Market Force

A fast game of crack the whip”. This is how Facility Association (FA) president David Simpson describes the residual auto insurance market’s relationship to the voluntary market – as the voluntary market moves in one direction, the FA moves quickly and more dramatically in response.

This relationship has been highlighted by the current turmoil in all private auto markets across Canada. While legislators and insurers have struggled over rising loss costs and rate increases drawing public ire, the FA has seen its volumes rise and losses grow. Simpson, who took over as president of the association in 2001 when predecessor Stan Griffin moved into the top spot at the Insurance Bureau of Canada (IBC), has faced an uphill battle in educating regulators, the public, and even to some degree the industry itself, on the role and needs of the industry’s “market of last resort” for high risk drivers. “[The] FA was a bit of a black box to a number of stakeholders,” Simpson notes. “I’m proud of what we’ve achieved in terms of increased transparency.”

Numbers Game

This kind of open communication has been particularly crucial in light of auto insurance product reform taking place across the country. While some reforms have been aimed directly at the FA’s operations, all market change impacts the residual market. Lack of available coverage due to insurers withdrawing from the unprofitable auto market have made the FA a more attractive option. In PEI and Newfoundland, for example, FA private passenger volumes now account for about 7%-9% of the overall auto market. “This could be the highest in 13 years,” Simpson notes. However, recent reforms in PEI aimed at reducing claims costs could signal some relief for insurers, hopefully opening up the voluntary market for more business.

In Nova Scotia, legislators are enforcing a 20% rate rollback, and despite a consumer advocate report saying the FA should be exempt from this rollback, the government has rejected this recommendation. And, most recently, Alberta has introduced auto insurance legislation which uses “very broad language” on a number of issues, specifically on creating a “take all comers” environment. “Typically these well intentioned initiatives to create availability have the opposite effect,” says Simpson. New Jersey’s experience was that “take all comers” made it unattractive to do business in that jurisdiction and the requirement has since been rescinded. “Take all comers is demonstrably ineffective in reducing volumes in the residual market.”

Alberta, like other provinces, is also proposing new restrictions on underwriting criteria, departing from risk-based pricing, a move Simpson says will be detrimental to consumers in the long run as low-risk drivers subsidize higher-risk ones. “Risk based pricing is the fairest system for customers.”

The Ontario maketplace, which represents the lion’s share of premiums, is in a state of limbo with the election of the new Liberal government. Simpson, however, maintains an optimistic view that the government will temper its rate freeze with initiatives aimed at cutting claims costs. Unfortunately, signs point to both the Alberta and Ontario rate freezes applying to the FA.

The “one bright spot” for the FA has been New Brunswick, where the situation had reached near crisis proportions prior to new legislation. Availability in the voluntary market had dwindled such that for some brokers, the FA was the only remaining market. Now, with reforms, private passenger volume is down 20% since the spring, and incoming FA applications are down by about one-half. “The brokers tell us there is a much greater appetite for risk in the voluntary market.” As such, the FA has come up with a list of “clean risks” in the province, to encourage brokers to put this business back into the voluntary market, and hope to get profiles out to companies who are now more willing to write business, outlining what demographics the FA is currently serving that the voluntary market could be marketing to.

Stemming Losses

For its own part, the FA has been pushing for rate increases in most provinces, although Simpson notes that even in Ontario, where FA rates are up more than 50% in the past year, “that may not be enough”. FA rates have been shown to be directly related to volume – i.e., if FA rates are competitive with the voluntary market, its volume rises whereas if FA rates are above the market, volume drops. Despite increases ranging from 5.1% in PEI to 45% in New Brunswick, “the opportunity for those rates to impact on 2003 results is relatively modest,” says Simpson.

And, 2003 results are shaping up to be dismal. The FA’s population growth has skyrocketed, with the association estimated to have written close to $1 billion in private passenger premiums for the financial year to end October. In this respect, claims growth has been significant. “The lion’s share of it is in Ontario,” where the combined ratio is expected be about 170% for 2003, and total losses for the year are projected at almost $455 million. For all provinces, the FA’s loss for 2003 is expected to near $500 million – this includes more than $125 million in assessments already made for prior year claims. “This is a significant negative impact on companies. Companies have to set aside money on a month-by-month basis to support the FA – that’s capital they don’t have to write business in the Canadian market.”

The rising losses are “the result of a dramatically increased loss ratio multiplied by much higher premium volume”, observes Simpson. Legislators and the public need to understand that these kinds of losses can impact company decisions to remain in a market or not. “I’ve had senior company people tell me FA losses are a significant concern in boardrooms,” Simpson says. “The residual market impact has a lot of attention beyond our borders,” he adds, with global parents of Canadian companies taking FA losses into consideration when they plan where to put their scarce capacity. Recently, domestic insurer Federation announced it would withdraw from Newfoundland’s auto market, and amongst the reasons cited were increasing FA losses. “That should never be a factor, but unfortunately it is,” he adds.

That said, Simpson speculates that with other factors increasing companies’ willingness to write the auto product, FA may be able to reduce its volume and therefore its losses in 2004. “This is the worst year ever. I’m determined we’re not going to have another year like we’ve just had.”

Facing Costs

To avoid 2003’s disastrous results, the FA has released a position paper outlining its needs moving forward. This includes improved auto insurance markets to encourage voluntary market writing, as well as making FA the true market of last resort through higher rates, and having rates reflecting other costs such as cost of capital, health levies and premium taxes.

Simpson also intends to speak against non-monetary barriers to submission into the FA, such as mandatory declination letters to explain why a risk has been turned away by the voluntary market, caps on broker commissions, and the take all comers rule. “The market forces are what really drives things. Those types of controls have been proven to be ineffective.”

Also, Simpson wants to see a harmonized, stable plan of operation for FA in all jurisdictions. “It [having to belong to FA] exposes them [insurers] to unlimited liability. Companies are naturally concerned about the rules for that system.” If, for example, Alberta’s auto legislation is passed, companies have to go back to global parents and say ‘not only are we exposed to unlimited liability, but the system can be changed at any time’. He hopes 2004 will see FA able to move in other provinces as it has in New Brunswick, to push volume back in to the voluntary market where it belongs. In this regard, Simpson has set an ambitious timeline, planning to achieve depopulation in the course of one or two years, rather than several years.

General Understanding

The FA may face challenging times, but Simpson welcomes the adversity. “If yo u have a focus on achievement, it’s hard to achieve unless you are presented with challenges.”

He brings a broad insurance background to the table, having worked with State Farm in a variety of capacities since 1987. He has experience in underwriting, public affairs and management, complemented by the MBA from Schulich School of Business he attained in 1996.

Simpson served on the Insurance Institute of Canada (IIC) board, and for two years as its Ontario branch’s president. Added to this is a commitment to IBC groups working on auto insurance reform and privacy legislation, as well as Financial Services Commission of Ontario (FSCO) working groups. The remainder of his time is devoted to wife Denise and his two young daughters, Samantha and Emma.

All of these varied experiences, Simpson says, make him a good generalist. The exposure to various regulatory approaches in particular has convinced him of what it will take to turn things around for FA – to have an auto insurance market that encourages participation by insurers. “A competitive market in insurance or anything else always benefits the consumer.”