for the supervision of rates charged by automobile insurers in the province. The Board is also responsible for regulating electric utilities (Newfoundland and Labrador Hydro and Newfoundland Power), petroleum products pricing including gasoline and home heating fuels, as well as limited regulation of the motor carrier industry including the trans-island bus service and ambulance operations. THE BOARD S ROLE IN AUTOMOBILE INSURANCE The Board sets annual benchmarks for automobile insurance rates by coverage (e.g. Third Party Liability, Collision, Comprehensive, etc.) and territory (Greater Avalon, the remainder of the Island, and Labrador). These benchmarks are set based on a Benchmark Report prepared by an independent actuarial consultant retained by the Board. Benchmarks are based on actuarial analysis that reflects overall industry reported loss experience in the province by coverage and territory. The result of this analysis is a single rate for each territory and coverage, referred to as the benchmark rate or the benchmark midpoint. In order to recognize the competitive nature of the insurance industry, as well as the fact that certain companies may have operating practices, characteristics or a book of business that distinguish them from the industry average, a range of ± 10% on the mid-point is permitted which establishes the benchmark range. The upper and lower limits of this range represent the maximum and minimum of the benchmarks. Applications filed by companies with adjusted base rates within the benchmark limits are subject to a thorough review by the Board. If rates filed are found to conform in all respects to the benchmarks, the filed rates are generally approved by the Board without further review. Applications seeking rates not in conformance with these benchmarks are subject to a different standard of review. Such filings must be actuarially justified by the company and are subject to a detailed review by an independent actuarial consultant, with the review findings reported to the Board. A determination on the application is then made by the Board. In October 2004, as part of its annual review of benchmark rates, the Board completed a public hearing into benchmarks for automobile insurance rates for 2005. The Board s order arising from this hearing is pending. The Board also undertakes audits of insurers to ensure that rates charged consumers are in accordance with the rates approved by the Board for the company. In 2004 the Board was given responsibility for the control and oversight of underwriting guidelines and risk classification system used by insurers in deciding whether or not to write a particular auto insurance policy and, if so, at what rates. The Board may prohibit certain underwriting practices of an insurer which, in the Board s opinion, are unjust or unfairly discriminatory.
2 MARKET OVERVIEW The automobile insurance market in Newfoundland and Labrador is relatively small in comparison with other provincial jurisdictions. It is also highly concentrated, with 53 companies operating throughout the province. Of these the top 11 companies wrote approximately 82% of all business written, the top 20 wrote 95%, and the top 25 wrote 98% of the market. THE BOARD S ROLE IN THE INSURANCE REVIEW In March 2004 the Board completed a report at the request of Government on potential cost savings arising from various automobile insurance product changes. This report utilized available data collected in a closed claims study undertaken in the late 1990s by the Insurance Bureau of Canada. Following review of the Board s report Government passed Bill 30 setting out a series of automobile insurance reforms including a $2,500 deductible on claims for pain and suffering, mandatory reductions in insurance rates, a one-year freeze in insurance premiums effective March 17 th, 2004. Government also announced that the Board would be asked to update available data in a new closed claims study. Government also commissioned a further report in relation to homeowner, commercial, and marine insurances. This report was released in August 2004. In late September, following proclamation of Bill 30, Government issued formal direction to the Board to conduct a review of automobile, homeowner, commercial and marine insurance in accordance with a Terms of Reference to be provided later. The Government appointed a Consumer Advocate, Mr. Thomas Johnson to represent consumers during the review. SPECIFIC INSURANCE ISSUES TO BE REVIEWED BY THE BOARD In October 2004 Government issued the Terms of Reference for the insurance review directing the Board as follows: The Public Utilities Board shall undertake a review and report on the issues outlined below with respect to Automobile, Homeowner, Commercial and Marine insurance in the province and in addition shall detail other issues of concern raised by stakeholders participating in the review, including public insurance.
