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Reform or the Road to Government Insurance?

Reform or the Road to Government Insurance?. 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

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Reform or the Road to Government Insurance?

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  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?

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