AUTO PRODUCT REFORM Back to the Future

Historical Results

1999 2000 2001 2002 2003 2004 2005 2006 200750.00%

55.00%

60.00%

65.00%

70.00%

75.00%

80.00%

85.00%

90.00%

Countrywide Automobile Net Loss Ratios - ex ICBC

Historical Results

Results from 2000 to 2003 were unsustainable poor

Reforms were clearly effective – must remember that reforms are the most effective initially and lose effectiveness as claimants and their advocates adjust to the new reality

Each province is evolving differently - results and trends are quite varied

Alberta

1999 2000 2001 2002 2003 2004 2005 2006 200750.00%

60.00%

70.00%

80.00%

90.00%

100.00%

110.00%

Alberta PP Auto Direct LR

Total TPL Acc Ben Other

Alberta

October 1, 2004 – Major tort reform $4,000 indexed cap on non-pecuniary

damages Maximum payment under AB – Med/ Rehab

increased from $10,000 to $50,000 Outcomes

Significant drop in BI frequency (unexpected) and severity (expected)

Med/rehab loss costs increased much less than expected

Disability income frequency down significantly (unexpected)

Alberta

1999 2000 2001 2002 2003 2004 2005 2006 20070

0.5

1

1.5

2

2.5

3

3.5

Alberta PP Auto Claims Frequency

TPL - BI TPL - PD AB - MR AB - DI

Alberta

As actuaries we: Missed the drop in frequency for BI and AB –DI Likely we underestimate the impact that

lawyers have in their role as advice givers when costing potential reforms – might want to consider this in future costing

Overestimated the impact of the Med/ Rehab – more likely we underestimated the impact of not increasing the timeframe upward from 2 years at the same time as increasing the limits

Alberta

February 8, 2008: Charter judgment rendered stating that Minor Injury Regulation unconstitutional

Immediate Impacts: Every company had to determine if their was

a material impact on their December 31, 2007 outstanding claim reserves/ premium liabilities, should the decision be upheld

Every company had to determine how they would handle claims going forward

Alberta

Next Steps: September 12, 2008 – Appeal heard before

the Court of Appeal Decision by year-end? Supreme Court of Canada?

Auto Insurance Rate Board Final Actuarial Statement from OW Minus 5% for experience, +20% for removal of

cap or +14% Rate board +5%

Alberta

Issues Arising out of this Ruling Estimated impact of removing the Cap

assumes that there was no frequency effect – not supported by the data – increases likely future claims by about 10%

In 2006, AIRB ignored calls to consider impact of potential charter challenge

In 2008, AIRB gave substantial weight to the possibility of the current ruling being overturned

No consideration of the substantial liability that will be incurred for claims in the system if charter challenge is upheld

Alberta

AB government had stated that they had contingency plans if this was struck down – will these see the light of day?

Stakes are very high for the insurers for whom Alberta auto is their main market

How will insureds/ politicians react to 25%+ increase in premiums for mandatory premiums?

Alberta – Actuarial Implications

Need to understand how the claims department is handling the situation Some have left their handling unchanged and

are keeping the excess in an actuarial reserve Others have increased their case reserves on

the assumption that the MIR will not be restored

Others are somewhere in between Given the importance, should consider

doing a sampling of actual case files to see how the issue is being handled

Alberta – Actuarial Implications

Industry data after 31/12/2007 will be of limited usefulness

Should consider what changes will need to be made to ratemaking procedures given the sketchiness of the industry data

DCAT: May want to consider running a scenario wherein auto insurance is nationalized

Alberta – Actuarial Implications

DCAT: Will need to consider the impact of the uncertainty in the high loss ratio scenario (if Alberta is material to the insurer)

Will need to carefully review the reserves for the FA RSPs and Farm – ensure that the assumptions on which the reserves are set are in line with your expectations

We need a better and faster way of determining what are material events during the Jan/ Feb timeframe – should align more closely with the accountants

Ontario

1999 2000 2001 2002 2003 2004 2005 2006 200740.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

130.0%

Ontario PP Auto AY Loss Ratios

Total TPL AB Other

Ontario

Latest reforms: Fall 2003 Restore deductibility of CPP Revise cat definition for those under the age of 16 Implement WAD I and II paf’s Tighten definition of serious and permanent Increase ded for non-pecuniary from $15k to $30k

(FLA $7,500 to $15,000) Allow tort for health care for permanent and serious Reduce Med/ Rehab hourly fee Limit fees for completion of forms Regulation of paralegals, prohibition of early lump

sum settlement

Ontario

Impact of reforms was greater than originally estimated – AB frequency dropped 25%

But AB loss ratio now greater than 100% and underlying trends in excess of 12%

More reforms in the pipeline – currently undergoing the mandatory 5 year review of Part VI of the Insurance Act by FSCO

Indeterminate timetable

Ontario

Absent reform, current PP all coverage average street premium is likely inadequate by 10%

If the verbal threshold and deductible were eliminated with no change to accident benefits – loss costs are likely to increase substantially –

Is the verbal threshold unconstitutional? Is the non-pecuniary deductible

unconstitutional?

