2014 revenue requirements application › documents › proceedings › 2014 › ...2014 revenue...

9/10/2014

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2014 Revenue Requirements Application Informational Presentation

September 10, 2014

• What is ICBC applying for?

• Basic Regulatory Framework

• Claims Costs: The main driver of the Rate Change

– Basic frequency and distracted driving

– Basic severity and Claims cost management

1

Agenda

B-4

markhuds

ICBC RR 2014 stamp

9/10/2014

2

• Other Components of Rate Change

– Investment Income

– Operating Expenses

• Information on draft CRC Framework

• Structure of Application

2

Agenda

• Basic rate increase of 5.2% for 2014 PY

• Approved on interim basis

• Any difference between final approved and interim rate change deferred to next year’s (2015) rate change

– Same as was done for 2013; difference of +0.3% was deferred and will be implemented with the 2014 rate change

3

What is ICBC applying for?

9/10/2014

3

BASIC REGULATORY FRAMEWORK

4

ICBC’s Regulatory Framework

5

• Special Direction IC2

– ICBC must apply for rate change annually by Aug 31

– Capital management

– Rate set according to Accepted Actuarial Practice, subject to rate smoothing provisions:

• Limitation on rate change to be within 1.5 percentage points of prior year’s rate change number

• Commission may exclude some or all of an unfavourable “loss cost forecast variance”

• The 2013 rate exclusion of 6.6% must be discontinued this year

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6

100% MCT Statutory Minimum

Margin for adverse events

130% MCT

Margin for rate smoothing

145% MCT Capital Management Target

160% MCT Threshold for CRC

Outlook MCT ratio for 2014

Capital Management Plan

7

6.7% 5.2% 3.7%

Rate change to cover costs is within band No limitation required

-1.5% +1.5%

2014 rate

change 2013 rate

change =

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5

8

0.4%

6.5%

3.3%

-2.4%

11.2%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

6.6%

5.2%

11.8%

5.2%

ICBC Rate Changes

Implications for 2014 RRA

9

• Indicated rate change is 5.2%

– Reflects no capital build, as MCT at target

– Within rate change band, so no limitation required

– Equals the rate change to cover costs

– Last year’s rate exclusion is discontinued

• Partially offset by a favourable forecast variance

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Components of 2014 rate change

10

0.0%

-0.1% 0.3% 5.2%

6.6%

2.9% -3.0%

-1.5%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

PY 2013Rate Level

Prior RateExclusion

Loss CostVariance

Loss CostTrend

InvestmentIncome

OperatingExpenses

Other Rate Changeto Cover

Cost

2013

Co

mp

ared

to

201

4Im

pac

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Leve

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CLAIMS COSTS: THE MAIN DRIVER OF THE

RATE CHANGE CHAPTER 3

11

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Loss Costs are the main driver

12

Loss and ALAE Payments

Operating Expenses

Other(including acquisition costs)

What is “Loss Cost”?

• Provision for Claims Costs in Rate

– Expected future claims cost per policy

• Claims Cost per Policy

– Frequency of claims

• (e.g., 15 claims per 1,000 policies)

– Severity (average cost of a claim)

• (e.g., $40,000)

– Loss Cost = Frequency x Severity

• (e.g., $600 = (15/1,000) x $40,000)

Approximate loss cost of the bodily injury coverage

13

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Loss Cost Forecast Variance (all coverages)

Last Year’s Loss Cost Forecast

14

$500

$550

$600

$650

$700

$750

$800

$850

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Lo

ss

Co

st

Accident Year

Actual (2013 Application) PY 2013 Projection (2013 Application)


Re-estimation of Last Year’s Loss Cost Forecast

15

$500

$550

$600

$650

$700

$750

$800

$850

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Lo

ss C

os

t

Accident Year


Actual (Current Application) PY 2013 Projection (Current Application)

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Difference is the Loss Cost Forecast Variance

16

$500

$550

$600

$650

$700

$750

$800

$850

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Lo

ss C

os

t

Accident Year



-1.5 ppts of rate change

17


$450

$500

$550

$600

$650

$700

$750

$800

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Accident Year



+6.6 ppts of Rate change

2013 RRA

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Components of 2014 rate indication

