September 16, 2010
BY EMAIL: [email protected]
Mr. Raymond P. Oakes Barristers and Solicitors Booth Dennehy LLP 387 Broadway
Winnipeg, MB R3C OV5
Dear Mr. Oakes,
Re: Public Utility Board/ MPI 2011 General Rate Application
Pooling of single-vehicle accidents and wildlife/livestock claims for loss cost allocation system
As per your request, Dion, Durrell + Associates (Dion Durrell) reviewed the current loss cost allocation system used by Manitoba Public Insurance (“MPI”) in regards to claims arising from single-vehicle accidents (“SVA”) involving wildlife or livestock and the various mechanisms/formulas in place in other major auto insurance markets across Canada, for attributing claims costs arising from such accidents to the various categories of vehicles.
Our review focuses on the impact of the attribution models with respect to SVA involving wildlife or livestock claims costs, on the pricing of motorcycle insurance in Manitoba and across the other major automobile insurance markets.
The purpose of this letter is to summarize the findings of our review.
LIMITATIONS
Our review is based on documents provided to Dion Durrell by Booth Dennehy LLP, industry data/information and other external sources. Though efforts have been made to review the
reasonableness of the data/information, Dion Durrell is not responsible for errors or omissions in the data/information provided.
This letter is strictly for the use of Booth Dennehy LLP and the Coalition of Manitoba Motorcycle Groups (“CMMG”). Any other use or disclosure should be discussed with Dion Durrell. If this letter is distributed further, it must be distributed in its entirety.
DOCUMENTS USED IN OUR ANALYSIS
The following documents were used in our analysis: 2011 MPI Rate Application;
Public Utilities Board Order No. 161/09; Public Utilities Board Order No. 97/05;
CMMG (MPI) Information Request – Round 1(questions from CMMG to MPI in regards to the MPI’s 2011 Rate Application);
2004 Report on the Impact of No-Fault Insurance on Motorcyclists in Manitoba by Dion Durrell (produced for the Motorcycle and Moped Industry Council, presented to the Public Utility Board in 2005)
BACKGROUND
MPI is Manitoba’s public automobile insurer. It provides no-fault insurance protection through its Autopac insurance product that includes a Personal Injury Protection Plan (“PIPP”) covering medical expenses, income replacement, rehabilitation, death benefits, etc. and a collision/comprehensive component that covers physical damages to the vehicle.
As demonstrated in a report prepared in 2004 by Dion Durrell titled “Report on the Impact of No-Fault Insurance on Motorcyclists in Manitoba”, the introduction of no-fault insurance in Manitoba has resulted in a material decrease in claims costs for automobile drivers and a material increase in claims costs for motorcyclists.
In 2005, the Manitoba Public Utilities Board (“PUB”) held a special hearing regarding the claims cost attribution methodology of MPI then in use and the concept of loss transfer implementation.
Following the hearings, the PUB directed that MPI adopt a new set of claims cost attribution rules as outlined in the next section.
MPI—CURRENT CLAIMS COSTS ATTRIBUTION RULES
Per our review of PUB Order no. 97/05 and section SM.1.4 of the 2011 MPI Rate Application, our understanding is that MPI currently applies the following attribution rules to allocate claims costs to various vehicle categories for ratemaking purposes:
1. Personal Injury Protection Plan (“PIPP”, accident benefits) (from PUB 97/05):
a) “In any accident involving only MPI-insured vehicles (one or more) and no other injured party, total PIPP costs are to be allocated equally (per vehicle) across the rating categories to which those vehicles belong; and
b) In any accident involving one or more MPI-insured vehicles and (i) one or more unidentified hit-and-run offenders, or (ii) another injured party or parties (including cyclists, pedestrians, and occupant(s) of out-of-province vehicles), 50% of total PIPP costs are to be allocated equally (per
MPI-insured vehicle) across the rating categories to which the MPI-insured vehicles belong, and the remaining 50% of total PIPP costs are to be effectively allocated across all vehicle rating categories.”
