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9/10/2014
1
2014 Revenue Requirements Application Informational Presentation
September 10, 2014
• What is ICBC applying for?
• Basic Regulatory Framework
• Claims Costs: The main driver of the Rate Change
– Basic frequency and distracted driving
– Basic severity and Claims cost management
1
Agenda
B-4
9/10/2014
2
• Other Components of Rate Change
– Investment Income
– Operating Expenses
• Information on draft CRC Framework
• Structure of Application
2
Agenda
• Basic rate increase of 5.2% for 2014 PY
• Approved on interim basis
• Any difference between final approved and interim rate change deferred to next year’s (2015) rate change
– Same as was done for 2013; difference of +0.3% was deferred and will be implemented with the 2014 rate change
3
What is ICBC applying for?
9/10/2014
3
BASIC REGULATORY FRAMEWORK
4
ICBC’s Regulatory Framework
5
• Special Direction IC2
– ICBC must apply for rate change annually by Aug 31
– Capital management
– Rate set according to Accepted Actuarial Practice, subject to rate smoothing provisions:
• Limitation on rate change to be within 1.5 percentage points of prior year’s rate change number
• Commission may exclude some or all of an unfavourable “loss cost forecast variance”
• The 2013 rate exclusion of 6.6% must be discontinued this year
9/10/2014
4
6
100% MCT Statutory Minimum
Margin for adverse events
130% MCT
Margin for rate smoothing
145% MCT Capital Management Target
160% MCT Threshold for CRC
Outlook MCT ratio for 2014
Capital Management Plan
7
6.7% 5.2% 3.7%
Rate change to cover costs is within band No limitation required
-1.5% +1.5%
2014 rate
change 2013 rate
change =
9/10/2014
5
8
0.4%
6.5%
3.3%
-2.4%
11.2%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
6.6%
5.2%
11.8%
5.2%
ICBC Rate Changes
Implications for 2014 RRA
9
• Indicated rate change is 5.2%
– Reflects no capital build, as MCT at target
– Within rate change band, so no limitation required
– Equals the rate change to cover costs
– Last year’s rate exclusion is discontinued
• Partially offset by a favourable forecast variance
9/10/2014
6
Components of 2014 rate change
10
0.0%
-0.1% 0.3% 5.2%
6.6%
2.9% -3.0%
-1.5%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
PY 2013Rate Level
Prior RateExclusion
Loss CostVariance
Loss CostTrend
InvestmentIncome
OperatingExpenses
Other Rate Changeto Cover
Cost
2013
Co
mp
ared
to
201
4Im
pac
t o
n R
ate
Leve
l
CLAIMS COSTS: THE MAIN DRIVER OF THE
RATE CHANGE CHAPTER 3
11
9/10/2014
7
Loss Costs are the main driver
12
Loss and ALAE Payments
Operating Expenses
Other(including acquisition costs)
What is “Loss Cost”?
• Provision for Claims Costs in Rate
– Expected future claims cost per policy
• Claims Cost per Policy
– Frequency of claims
• (e.g., 15 claims per 1,000 policies)
– Severity (average cost of a claim)
• (e.g., $40,000)
– Loss Cost = Frequency x Severity
• (e.g., $600 = (15/1,000) x $40,000)
Approximate loss cost of the bodily injury coverage
13
9/10/2014
8
Loss Cost Forecast Variance (all coverages)
Last Year’s Loss Cost Forecast
14
$500
$550
$600
$650
$700
$750
$800
$850
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Lo
ss
Co
st
Accident Year
Actual (2013 Application) PY 2013 Projection (2013 Application)
Loss Cost Forecast Variance (all coverages)
Re-estimation of Last Year’s Loss Cost Forecast
15
$500
$550
$600
$650
$700
$750
$800
$850
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Lo
ss C
os
t
Accident Year
Actual (2013 Application) PY 2013 Projection (2013 Application)
Actual (Current Application) PY 2013 Projection (Current Application)
9/10/2014
9
Loss Cost Forecast Variance (all coverages)
Difference is the Loss Cost Forecast Variance
16
$500
$550
$600
$650
$700
$750
$800
$850
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Lo
ss C
os
t
Accident Year
Actual (2013 Application) PY 2013 Projection (2013 Application)
Actual (Current Application) PY 2013 Projection (Current Application)
-1.5 ppts of rate change
17
Loss Cost Forecast Variance (all coverages)
$450
$500
$550
$600
$650
$700
$750
$800
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Accident Year
Actual (2012 Application) PY 2012 Projection (2012 Application)
Actual (2013 Application) PY 2012 Projection (2013 Application)
+6.6 ppts of Rate change
2013 RRA
9/10/2014
10
Components of 2014 rate indication
18
0.0%
-0.1% 0.3% 5.2%
6.6%
2.9% -3.0%
-1.5%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
PY 2013Rate Level
Prior RateExclusion
Loss CostVariance
Loss CostTrend
InvestmentIncome
OperatingExpenses
Other Rate Changeto Cover
Cost
2013