3 Automobile Insurance To conduct a closed claim study to determine the costs associated with third party liability bodily injury claims arising from the use of private passenger automobiles and commercial automobiles. To review the impact on rates of the use of a monetary cap of various amounts on claims for non-economic loss for minor/mild injuries and the implications of such a cap for claimants. To review the impact on rates of the use of a deductible of various amounts on claims for non-economic loss and the implications of such a deductible for claimants. To review the feasibility and impact on rates of providing consumers one of the following choice options when purchasing liability coverage: 1) no restrictions on non-economic loss; or a cap on the amount of non-economic loss recoverable; and 2) no restrictions on non-economic loss; or a deductible from the amount of non-economic loss recoverable. In relation to accident benefits, to review the implications of mandating that consumers carry accident benefits coverage with respect to: - the impact on rates, - benefits to claimants; and - integration with other insurance plans. To review the implications to policyholders of the elimination of age, gender and marital status as rating factors, including an examination of alternative rating systems such as the proposed Alberta grid rating system with an all comers rule. To review the implications of permitting group rating. To report on any additional cost saving measures identified by the Board during its review. Homeowners Insurance Report on issues which may be raised surrounding availability and accessibility of this insurance in light of the associated profit margins and identify ways in which these issues may be addressed such as through: - rate regulation; - alternative means of providing this insurance, including the introduction of risk sharing pools; and - underwriting guidelines.
4 Commercial Insurance Report on issues which may be raised surrounding availability and accessibility of this insurance in light of the associated profit margins, particularly in reference to the hospitality/tourism industry, as well as, not-for-profit organizations, volunteer organizations and other individuals involved in volunteer activities. Identify ways in which these issues may be addressed such as through: - rate regulation; - alternative means of providing this insurance including the introduction of risk sharing pools, caps or deductibles; and - grouping or classification of commercial consumers in setting rates. Marine Insurance Report on issues that may be raised with respect to the accessibility and availability of marine insurance. Report on possible reasons for high loss ratios and year to year variation. Note: In addition to the issues the Public Utilities Board is directed to undertake in these Terms of Reference, the Board is undertaking public hearings to review its benchmarks in respect to both commercial and private passenger automobile insurance and issues surrounding how benchmarks are established such as rate of return on equity, rate classification systems, reserves and benchmarking policies and procedures generally. CONSUMER ADVOCATE Government has appointed Thomas Johnson, a lawyer and partner with O Dea, Earle Law Offices, to represent consumer interests in the insurance review. Mr. Johnson may be reached via mail at P.O. Box 5955, St. John s, NL, A1C 5X4 or by email: consumeradvocate@groupmail.ca STATUS OF THE INSURANCE REVIEW With the one-year rate freeze for automobile insurance rates scheduled to expire on March 17, 2005, the automobile insurance review was given priority. Homeowner, commercial and marine insurances will be considered in a subsequent comprehensive review by the Board. With respect to the automobile insurance review the Board has now completed a study which estimates the costs associated with third party liability bodily injury claims arising from the use of private passenger automobiles, and the savings associated with various caps and deductibles. This report is available online at www.pub.nl.ca or from the Board upon request. As the review progresses, all information, including additional reports, will be posted on the Board's website. The Board is now proceeding with the public consultation phase of the automobile insurance review.