2. Collision and Comprehensive Claims (Physical Damages) (from Section SM.1.4-2011MPI Rate Application):
“Collision and comprehensive claims are applied on a first paid basis, with the exception of the motorcycles. For motorcycle collision claims, 100% of motorcycle costs from single vehicle claims are attributed to motorcycles and 50% of motorcycles costs from multi-vehicle claims were attributed to motorcycles. The balance of the motorcycle collision costs were allocated to all other Highway Traffic Act power units. There is no special allocation for motorcycle comprehensive claims because this coverage is not included in the basic plan.”
Based on the above cost attribution rules, our understanding is that in cases of accidents involving a motorcycle and no other vehicle (“Single Vehicle Accidents” or “SVA”) and wildlife or livestock:
1. PIPP costs would be 100% allocated to the motorcycle vehicle category for ratemaking purposes, per PUB 97/05; and
2. Collision and comprehensive claims costs (physical damages) would be 100% allocated to the motorcycle vehicle category for ratemaking purposes, per Section SM.1.4 of the 2011 MPI Rate Application.
Therefore, our understanding is that 100% of all claims costs are attributed to the motorcycle class in cases where a motorcycle rider is involved in an accident not involving another vehicle category, and involving collision with wildlife or livestock (assuming no subrogation is pursued successfully in the case of livestock/domestic animals).
As described above in rule 1.a), in the case of SVA involving wildlife or livestock claims, the 100% allocation of PIPP costs to the motorcycle vehicle group differs from the allocation of PIPP costs that would occur in the case of a SVA involving a motorcycle and a pedestrian or cyclist, in which case the costs would be allocated 50% to the motorcycle vehicle category and 50% to all vehicle categories. It’s important to note that, as stated in MPI’s 2011 Rate Application – CMMG (MPI) Information Request – Question 1-14, for the period 2005-2009, injury costs from SVA with pedestrians and cyclists total $38,942,415 for private passenger vehicles and only $2,398 for motorcycles. Per attribution rule 1.a) outlined previously, 50% of PIPP costs are to be allocated to all vehicles (all categories) in this case. It is clear that this is currently penalizing motorcycles.
In our view, SVA involving pedestrians or cyclists are fundamentally the same in nature as SVA
involving wildlife or livestock. The claims costs attribution rules should be applied objectively to similar types of accidents to allocate costs to various categories of vehicles for the purpose of setting rates. For this reason, we don’t believe they should be treated in different ways by MPI for ratemaking purposes. In addition, the impact of implementing a change in rules to pool SVA involving wildlife or livestock for
pricing purposes as been documented and quantified by MPI, demonstrating that the data on this type of claim is readily available and such could be implemented with minimal administrative implications and little dislocation for the largest category of vehicles, private passenger automobile.
As specified by MPI in its 2011 Rate Application – Information Requests – Round 1 – CMMG (MPI) 1-2, the required rate change for motorcycles including the pooling of PIPP costs arising from SVA involving wildlife or livestock would be -4.0% compared to +6.0% as sought by MPI using the current attribution rules, or a combined difference of -9.4%. In comparison, the required rate change for private passenger auto would be -1.7% with the pooling of wildlife and livestock claims compared to -1.9% as currently sought by MPI in its 2011 Rate Application, or a combined difference of
+0.2%.
In addition, the introduction of a no-fault system should in general, in our view, result in reduced costs for all and not shifting of costs from one group to another. Under tort, costs would be borne by the group at fault and hence we are of the view that the tort environment would provide a good picture of the relative costs between groups, i.e. if the expected costs between groups were roughly similar under tort, then they should be roughly similar under no-fault.
As demonstrated by Dion Durrell in a report prepared in 2004 titled “Report on the Impact of No-Fault Insurance on Motorcyclists in Manitoba” and presented to the PUB during the 2005 hearings on loss transfer, the introduction of no-fault insurance in Manitoba has resulted in a material decrease in claims costs for automobile drivers (-34.6%) and a material increase in claims costs for motorcyclists (+29.6%). It is our view that under no-fault, loss costs have been shifted from automobile drivers to motorcyclists when a claim involves both these classes of vehicles.
