Accelerating Rates

New Brunswick’s insurance industry is hoping for a return to normalcy following a post-election political intervention by the provincial government.

Immediately after his election on Sept. 18, 2006, Premier Shawn Graham and his Liberal government quickly acted to broker a deal with the province’s insurance industry. The negotiated settlement, announced in December 2006, effectively bypassed the traditional rate-setting role of the New Brunswick Insurance Board and left the province’s insurers having to implement a 13.5% auto rate decrease by Mar. 1, 2007.

The Liberal government appointed negotiator Bill Anderson to “achieve the government’s goal of having the best auto insurance coverage and the best price for New Brunswickers,” in the words of Justice and Consumer Affairs Minister T.J. Burke.

Anderson had already worked with the province’s insurance industry to hammer out the auto insurance reforms of 2003. Among other things, the reforms created the Automobile Insurance Review Panel of the Public Utilities Board (later known as the New Brunswick Insurance Board), which reviews and approves auto rate increases – including an automatic review of any rate increases of more than 3%.

The province gave Anderson 60 days to negotiate the elimination of existing territorial rate categories, as well as to eliminate discrimination based on gender when evaluating consumer risk.

The political backdrop for the negotiations with the insurance industry included public threats by the Liberals, articulated during the election campaign, that the government would consider imposing a system of public auto if they didn’t obtain concessions on rates from insurers during the negotiations.

On Dec. 4, 2006, the government announced an “agreement reached with the insurance industry” for a total auto rate decrease of 13.5%. This includes an additional 5.9% auto rate decrease on top of the 7.6% rate decrease that New Brunswick had already approved for the Jan. 1, 2007 renewals. The additional 5.9% will be effective Mar. 1, 2007.

In addition, the government fulfilled its commitment to eliminate gender as a risk category. It held off on eliminating existing territories until 2008, however, pending further review on how best to accomplish this task.

Representatives of the province’s insurance industry gratefully acknowledged the government for backing away from its public auto threat and taking the negotiations seriously. Still, the politicized process clearly left a bad taste in their mouths.

“It’s the very kind of process that we have been trying to encourage governments to stay away from … which is effectively to intervene in the rate approval process they have had in New Brunswick as part of the reforms in 2003,” said Don Forgeron, vice president, Atlantic Region for the Insurance Bureau of Canada.

“They established an independent rate approval process that has worked very, very well,” Forgeron said of the work of the New Brunswick Insurance Board. “Rate decreases approved by the board to date have been in excess of 30%.”

But now, Forgeron lamented, “a new government comes along after the fact and says, for whatever reason, ‘We don’t like that process.’ Then they unilaterally impose an additional reduction that is not justified actuarially. From that point of view, it really puts in jeopardy all of the benefits of the reforms that we worked so hard for in terms of stability.”

AUTO RATE STABILITY

Future auto rate stability might indeed be a long-term casualty of the December 2006 agreement, said Gregg Hanson, the president and CEO of the province’s largest auto insurer, Wawanesa Mutual Insurance Company.

“Our whole industry is based on the concept of risk,” Hanson elaborated. “Every time you increase the risk, you increase the cost, because it’s harder for us to measure what it’s going to cost us if you increase the risk. And if you force us to take premiums down by a greater extent than our best judgment and actuarial science suggests how far we should take it down, you are increasing risk – and there’s no question in our mind that that creates instability.”

Hanson said the instability is based on the fact that “if you take rates too far down on one side, you’re going to have to take them up more than you’d like to on the other side.” He said Wawanesa has always been trying to have the impact of rate changes on consumers be in a tighter band. “In other words, when market cycles are soft, we don’t like to reduce our premiums too much and when market cycles get hard, we don’t like to increase them too much,” Hanson says. “We want to buffet that impact on the consumer’s budget. It’s a significant item in a consumer’s budget and we just don’t want those prices to be fluctuating too widely.”

No one is willing to discuss publicly whether individual companies might decide the risk is simply not worth it and pull out of the province. But certainly large insurers that have already set their provincial auto rates high will be affected to a lesser degree by the enforced 13.5% decrease than smaller companies that already offer lower rates.

One dilemma facing individual insurers in the province will be how to make up for the lost premium as a result of the lower rates. An insurer’s options include reviewing its underwriting rules and guidelines (in effect, changing the scope, terms or type of the company’s auto coverage). A second option involves ceding a greater proportion of clients to the province’s risk-sharing pool. The risk-sharing pool is typically the destination of clients who represent higher risks because of driver inexperience, spotty driving records or other considerations. Finally, a company might try to lower its expense ratios after reviewing internal costs such as staff, broker commissions, premium taxes and occupancy costs such as heat, light, or electric bills. This assumes, of course, that a company’s expense ratio is out of step with the marketplace.