Ontario

Ontario auto represents 56% of the non-government auto writings across the country, 25% of the total industry

Implications of either no changes to product (given current trends) or changes that further enhance product likely to lead to a significant consumer/ political push back

Ontario – Actuarial Implications

For some companies, results are poor enough that may lead to the dpac needing to be written down or setting up a premium deficiency

DPAC: A scenario where the verbal threshold/ deductible are ruled unconstitutional should be considered, if Ontario auto is a significant exposure

DPAC: A scenario wherein the industry in nationalized should be considered, if Ontario is a significant exposure – political fall-out of significant rate increases should not be taken lightly

Should a contingent liability be established? If it was, on what basis and using what assumptions?

Trends in AB high enough that should consider adjusting historical data to reflect current inflation

Quebec

1999 2000 2001 2002 2003 2004 2005 2006 2007

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Quebec Auto Direct Calendar Year Loss Ratios

Total TPL AB Other

Quebec

Few reforms being considered Most concentrated auto market in

Canada Results continue to be excellent although

premiums have been flat for the last 4 years

Maybe an hybrid system not so bad!

New Brunswick

1999 2000 2001 2002 2003 2004 2005 2006 20070.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

New Brunswick PP Auto AY Loss Ratio

Total TPL AB Other

New Brunswick

On July 1, 2003 implemented $2,500 cap on non-pecuniary losses for minor injuries

Mandatory filing of rates with 20% default reduction in rates

Experience has been excellent since – currently upward trend in all coverages

New Brunswick

1999 2000 2001 2002 2003 2004 2005 2006 20070

0.5

1

1.5

2

2.5

3

New Brunswick PP Auto Frequency

TPL- BI TPL - PD AB -MR AB - DI

New Brunswick

BI frequency dropped – not anticipated in the original costing

AB – MR and AB –DI frequency also dropped – not anticipated in original costing

Despite expectations, no test cases selected or trial dates set for a charter challenge

New Brunswick

Current private passenger premiums for compulsory coverages are adequate but only if cap in place – would need significant increases for both BI and AB if cap removed

Impact could be around greater than Alberta ($160 per car) as cap is lower – a significant increase with major political fall-out

New Brunswick – Actuarial Implications

DCAT: If the cap is removed, would the political fall-out be big enough to push into government insurance?

DCAT: If cap is removed, what are the loss ratio / reserve implications?

Should a contingent liability be set up particularly given that there is no current legal action? Would this acceptable under IFRS?

Nova Scotia

1999 2000 2001 2002 2003 2004 2005 2006 20070.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Nova Scotia PP Auto AY Loss Ratio

Total TPL AB Other

Nova Scotia

November 1, 2003 $2,500 cap on non-pecuniary damages for

Minor Injuries October 6, 2008 – trial begins before

Supreme Court of Nova Scotia Seeks to strike down as outside the power of

regulation part of NS Reg 182/2003 which defines ‘resolves within 12 months’

Seeks to strike down cap as unconstitutional

Nova Scotia

Like NB, unanticipated drop in BI frequency Like NB, unanticipated drop in AB – MR Current rates are adequate IF cap stays in

place Rates now have to be filed every 2 years –

what impact will this have? Expected costs if cap is struck down – as per

NB What happens if cap is found constitutional

but Regulation is ultra vires? What would “resolves within 12 months” mean?

Nova Scotia – Actuarial Implications

Should a separate contingent liability be established? How should this be determined?

What probability should be used? Should there be view put forward by the CIA or should each actuary come to their own conclusions? Do we need more guidance on issues such as this?

DCAT implications similar to NB

Prince Edward Island

Issues similar to New Brunswick April 1, 2004 - $2,500 cap on non-

pecuniary losses for Minor injuries No test cases selected or trial dates set

Newfoundland and Labrador

1999 2000 2001 2002 2003 2004 2005 2006 20070.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

N &L PP Auto AY Loss Ratio

Total TPL AB Other

Newfoundland & Labrador

August 1, 2004 $2,500 straight non-pecuniary deductible for

all injuries and some minor reforms At most, a modest decrease in loss costs

No charter challenge at this time

N &L – Actuarial Implications

Likely very few – impact of the reforms was so small that even if they were somehow undone, would have little impact

Summary

Ontario auto results are not sustainable both in absolute terms and in terms of underlying trends – this will have to be considered in both the setting of reserves and the running of adverse scenarios for DCAT

Charter challenges in Alberta will have to be considered in setting reserves at 12/31/2008.

How should the charter challenge issue in NS be considered in setting reserves at 12/31/2008?

Summary

Can we make improvements to our costing methodologies to better consider claimant behaviour?

For companies for whom auto is a significant line, may want to consider running adverse scenarios that include nationalization in response to consumer/ political reaction to significant rate increases.

Questions?