Government Insurance Reforms: Success or Failure

1. Reform or the Road to Government Insurance?

2. Reforms Across The Country • All province except Quebec have initiated reforms in response to the hard market • All were designed to lower rates, some voluntarily, some by decree • All promised some claims relief in return for lower rates • Some were tweaks, other complete re-writes

3. Have they been successful? • Depends on your point of view and your timeframe • Consumers have seen lower rates – both governments and clients would see this as success • There should be a reduction in BI costs – if the caps are effective – success from an insurer’s perspective

4. Have they been successful? • Over long term, success – healthy, competitive market where product is available and affordable – everybody wins • Current set of reforms may lead away from this goal – everybody loses

5. Most Likely to End Up with Government Run Insurance • Alberta • Newfoundland & Labrador • Nova Scotia • New Brunswick • PEI • Ontario • Quebec

6. Alberta • Product Reform • October 1, 2004 • Cap on pain and suffering for minor injuries of $4,000 • Increase limit for med/rehab benefits from $10,000 to $50,000 • January 1, 2005 • Consideration of collateral sources • Determination of wage losses using net rather than gross income

7. Alberta • Premium Reform • October 30, 2003 • Premiums frozen • October 30, 2004 • Grid rates introduced as cap on premiums that could be charged for TPL & AB • 5% reduction in premium for the remainder of the policy term for non-grid risks • Take-all comers rule • Two risk sharing pools – one for grid risks, the other for non-grid risks

8. Alberta • July 1, 2005 • 6% mandated premium reduction for TPL & AB • November 1, 2005 • Further premium reductions for TPL & AB, hearings to be held at the end of June, MOW report recommends a further 8.2% decrease in addition to the 6% noted above

9. Alberta • Have the reforms been effective? • NO IDEA. IT IS TOO EARLY TO TELL.

10. Alberta • Is the system sustainable? • NO IDEA. TOO EARLY TO TELL.

11. Alberta • What we do know: • The premiums collected by the industry will decrease due to capping effect of grid – estimated impact – 7.8% to 8.3%. • The premiums collected by the industry will decrease due to mandatory 5% reduction for non-grid risks – estimated impact 4.1% to 3.6% • Loss costs will decrease due to product reform – estimated impact -12.9% to -16.3%

12. Alberta • What we do know: • Non-grid risks will have to subsidize grid risks – estimated subsidy 10.1% to 10.8% per non-grid risk • Likely understates as does not include the impact of bad actors re-entering system now that they can afford insurance again

13. Alberta • Auto insurance market was $2.5 billion in 2004 • 68 insurers actively write Alberta auto • Top 5 have 46% of the market • Top 10 have 65% of the market

14. Alberta • Strategy 1 – Become a niche writer • Sub-standard – There is no more substandard market • Group – groups have not historically been profitable in Alberta – groups are most profitable with there are significant premiums in first party coverages - will be forced to write non-group risks using group rates • Strategy 2 – Write everything • Will give insurer large share of sharing pool losses without sufficient control over rates to generate sufficient profit to cover losses

15. Alberta • Strategy 3: Creaming • Write with a loyal broker force in more adequately rated risk areas • To the extent it is possible, write only full coverage – all mandatory coverage only risks in the pool

16. Alberta • Strategy 3 – Likely outcome • Brokers with historically higher loss ratios or high percentage of insureds with mandatory coverages only will have great difficulty keeping markets • Pool for non-grid risks will grow - subsidy required from non-grid risks outside pools will increase • Insurers who can not cream or for whom Alberta is not an important market will leave increasing availability problems • Government reacts – sees no solutions and sets up Government owned insurer

17. Alberta • Factors For Government Insurance • Auto Insurers have poor image with both the Government and the public • Government has excess cash that can be used for establishing a government run insurer • Are surrounded by relatively successful Government-run insurance companies • The industry is not a significant employer outside of brokerages – could still use brokers as the distribution network.

18. Alberta • Factors Against • Sends wrong message to industry about Alberta being ‘open for business’ • Uncertain of costs under NAFTA – re confiscation of business more than $300 million written by companies with US parents

19. Importance of Alberta Auto Market to Individual Insurers

20. Newfoundland & Labrador • Product Reform • All injuries have a $2,500 deductible on pain and suffering • Other minor tort reforms

21. Newfoundland & Labrador • Price Reform • Varied by coverage & territory – as per Bill 30 • Goal was 15% overall decrease – loss reforms worth less than 5% • Effective August 1, 2005 insurers must reduce their approved rates by 5% (including FA) • Elimination of rating by age, sex, marital status – must refund difference for those whose rates are less • Group insurance ban to be repealed • Move from benchmark to full prior approval

22. Newfoundland & Labrador • Market had written premiums of $246 million in 2004 • 52 active writers • Top 10 – 83% of market • Top 5 – 59% of market

23. Importance of N&L Auto Market to Individual Insurers

24. Factors in Favour of Establishing Government Insurance • Government and public are very unhappy with P&C insurers • Political issue • May be facing significant availability issues of insurers who have declared they are pulling out actually do – 23% of market has declared that they will leave – more may leave if they carry through with the regulation of homeowner’s rates

25. Factors Against • N&L government has no money – establishing a new insurer would be expensive • There are no nearby precedence for moving to government run insurance • Are in negotiation with other Atlantic provinces to unify regulatory structures • Have writers with a significant stake in the market that may be willing to suffer short term losses to gain market control

26. Conclusion • Insurers in Alberta and N&L are largely in a lose- lose situation – there are few strategies for success • Loss of the Alberta automobile insurance market is a real possibility • Alberta auto represents 14.5% of the Canadian auto market, 6.9% of the total market • Loss of the N&L also possible but less likely – less than 2% of the auto market, 0.7% of total market

27. Conclusion • Governments can not treat an industry with 50+ players like a monopoly and not expect availability issues • What strategy would you recommend to your company?