ELIMINATION OF GENDER

New Brunswick insurers will similarly have to review their options in light of the elimination of gender as a category for assessing risk. Where gender is concerned, insurers were hoping the government would follow the same cautious path it tread when it decided to postpone the elimination of territories until 2008, pending further study. But the gender classification is now gone, leaving insurers to consider their options.

Lowering the rates for male drivers under 25 is not an attractive option for insurers, because such a move might encourage high-risk behaviours. Many believe it’s not good public policy to allow high-risk, reckless young men to purchase insurance to drive their high-octane cars at a reduced rate. “At an early age, between 16 and 25, there’s no question that testosterone does not mix very well with gasoline,” Hanson says. “As one person said to me, the testosterone seems to go right to the right [accelerator] foot of the young male driver.”

For Hanson and other insurers, eliminating the gender category altogether doesn’t make much sense. “In the life insurance industry, we don’t as a society seem to care about the fact that life insurance is cheaper for a woman than it is for a man,” Hanson observes. “They [women] live longer, so the insurance company has the money longer [and therefore] they can provide a lower price. On the other hand, we say: ‘Even though the statistics prove that a youthful male operator has a much higher propensity for accidents than a female, we don’t seem to like the idea that we’re going to charge them different insurance rates.’ It’s like it’s against human rights or something. It’s not against human rights: It’s statistically justifiable.”

Forgeron comments that the IBC will be looking to see how the New Brunswick Insurance Board handles the gender-neutral rate changes during its March 2007 rate reviews.

ELIMINATING TERRITORIES

Insurers say the same statistical justification for maintaining gender categories also app lies to territorial pricing. They note the Liberals’ traditional support comes from the north end of the province, where auto rates are generally higher than they are in the south.

Don Harrigan, the president of the New Brunswick Insurance Brokers Association, says the current territories are based on county line divisions, which “are well in need of review.” He notes the current territories fail to take into account new features on the province’s landscape, such as a four-lane highway running through the centre of the province or vandalism in densely populated urban areas.

“That’s all different to the auto market, and [basing territories on] postal code can pick that up,” Harrigan says. “Our brokers association went on record with the negotiator that the elimination of territories would be trouble. We heard the industry did the same thing. Luckily the government listened to Mr. Anderson (who recommended further review).”

DODGING A BULLET

But even if territories are eliminated, Harrigan adds, the province’s insurance industry should consider itself lucky the Liberals backed off on their threat to introduce a public auto insurance system. This threat capitalized on the public’s anger with the insurance industry after events leading up to the 2003 reforms, Harrigan noted.

According to Harrigan, from a broker’s point of view, public anger surfaced after the confluence of several historical events.

During its 10-year term in office, between 1987 and 1997, the provincial government of Frank McKenna eliminated the Public Utilities Board, following a North American trend towards deregulation. The move effectively deregulated auto insurance rates.

Also, Harrigan added, over the course of many decades, provincial insurers settled claims on a cash-flow basis, thereby escalating claims litigation costs (i.e. lawyers pursued minor accident claims, knowing the insurers would pay the money to settle the claims). This phenomenon caused insurers to call for tort reform, thus keeping claims litigation costs from going through the roof. The 2003 reforms included the establishment of a $2,500 cap on non-economic losses such as pain and suffering for soft-tissue and non-permanent personal injuries. Harrigan noted the province’s auto rates increased as insurers returned to sound underwriting principles for settling auto claims.

Harrigan pointed out as well that global investors walked away from insurance companies after they saw the financial impact the 9-11 attacks in New York and Washington had on the world’s insurers. The need to meet increased investor demands for capital caused some insurers to abandon underwriting in the province of New Brunswick because the area did not produce enough of a profitable return.

Based on these and other events, said Harrigan, the Liberals were able to capitalize on public discontent with insurers over high rates and dumped policies. The Liberals promised public auto during their 2003 election campaign and came within one seat of winning the election against incumbent premier Bernard Lord.

All told, Harrigan says, “the industry had to realize that they were going to have some political fallout on how they turned their back on New Brunswick in 2002-03, and if this is the worst it gets, they were real lucky…The industry came as close as it was going to come to ending up with government auto. And if [the conditions of the December 2006 agreement are] the fallout from it, then boys, take it on the chin and call it a good day.”