A change in attribution rules to include the pooling of wildlife and livestock SVA PIPP claims costs would further recognize and offset the shift of accident benefits claims costs from automobile to motorcycles from the introduction of the no-fault program that has penalized motorcyclists from a premium rate perspective. This change would also be consistent with the approach used in the case of pedestrians and cyclists hit by motorcycles.
OTHER JURISDICTIONS
Mechanisms that ensure equitable treatment among classes of vehicles are found in various jurisdictions across North America such as:
Loss Transfer, where the insurer of the motorcycle transfers losses to the insurer of the automobile to the extent that the automobile driver is at fault;
Tort, where tortfeasors are accountable to the extent that they are at fault in an accident; Optional Tort/No-Fault where the insured can choose the type of coverage they would prefer; Threshold, where suits are allowed once a monetary or verbal threshold has been breached.
We describe below the auto insurance systems in place in the major provinces across Canada and the various mechanisms in place to allocate costs between various classes of vehicles in each jurisdiction with a focus on allocation of SVA-Wildlife/Livestock claims.
Ontario
Ontario has a “threshold no-fault” system for automobile insurance where claims for non-economic loss can be pursued in tort in cases where the claim meets the threshold.
The automobile insurance product is sold through private insurers in a competing environment. For this reason, there is no common rating algorithm used for pricing the product and there are no indications as to what form of costs reallocation occurs, if any, between vehicle categories in the case of SVA-Wildlife/Livestock claims.
However, in Ontario, two forms of mechanisms are used to ensure equitable treatment among classes of vehicles:
1. Tort recovery for claims meeting a verbal threshold, where tortfeasors are accountable to the extent that they are at fault in an accident. This shifts claims costs to the insurer of the at-fault party;
2. Loss Transfer mechanism whereby, under certain circumstances, insurers who pay no-fault benefits (the first-party insurer) may be reimbursed by the second party insurer for all or part of a claim.
Loss transfer in Ontario only operates between insurers of different classes of vehicles and only applies when the policyholder of the second party insurer is the partly at fault (it is available to insurers of motorcycles in Ontario). The purpose of Loss Transfer is to balance the cost of no-fault insurance between different classes of vehicles. In Ontario, insurers of motorcycles, motorized snow vehicles and non-heavy commercial vehicles can use the Loss Transfer provision to recover from the insurer of a heavy commercial vehicle (in both cases, in accidents occurring between the different classes of vehicles, the expectation is that the damages to the smaller vehicle, and its passenger(s), would generally be much greater and hence in a no-fault environment the smaller vehicle would retain a greater proportion of loss unless some sort of transfer mechanism exists). Under this mechanism motorcycles insurers can recover costs in excess of $2,000 to the extent that the other party is at fault.
Both measures have mitigated the adverse impact on motorcycle rates arising from the introduction of a no-fault system.
Quebec
Compensation for automobile related injuries in the Province of Quebec is provided by a governmental agency called Société de l’Assurance Automobile du Québec (“SAAQ”). Physical damage coverage is purchased through private insurers.
Quebec operates via a strict no-fault system for injuries to individuals with no right to sue at-fault parties for additional recoveries. It operates through a tort-based system for physical damages.
Based on our research, for ratemaking purposes, the SAAQ allocates 100% of claims costs (bodily injury) to the vehicle involved in the SVA subject to a per claim limit of $1 million. In attributing losses between the various vehicle categories, costs in excess of $1 million are effectively allocated to the entire pool of vehicles. This mechanism was put in place to limit the effect of any exceptionally large claim on the pricing of the product. This costs redistribution essentially follows the excess reinsurance principle whereby the costs related to a small number of very large claims is redistributed to a larger pool of insureds.
In addition, once losses have been attributed to the various vehicle categories, a second limit of $250,000 is applied to claims costs attributed to each vehicle involved in an accident, in order to limit fluctuations in rate relativities between classes within a given vehicle category. In other words, the losses in the layer $750,000 in excess of $250,000 are not used for the purpose of setting rate relativities between classes of a given vehicle category but they are used in establishing the overall loss cost for the vehicle category. In the case of a motorcycle rider involved in a SVA with wildlife/livestock, the above procedure would limit the impact on pricing of any one claim to $1 million for that vehicle category (motorcycles). A cap of $250,000 would also be applied in attributing the costs of the accident to the class of motorcycle involved in the accident, with the excess redistributed to the remaining classes within the motorcycle category.