18

0.0%

-0.1% 0.3% 5.2%

6.6%

2.9% -3.0%

-1.5%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

PY 2013Rate Level

Prior RateExclusion

Loss CostVariance

Loss CostTrend

InvestmentIncome

OperatingExpenses


Cost

2013

Co

mp

ared

to

201

4Im

pac

t o

n R

ate

Leve

l


19

0.0%

-0.1% 0.3% 5.2%

6.6%

2.9% -3.0%

-1.5%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

PY 2013Rate Level

Prior RateExclusion

Loss CostVariance

Loss CostTrend

InvestmentIncome

OperatingExpenses


Cost

2013

Co

mp

ared

to

201

4Im

pac

t o

n R

ate

Leve

l

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20

Loss Cost Trend (all coverages)

$500

$550

$600

$650

$700

$750

$800

$850

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Lo

ss C

os

t

Accident Year



21

Loss Cost Trend (all coverages)

$500

$550

$600

$650

$700

$750

$800

$850

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Lo

ss C

os

t

Accident Year



PY 2014PY 20142.9 ppts of rate change

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Main Driver of Loss Costs: Bodily Injury (BI)

• Represents 75% of Claims Costs

• Over last few years there has been

– A significant and unfavourable shift in the frequency of BI claims

– A large increase in the rate at which injured parties are obtaining legal representation

22

BI Frequency Forecast

23

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fre

qu

en

cy

Accident Year

Actual PY 2014 Projection (Current Application)

PY 2013 Projection (2013 Application) PY 2013 Projection (Current Application)

Model (2013 Application) Model (Current Application)

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BI Severity

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25

Rate of represented BI claims

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26

Legal

Representation Severity

Pending Frequency

Foundation

People, Processes, Technology

Corporate strategy to address BI claims

Influence Control

BI FREQUENCY AND DISTRACTED DRIVING

CHAPTER 7

27

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Road Safety is focusing on BI frequency

• Safe Systems strategic framework

– Enforcement is largest investment

– Road improvements continue

– Education and awareness re-prioritized to reflect trends and emerging factors

• Focused on outcomes

– Reducing crashes overall

– Reducing frequency of BI claims

28

Distracted Driving is…

• An emerging piece of the overall crash picture

• A concern throughout the developed world

• Part of a social shift in society to instant communication

• Interrupting an otherwise positive crash trend

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One key factor contributing to BI claims frequency is a recent increase in rear-end crashes resulting in injury

0

5,000

10,000

15,000

20,000

25,000

30,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

In

cid

en

ts

Top Crash Configurations in Casualty Crashes

(ICBC Data 2001-2012)

REAR END

SIDE IMPACT

SINGLE VEHICLE

UNDETERMINED

HEAD ON

SIDE SWIPE - SAME DIRECTION

SIDE SWIPE -OPPOSITE DIRECTION

REAR TO REAR

30

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Distraction is leading cause

0%

10%

20%

30%

40%

50%

60%

Casu

alt

y C

rash

In

cid

en

ts

Contributing Factors

Contributing Factors in Casualty Crashes Rear End Crashes and All Configurations

(TAS: 8 year average, 2005-2012)

All Configurations

RE Crashes

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No silver bullet: a strategic approach

• A 3 pillar approach to crash reduction as recommended by the WHO

– Legislation: informing government of crash trends, research

– Enforcement: 2 campaigns, community policing, crash mapping causal factors

– Education and awareness: new partnerships, new advertising approach, building groundswell of support

32

Dad – Caught in a glance

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https://www.youtube.com/watch?v=DQPKG8YaXL8

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Heading Home – Only takes a second

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https://www.youtube.com/watch?v=OixjoQetvyw

Stop Light – Intersections are not safe

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https://www.youtube.com/watch?v=a5ZSJxGya7s

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Engaging Stakeholders

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Chris & Mike – Stoplight texting

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http://youtu.be/VS_aDNipELU

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Squire & Dean – Emails at stop signs

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http://youtu.be/JZ_W37FCYmA

Kristi & Karen – Quick calls

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http://youtu.be/QR8bdSTZb10

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Distracted driving campaign

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ICBC will provide media support for enhanced enforcement during the campaign.

