Alberta Automobile Insurance Rate Board 2006 Annual Adjustment - PDF document

Alberta Automobile Insurance Rate Board 2006 Annual Adjustment Review A submission by Facility Association June 15, 2006 1 May 31, 2006

1 B ACKGROUND 2 3 Facility Association is an administrative residual market mechanism that administers 4 involuntary residual market automobile insurance on behalf of the voluntary/private sector 5 automobile insurance industry across Canada. Created by the industry, Facility 6 Association’s mission is to guarantee the availability of automobile insurance coverage for 7 consumers who require it to legally operate their vehicles. We do that with a full-time staff 8 of twenty people and a network of outsourcing arrangements. 9 10 In Alberta, for private passenger vehicles, we administer the Alberta Risk Sharing Pool (in 11 reality two pools, one for Grid and the other for Non-Grid risks) and a very small 12 “Residual Market Segment” with very tightly defined risk criteria. For non-private 13 passenger vehicles, we administer the Facility Association Residual Market, or FARM. 14 15 We will not address the actuarial issues mentioned in the Annual Review Notice in this 16 submission, but rather the two other subjects mentioned in the Notice: the premium grid 17 and the Risk Sharing Pool. 18 19 T HE P REMIUM G RID 20 21 When the premium grid was implemented, we were surprised by the magnitude of the 22 impact we saw on the previously approved rates for some driver and vehicle profiles. For 23 example, we had cases where we saw rates go down by nearly 57% for drivers with two at- 24 fault accidents in the previous three years. Even more startling, for underage drivers with 25 two at-fault accidents in the previous three years, we saw rates go down by 82%. Please 26 keep in mind that unlike the rates of member companies, our rates have always been 27 regulated in Alberta for all coverages on all vehicle types. More recently, we saw a case of 28 a twenty-nine year old driver with seven speeding tickets. The Residual Market Segment 29 premium would be $5,961, while the grid caps the premium at $2,852—less than half. 30 More examples of this type can be found in Appendix A. 31 32 We understand that the Board is in the process of investigating and possibly addressing the 33 issue of rates for “bad drivers” so we will not dwell on this aspect of the premium grid any 34 further other than to say we would be pleased to share further examples with the Board if it 35 is useful for us to do so. The remainder of this submission will be devoted to the Alberta 36 Risk Sharing Pool. Facility Association Submission AIRB 2006 Annual Adjustment Review 2 May 31, 2006

37 T HE R ISK S HARING P OOL - A UTHORIZATION 38 39 In Alberta, we administer the Risk Sharing Pool as authorized by our Plan of Operation, 40 which is approved by the Superintendent of Insurance. (The Plan may be viewed and 41 downloaded at our website, www.facilityassociation.com.) All companies licensed to sell 42 automobile insurance in Alberta are required to abide by the provisions of the Plan. The 43 Plan requires us to maintain and report separate financial results for risks ceded to the 44 Alberta Risk Sharing Pool(s) split between those that are subject to the premium grid and 45 those that are not. So, this creates the need for two Risk Sharing Pools, commonly referred 46 to as the Grid Risk Sharing Pool and the Non-Grid Risk Sharing Pool. Both are for private 47 passenger automobiles only. All financial results of the Alberta Risk Sharing Pools (and 48 the Residual Market Segment and the FARM) stay in Alberta. That is, they are not spread 49 across the other jurisdictions we serve. 50 51 T HE R ISK S HARING P OOL - O PERATION 52 53 Essentially, a Risk Sharing Pool is a residual market that acts as an industry-wide 54 reinsurance mechanism that is largely invisible to consumers and intermediaries. A 55 consumer buys insurance in the normal way, and the application is forwarded to a 56 company underwriter. The underwriter assesses the risk, decides whether to keep it on the 57 company’s own books or to transfer the risk to the Risk Sharing Pool, subject to the 58 operational rules and eligibility guidelines of the Pool. 59 60 For both Alberta Risk Sharing Pools, companies receive an expense allowance to cover 61 costs such as those incurred for acquisition, policy issuance and policy administration. 62 That expense allowance is set annually by the Facility Association Board of Directors in 63 consultation with the Superintendent. For both Pools, companies are required to submit 64 100% of all premiums for all coverages on a policy and are eligible for 100% 65 reimbursement for eligible claims and related expenses. Financial results of the Pools are 66 shared among companies based on the proportion of a company’s exposures not ceded to a 67 Risk Sharing Pool divided by the number of industry exposures not ceded to a Risk 68 Sharing Pool. As Facility Association is simply an administrative mechanism, all 69 companies receive a monthly report reflecting the operations of the Pool providing them 70 with the amounts they are then required to book into their own financial statements. 71 Facility Association Submission AIRB 2006 Annual Adjustment Review 3 May 31, 2006

72 The two Pools differ primarily in the number of risks companies can transfer to each Pool. 73 For the Grid Risk Sharing Pool, companies can transfer risks without limit. That is based 74 on the philosophy that companies are required to accept risks for which they have no 75 control over price and therefore little or no control over the financial results of that 76 business. For the Non-Grid Pool, companies can transfer up to 4% of written exposures not 77 transferred to the Grid Pool. This Pool is designed to help companies cope with the “take 78 all comers” environment in the province. 79 80 In a competitive market, most insurers tend not to target the entire universe of private 81 passenger automobile risks. Insurers generally each have their areas of expertise and a 82 healthy competitive marketplace always tends to allow a proper mix of generalist and 83 specialist/niche private passenger automobile writers Moreover, since it is a practical 84 impossibility to have a perfect price for every risk, most insurers choose to have risk 85 eligibility rules to complement and protect their respective pricing structures. An 86 underwriter faced with a requirement to accept a greater degree of risk than that 87 contemplated by the company’s classification system and rates can transfer that risk to the 88 Non-Grid Pool. The Non-Grid Pool has a relatively low limit to ensure that it does not 89 become used as a marketing tool. That is, without such a limit, companies could 90 deliberately adopt a strategy of under-pricing certain risks to attract new customers. 91 Because these risks could then be transferred to the Non-Grid Pool, and because of the way 92 all insurers share in the results of the Pool, this would amount to companies growing their 93 businesses at the expense of their competitors. 94 95 The key point here is that Risk Sharing Pools are designed as a mechanism to promote 96 stability in the marketplace by making it possible for companies to accept risks they 97 believe are not adequately priced. The general expectation, therefore, is that Risk Sharing 98 Pools by their very nature will operate at a financial loss. It is also important to note that 99 because the Risk Sharing Pools also act as a cross-subsidization mechanism across the 100 industry, at any given point in time, companies will have their own, unique, financial 101 results vis a vis the Pools. 102 103 R ISK S HARING P OOLS - S IZE 104 105 There are two ways to talk about the size of the Risk Sharing Pools: premium volume and 106 exposure count. For calendar year 2005, the premiums written through the Grid Pool were 107 $370.6M and $56.9M through the Non-Grid Pool. Taken together, they represent 22.2% of Facility Association Submission AIRB 2006 Annual Adjustment Review 4 May 31, 2006