1/23/2012 ICBC 2012 R EVENUE R EQUIREMENTS E XHIBIT B-4 Revenue Requirem ents Application Public W orkshop January 23, 2012 Agenda • Overview • Investment income • Bodily injury claims • Operating expenses • Capital provision • Capital provision • Summary 1 1
1/23/2012 How we set rates • Based on prospective costs • Premiums to generate enough money to cover all costs • According to accepted actuarial practice 2 Pressure on basic rates 14% 12% +11.2% 10% +1.3% 2 0 1 0 Com pared to 2 0 1 2 8% I m pact on Rate Level 6% 4% 2% +7.4% 0% 0.0% +2.5% -2% 3 2
1/23/2012 What is driving the rate increase? • External factors are contributing greatly g g y to the need for an 11.2% rate increase • Significant unprecedented changes are happening at the sam e tim e – Recession and coming out of recession Recession and coming out of recession – Changing claims frequency – Low capital levels 4 The negative impact of these changes are magnified Because, significant unprecedented Because, significant unprecedented changes are happening at the sam e tim e 1 . I nvestm ent incom e - 2008 and 2009 recession, slow recovery 2 . Claim s costs - increasing BI claims frequency in 2010 and 2011 3 . Capital – lower levels 5 3
1/23/2012 1. Investment income • Since the recession – earning a lower yield on investments yield on investments • 1% drop in the yield is equivalent to $60M less investment income to offset costs • Therefore, premiums must increase to , p cover more of the costs • This translates into a 2.5% rate increase 6 We are not alone • The market conditions have affected many businesses many businesses • Insurance companies (life and P&C), pension plans are all facing similar challenges 7 4
1/23/2012 2. Claims costs Background • Bodily injury claims costs are the largest B dil i j l i t th l t driver of the rate increase • Claims costs are approximately 75% of the costs of the business • Bodily injury accounts for over 70% of y j y all claims costs • In comparison, operating costs are about 15% of all costs 8 What has changed with bodily injury costs? • In the past, the severity or average cost of a claim has increased by about f l i h i d b b 6% • In the past, the frequency has always decreased each year by 3-4% • The declining frequency rate helped offset the increasing severity rate 9 5
1/23/2012 Severity (average cost per claim) Basic Bodily I njury Severity 35,000 35 000 30,000 Severity ( $ ) 25,000 20,000 15,000 10,000 5,000 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Accident Year 10 Frequency (# claims/ 100 policies) Bodily Injury Basic Frequency 2.5% 2.0% Frequency 1.5% 1.0% 0.5% 0 5% 0.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Accident Year 11 6
1/23/2012 2010 rate filing • In 2008 and 2009, during the recession, we observed a more dramatic drop in we observed a more dramatic drop in the frequency of claims • This meant we had a bigger offset to the rising severity – i.e. We did not need as much premium to cover claims costs l i t – No rate change in 2008 or 2009 – Small rate decrease in 2010 12 Frequency (number of claims per 100 policies) Bodily Injury Basic Frequency 2.5% 2.0% Frequency 1.5% 1.0% 0.5% 0.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Accident Year 13 7
1/23/2012 2011 rate filing • In 2010 and 2011, the frequency has bounced back rather quickly bounced back rather quickly • Now the offset to the rising severity is virtually nil – We need more premium to cover the claims costs – Requires 11.2% rate increase 14 Frequency (number of claims per 100 policies) Bodily Injury Basic Frequency 2.5% 2.0% Frequency 1.5% 1.0% 0.5% 0.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Accident Year 15 8
1/23/2012 Insurance Research Council (IRC) December 2011 • … auto injury claim trends indicate that insurance claim costs countrywide have insurance claim costs countrywide have recently increased, reversing previous trends of declining or relatively stable costs. • … injury claims severity has been increasing steadily in the last several i i t dil i th l t l years, much of the increase has been offset by declining claims frequency… 16 IRC findings cont’d • ... claim frequency, on a countrywide basis, is no longer decreasing. • ... the effect of rising claim severity has been magnified by the simultaneous increase in claim frequency … 2010 marks the last year since 1984 that BI claim frequency did not decline. claim frequency did not decline. 17 9