Community Policing volunteers will conduct Cell Watch deployments to remind drivers to leave their phones alone, and record noticeable driver distraction.

A framework for monitoring progress

• Attempting to overcome confounding factors

• Use of frequency of rear-enders as one of several indicators of effectiveness of strategy

• Developing methodology for incorporation into monitoring and evaluation framework

41

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CLAIMS COST MANAGEMENT

CHAPTER 6

42

43

Legal

Representation Severity

Pending Frequency

Foundation

People, Processes, Technology

Corporate strategy – areas of focus

Influence Control

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Legislative framework and product

• Legislation

– Tort system with full right of recovery

– Provides less certainty over claims costs

• ICBC’s dual role

– Coverage, service, fair compensation

– Duty to defend and manage claims costs

• Legal representation

44

Claims is focused on areas of greatest opportunity

• Sections/areas of focus:

– Organizational capacity

• Significant transformational change

– Claims cost management initiatives

• Managing represented claims

• Reducing number of pending claims

• Addressing fraudulent claims

45

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46

Transformational change enables greater capacity to achieve results

Foundation People, Processes, Technology

Claims Transformation

• New organizational model/structure (People)

– Claims functional organizational model - 2011

– Claims job hierarchy - 2013

• New systems and business processes

– Roll out first phase new systems and business processes – November 2013

– Roll out final phase of new systems and business processes - April 2014

Claims initiatives mitigate cost pressures

47

$20,000

$25,000

$30,000

$35,000

$40,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Severit

y

Accident Year

Selected Severity Without Impacts of Claims Initiatives

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Claims initiatives moderate cost pressures

• Improvements to first contact

– Claims process; benefits; file assignment

• Information campaign

– Improved understanding of claims process

• Proportional legal process and costs

• Working with stakeholders

48

49

Rate of representation is increasing

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26

Legal representation is occurring earlier in the process

50

Customer Attitudes Survey

• Historical approach

– Claims focused investigation

• Customer experience/interactions

• Early representation by area or office

• Customer Attitudes Survey

– Identify and investigate the key factors (drivers) that influence customers’ decisions to seek representation

• Cross-divisional expertise and analytic data modelling were used

51

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Key driver of representation: perceived lawyer benefits

52

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

0 10 20 30 40 50 60 70 80 90 100

Rel

ativ

e Im

pac

t o

n P

rop

ensi

ty t

o R

ep

Composite Score

Perceived Lawyer Benefits 9.9%

Tolerance of Lawyer Detriments3.6%

Deserving Attitude 3.2%

Expect Difficult Process 2.9%

Expect Unfair Compensation2.4%

Economic Motivation 1.4%

Expect Unfair Treatment 0%;Expect Biased Adjusters 0%

Managing pending bodily injury claims

• Growth in number of pending claims during TP transition

– File moves during implementation of new org structure and job hierarchy

– Training, adapting to the new system, working in co-existence

• Increased focus on settling older, represented claims in 2014

53

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28

Fraud strategy aligned to corporate bodily injury strategy

• Claims Adjuster and SIU infrastructure

– Training, process, alignment

– Improved resource utilization

• New system benefits will take time

– Improved data collection and analysis

• Developing a fraud roadmap

– Alignment to the corporate BI strategy

54

Summary

• Resolve claims in fair and reasonable manner through effective and efficient interactions, recognizing ICBC’s dual role

55

• ICBC took steps to address emerging pressures and is seeing some success

• ICBC must remain focused in implementing the new Claims system

• Going forward, areas of focus leverage research and new systems over time

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INVESTMENT INCOME CHAPTER 5

56


57

0.0%

-0.1% 0.3% 5.2%

6.6%

2.9% -3.0%

-1.5%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

PY 2013Rate Level

Prior RateExclusion

Loss CostVariance

Loss CostTrend

InvestmentIncome

OperatingExpenses


Cost

2013

Co

mp

ared

to

201

4Im

pac

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Leve

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Investment Income

• Favourable impact on rates due to:

– Higher New Money Rate due to:

• Increase in interest rate forecast and

• Proposed revised formula

– Higher income from Basic equity

• Proposed revised formula for New Money

Rate

– Accommodates introduction of high yield bonds

into strategic asset mix

– Incorporates risk premium for credit assets

58

New Money Rate

Asset Type Current Proposed

Equities Forecast 30-year Canada bond yield plus Commission approved equity risk premium

Same

Real Estate Forecast CPI plus premium of 4.25%

Same

Fixed Income Forecast 3-year Canada bond yield

Same – but only applies to risk-free fixed income assets

Credit (corporate bonds, mortgages & high yield bonds)

N/A Forecast 3-year Canada bond yield + credit risk premium

59

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OPERATING EXPENSES CHAPTER 8

60

Loss Costs are the Primary driver

61

Loss and ALAE Payments

Operating Expenses

Other(including acquisition costs)

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62

0.0%

-0.1% 0.3% 5.2%

6.6%

2.9% -3.0%

-1.5%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

PY 2013Rate Level

Prior RateExclusion

Loss CostVariance

Loss CostTrend

InvestmentIncome

OperatingExpenses


Cost

2013

Co

mp

ared

to

201

4Im

pac

t o

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Leve

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63

Operating Expenses: 2014 Outlook

• Minimally favourable impact on rate indication (-0.1 ppt)

• Growth of operating expenses outpaced by growth in ICBC’s business

• In 2014 facing compensation, technology, and inflationary cost pressures

• Proactive cost management continues: operational efficiencies and managing budgets within targets

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CUSTOMER RENEWAL CREDIT

CHAPTER 4

64

CRC Regulatory Requirements

Per Special Direction IC2 and 2013 Government Directive every year for which the Commission sets Basic insurance rates, it should approve a CRC if

– There is capital available “well in excess”

– CRC will not result in the MCT falling below the capital management target

– Rates will remain relatively stable and predictable despite the approval of the CRC

– It is cost-effective to implement

65

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66

Margin for adverse events

130% MCT

Margin for rate smoothing

145% MCT

Capital Management Target

160% MCT

Threshold for CRC

Outlook MCT

ratio for 2014

Per Decision on 2013 RRA

150% MCT

Pay CRC such that

MCT returns to

150%

Content of CRC chapter

• Guiding principles for framework

• Eligibility criteria for customers

• How the CRC will be calculated and how customers will redeem the CRC

• Cost effective implementation requires CRC system to be based on new Insurance system

67

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STRUCTURE OF APPLICATION

68

Structure of Application

• Chapters 1 and 2: Application and Introduction & Executive Summary

• Chapter 3: Actuarial rate indication level analysis

• Chapter 4: Customer Renewal Credit

– Draft framework with details to be settled as systems requirements completed

• Chapter 5: Investments

– Proposed revision to the formula for the New Money Rate

69

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• Chapter 6: Claims Cost Management

– Responds to 2013 Decision, including:

• Results of claimant/customer attitudes survey

• Experience of other jurisdictions

• Fraud data and update

• Metrics during Claims transition

• Chapter 10: Performance Measures

– Metrics to support corporate BI strategy, including BI frequency

– Removal of New Claims Initiation 120 and 210 seconds measures

70


• Chapter 7: Road Safety

– Proposal for streamlining Road Safety reporting

– 2014 Education and Awareness priorities included Distracted Driving Strategy

• Chapter 8: Operating expenses

– Focus on operating expense categories on corporate basis

– Allocation to Basic explained at outset of chapter

– New incentive pay plan explained

71

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• Chapter 9: Government Initiatives with Service Agreement documents

• Appendices:

– Participants’ Reference Guide, including glossary

– Basic Insurance Info Sharing

– 2014-2016 Service Plan

– 2013 Annual Report

72

SUMMARY

73

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Summary

• 5.2% = required rate to cover costs

• Compliance with regulatory framework

• Corporate strategy to address BI claims

– BI frequency through road safety

– BI severity through claims cost management

• Favourable impact of investment income and operating expenses

• Information on CRC

• Improvements to structure of Application

74

QUESTIONS

75

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