The nature of motorcycling is such that in a collision between a motorcycle and wildlife or livestock, the motorcyclist will, due to the much lower level of protection, generally be injured more severely than the driver of a car involved in a similar accident. With the capping measure outlined above, the SAAQ ensures that exceptionally large claims will not impact rates for the motorcycle group of vehicles adversely.
For physical damages, since the coverage is provided through private insurers with no common pricing algorithm, there is no indication that any type of costs allocation to other vehicle categories occurs in the cases of SVAs-Wildlife/Livestock claims. Given the generally lower severity of physical damage in comparison to personal injury type claims, it is unlikely that any capping occurs at the claim level for the purpose of costs attribution to various vehicle categories and classes.
In the case of a multi-vehicle accident, the SAAQ allocates the total costs of all claims related to that accident equally to the various vehicles involved. The same capping rules outlined previously also apply in such case.
Saskatchewan
Saskatchewan has a government-run (Saskatchewan Government Insurance) choice no-fault system where the insured can choose between two different products: tort with a dollar threshold on non-economic damages or pure no-fault. While we do not have a specific confirmation as it relates to
SVA-Wildlife/Livestock claims, based on past research, personal injury type costs are assigned to the vehicle that incurred the costs, without any consideration of fault.
British Columbia
Automobile insurance in this province is provided by a government-run insurance company, Insurance Corporation of British Columbia (“ICBC”). Drivers can however obtain optional additional coverage, such as extended liability, collision, and comprehensive plans through private insurers. We do not have any specific indications as it to the treatment of SVA-Wildlife/Livestock claims. However, since ICBC operates under a tort system, the majority of claims costs are recorded against the tortfeasor avoiding the shift of costs from automobiles to motorcycles present in no-fault systems.
Others
Alberta and the Atlantic provinces all function under tort-based systems where insureds have to sue the at-fault driver in order to recover the costs incurred in a motor vehicle accident. Again, the automobile insurance products are sold through private insurers in a competing environment. There is no common rating algorithm used for pricing the product and there are no indications as to what form of costs reallocation occurs, if any, between vehicle categories in the case of SVA-Wildlife/Livestock claims. However, since Alberta and Atlantic provinces operates under a tort system, the majority of claims costs are recorded against the tortfeasor avoiding the shift of costs from automobiles to motorcycles present in no-fault systems.
CONCLUSION
Given that, SVA involving pedestrians or cyclists are similar in nature to SVA involving wildlife or livestock, we believe that a fair and reasonable treatment would be to pool them in the same manner by MPI for ratemaking purposes. The impact of implementing a change in rules to pool SVA involving wildlife for pricing purposes as has been documented and quantified by MPI, demonstrating that the data on these types of claims is readily available and such rules could be implemented fairly easily with little dislocation for the largest category of vehicles, private passenger automobile.
Based on MPI’s calculations, the combined impact on motorcycle rates of introducing a pooling of wildlife and livestock claims consistent with the pooling of other SVA claims involving pedestrians and cyclists would be a decrease of 9.4% from the indicated rates pursued in the 2011 Rate Application, with minimal impact on private passenger rates.
The introduction of no-fault insurance in Manitoba has had a favourable impact on automobile rates and an adverse impact on motorcycle rates. A change in attribution rules to include the pooling of wildlife and livestock SVA PIPP claims costs would further recognize and offset the shift of accident benefits claims costs from automobile to motorcycles from the introduction of the no-fault program that has penalized motorcyclists from a premium rate perspective. This change would also be consistent with the approach used in the case of pedestrians and cyclists hit by motorcycles.
Please contact us if you have any questions relating to this issue. Best regards, Nicolas Beaudoin Consulting Actuary [Tel: 416.408.5342] [Email: [email protected]] NB:jb
Copy: Michel Trudeau, Dion Durrell + Associates Inc. CMMG_2010 09 16 MPI Moto Wildlife Livestock.doc