1/23/2012 3. Basic Capital • We had higher capital levels in the past • Excess capital can be used to partially mitigate rate increases • In 2011, the rising claims costs and lower investment income resulted in a significant Basic loss, which reduced g , capital significantly in 2011 18 MCT Is Volatile 167% 170% 165% 165% 162% 158% 160% 156% 155% 155% 151% 150% 143% 141% 141% 138% 136% 140% 132% 130% 123% 120% 120% 115% 110% 102% 100% 90% 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q4 MCT Actual (CGAAP) MCT Actual (IFRS) MCT Outlook (IFRS) 19 10
1/23/2012 Summary • Investment income is lower by $60M • BI frequency increased, claims costs are $100M higher higher • Lower capital levels Result: Less ability to m itigate severity increases • Operating costs are not contributing to the 11.2% increase in rates 20 Overview of Rate Change Com ponent I m pact Investment Income and Premium Finance Plan Investment Income and Premium Finance Plan + 2.5 ppt + 2.5 ppt PY 2010 Loss Cost Forecast Variance + 5.5 ppt Loss Trend to PY 2012 + 1.9 ppt Trend in Average Premium + 0.4 ppt Operating Expenses (excluding IFRS changes) + 0.0 ppt IFRS change + 0.4 ppt Capital Provision + 0.3 ppt Other + 0.2 ppt PY 2 0 1 2 I ndicated Rate Level Change + 1 1 .2 ppt 21 11
1/23/2012 How investments impact rates • New money rate – BCUC approved formula BCUC d f l – Based on average of six financial forecasts – Prospective • Return on equity – Based on current investment holdings – Prospective 22 Rates highly sensitive to interest rates movements Low er interest rates = Higher Basic rates L i t t t Hi h B i t Lower interest rates have negatively impacted the basic rate indication by 2.5% 23 12
1/23/2012 Interest rates have moved lower % Government of Canada Yield Curves 4.50 Mar 2010 4.00 3.50 3.00 Sep 2011 Interest rates 2.50 have dropped Market 2.00 expectations for 1.50 interest rates to 1.00 stay low into 2012 0.50 0.00 2 year 3 year 5 year 10 year 30 year 3/31/2010 9/30/2011 24 ICBC’s investment portfolio • Portfolio valued at $11.5 billion – Conservative investment policy to protect customers Conservative investment policy to protect customers 2 3 % 5 % Real Estate Equity Equity Fixed Income 7 2 % Assets 25 13
1/23/2012 ICBC’s investment portfolio • Premiums are invested in accordance with ICBC’s strategic asset mix with ICBC s strategic asset mix Equities assumed to Real estate assumed yield at a premium to deliver a premium over 30 year bond yield over inflation 2 3 % 5 % Real Estate E Equity it Fixed Income assets Fixed Income invested at the 3 year Assets 7 2 % bond yield 26 New Money Rate Assets W eight Return 2 0 1 0 PY 2 0 1 2 PY Real 5% Inflation + 4.25% 6.48% 6.29% Estate 30 year Government bond yield Equity 23% 10.07% 8.98% + equity risk premium Fixed 72% 3 year Government bond yield 3.18% 1.91% Income New Money Rate 4 .9 3 % 3 .7 6 % 27 14
1/23/2012 Central banks reducing interest rates to stimulate growth % Government of Canada Yield Curves Government of Canada Yield Curves 4.50 Mar 2010 4.00 3.50 3.00 Sep 2011 Interest rates 2.50 have dropped Market 2.00 expectations for 1.50 interest rates to 1.00 stay low into 2012 stay low into 2012 0.50 0.00 2 year 3 year 5 year 10 year 30 year 3/31/2010 9/30/2011 28 Dropping Economic Growth Expectations US Canada 3.50% 3.50% 3 00% 3.00% 3.00% 3 00% 2.50% 2.50% Output Output 2.00% 2.00% 1.50% 1.50% 1.00% 1.00% 0.50% 0.50% 0.00% 0.00% 10-Dec 11-Jun 11-Sep 10-Dec 11-Jun 11-Sep 2011 2012 2011 2012 Source: IMF Central banks dropping interest rates to stimulate growth 29 15
1/23/2012 Interest rates to stay low into 2012 • ICBC monitors key economic forecasts – Scotiabank Scotiabank – Bank of Montreal – National Bank All have indicated that interest rates will stay low in 2012 – TD Bank – Royal Bank – Bank of America/ Merrill Lynch “Canada’s primary dealers now expect the Bank of Canada to raise interest rates in September 2012, signaling a gloomier outlook as concerns over stalled global economic momentum persist.” Reuters, October 7, 2011 30 Global Challenges • Slowing economic growth – Major economies at risk of slipping into recession Major economies at risk of slipping into recession • High unemployment • Government debt issues – Large levels of Government debt – Large government deficits a ge go e e t de c ts – Potential European sovereign debt defaults • Volatile equity markets 31 16
Recommend
More recommend