5 AUTOMOBILE INSURANCE REVIEW PROCESS The automobile insurance review will be a consultative process. This approach will ensure that all consumers and industry groups have equal opportunity to present their opinions and comments on automobile insurance to the Board. The Board is committed to a process that is efficient, cost effective and timely. Members of the public and industry groups are invited to make oral presentations and/or written submissions regarding automobile insurance. All submissions, including voicemail, email and correspondence, will be monitored and form part of the public record. Specifically, the ways to participate include: Participate in Person: The Board will hold sessions at various centers throughout the province. Dates and locations to be announced. Anyone interested in attending a session should advise the Board of their interest no later than Wednesday January 19, 2005. Website: Individuals may complete an online form at www.pub.nl.ca Email: Individuals may email their comments to the Board, insurancereview@pub.nl.ca Telephone: Individuals may leave a voice message on the Board s toll free line, 1-866- 782-0006. Mail: Individuals may send in their comments via mail: The Public Utilities Board, Automobile Insurance Review P.O. Box 21040, St. John s, NL, A1A 5B2 Fax: Individuals may fax their comments to (709) 726-9604 Consumer Advocate: The Government appointed Consumer Advocate for this review is Mr. Thomas Johnson who may be reached via mail at P.O. Box 5955, St. John s, NL A1C 5X4 or by email: consumeradvocate@groupmail.ca Once completed, the report will be submitted to the Government of Newfoundland and Labrador, as per the Terms of Reference. GLOSSARY OF AUTOMOBILE INSURANCE TERMS Below are some definitions and examples of the key areas of the automobile insurance reform review. Third Party Liability The law imposes an obligation (liability) upon a person who owns or operates an automobile and causes bodily injury or death to a person or damage to property of others. Third party liability is the insurance coverage that provides financial protection to an insured against liability arising out of bodily injury to or the death of a person or loss or damage to property caused by an automobile or the use or operation of it. The minimum third party limit a person must carry is $200,000. However, if a judgement is awarded against you that exceeds this amount, you will be personally responsible for the balance. In many cases, vehicle owners opt to increase their liability limits to $500,000, $1,000,000 and in some cases, $2,000,000.
6 Monetary Cap The maximum financial payment a claimant may receive as a settlement for any claim (or part of a claim) that is subject to the cap, such as payments for pain and suffering or other non-economic losses. Deductible That portion of a loss you are required to pay, sometimes referred to as the self insured amount, before your insurance coverage will respond. Deductibles are used to reduce your physical damage premiums. For example, if you purchase a policy with a $200 deductible and you suffered a loss totalling $1000, you would pay the first $200 and the insurance company would pay the remaining $800. Non-economic Loss Losses that involve payments that are not easily quantified as they do not involve a loss of money or property for which an exact value can be assessed. Unlike lost wages and current medical expenses for which an accounting can be provided, claims involving such expenses as pain and suffering, future care and housekeeping expenses and similar expenses, which are assessed without detailed loss information. Accident Benefits Coverage Accident Benefits is an optional coverage providing limited compensation to the insured, passengers in the insured vehicle, or pedestrians struck by the insured vehicle who suffer injury or death in an accident involving the insured vehicle, as well as the insured and certain dependent relatives while passengers in certain other vehicles. Compensation is paid on a no fault basis in accordance with an established scale. Coverage will pay specified amounts for such things as immediate medical and rehabilitative expenses, funeral expenses, lump sum death payment and a weekly payments to employed individuals disabled in a car accident. Accident benefits is not designed to fully compensate a victim but does provide access to certain funds in a relatively quick fashion while a claim is being processed. Rating System The system used by insurance companies to account for various risk factors associated with an insured and on which the premium for coverage is based. Rating systems are a combination of risk classification and underwriting guidelines used by companies and include consideration of certain factors related to the driver of a vehicle, such as the number of drivers using the vehicle, the age, sex and marital status of the driver, at fault accidents for each driver, the number of claims on the vehicle, the numbers of years driving experience and other factors. Consideration of each of these factors will result in the assignment of a rating class and a driving record which are then used to calculate the premium required for the requested coverage.
7 Group Rating The determination of rates for a homogenous group of insureds, as a subset of a larger group of insureds, having certain assigned common characteristics. The rating of insureds is based on the overall loss experience of the group separate from the larger pool of insured drivers. Groups may be defined on any basis with the most common being professional occupation, education level, place of employment, place of residency to name a few. P:\INSURANCE REFORM\BACKGROUNDER\2-PUBLIC UTILITIES BOARD AUTO INSURANCE REVIEW.doc