Co
mp
ared
to
201
4Im
pac
t o
n R
ate
Leve
l
Components of 2014 rate indication
19
0.0%
-0.1% 0.3% 5.2%
6.6%
2.9% -3.0%
-1.5%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
PY 2013Rate Level
Prior RateExclusion
Loss CostVariance
Loss CostTrend
InvestmentIncome
OperatingExpenses
Other Rate Changeto Cover
Cost
2013
Co
mp
ared
to
201
4Im
pac
t o
n R
ate
Leve
l
9/10/2014
11
20
Loss Cost Trend (all coverages)
$500
$550
$600
$650
$700
$750
$800
$850
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Lo
ss C
os
t
Accident Year
Actual (2013 Application) PY 2013 Projection (2013 Application)
Actual (Current Application) PY 2013 Projection (Current Application)
21
Loss Cost Trend (all coverages)
$500
$550
$600
$650
$700
$750
$800
$850
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Lo
ss C
os
t
Accident Year
Actual (2013 Application) PY 2013 Projection (2013 Application)
Actual (Current Application) PY 2013 Projection (Current Application)
PY 2014PY 20142.9 ppts of rate change
9/10/2014
12
Main Driver of Loss Costs: Bodily Injury (BI)
• Represents 75% of Claims Costs
• Over last few years there has been
– A significant and unfavourable shift in the frequency of BI claims
– A large increase in the rate at which injured parties are obtaining legal representation
22
BI Frequency Forecast
23
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fre
qu
en
cy
Accident Year
Actual PY 2014 Projection (Current Application)
PY 2013 Projection (2013 Application) PY 2013 Projection (Current Application)
Model (2013 Application) Model (Current Application)
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13
BI Severity
24
25
Rate of represented BI claims
9/10/2014
14
26
Legal
Representation Severity
Pending Frequency
Foundation
People, Processes, Technology
Corporate strategy to address BI claims
Influence Control
BI FREQUENCY AND DISTRACTED DRIVING
CHAPTER 7
27
9/10/2014
15
Road Safety is focusing on BI frequency
• Safe Systems strategic framework
– Enforcement is largest investment
– Road improvements continue
– Education and awareness re-prioritized to reflect trends and emerging factors
• Focused on outcomes
– Reducing crashes overall
– Reducing frequency of BI claims
28
Distracted Driving is…
• An emerging piece of the overall crash picture
• A concern throughout the developed world
• Part of a social shift in society to instant communication
• Interrupting an otherwise positive crash trend
29
9/10/2014
16
One key factor contributing to BI claims frequency is a recent increase in rear-end crashes resulting in injury
0
5,000
10,000
15,000
20,000
25,000
30,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
In
cid
en
ts
Top Crash Configurations in Casualty Crashes
(ICBC Data 2001-2012)
REAR END
SIDE IMPACT
SINGLE VEHICLE
UNDETERMINED
HEAD ON
SIDE SWIPE - SAME DIRECTION
SIDE SWIPE -OPPOSITE DIRECTION
REAR TO REAR
30
31
Distraction is leading cause
0%
10%
20%
30%
40%
50%
60%
Casu
alt
y C
rash
In
cid
en
ts
Contributing Factors
Contributing Factors in Casualty Crashes Rear End Crashes and All Configurations
(TAS: 8 year average, 2005-2012)
All Configurations
RE Crashes
9/10/2014
17
No silver bullet: a strategic approach
• A 3 pillar approach to crash reduction as recommended by the WHO
– Legislation: informing government of crash trends, research
– Enforcement: 2 campaigns, community policing, crash mapping causal factors
– Education and awareness: new partnerships, new advertising approach, building groundswell of support
32
Dad – Caught in a glance
33
https://www.youtube.com/watch?v=DQPKG8YaXL8
9/10/2014
18
Heading Home – Only takes a second
34
https://www.youtube.com/watch?v=OixjoQetvyw
Stop Light – Intersections are not safe
35
https://www.youtube.com/watch?v=a5ZSJxGya7s
9/10/2014
19
Engaging Stakeholders
36
Chris & Mike – Stoplight texting
37
http://youtu.be/VS_aDNipELU
9/10/2014
20
Squire & Dean – Emails at stop signs
38
http://youtu.be/JZ_W37FCYmA
Kristi & Karen – Quick calls
39
http://youtu.be/QR8bdSTZb10
9/10/2014
21
Distracted driving campaign
40
ICBC will provide media support for enhanced enforcement during the campaign.
Community Policing volunteers will conduct Cell Watch deployments to remind drivers to leave their phones alone, and record noticeable driver distraction.
A framework for monitoring progress
• Attempting to overcome confounding factors
• Use of frequency of rear-enders as one of several indicators of effectiveness of strategy
• Developing methodology for incorporation into monitoring and evaluation framework
41
9/10/2014
22
CLAIMS COST MANAGEMENT
CHAPTER 6
42
43
Legal
Representation Severity
Pending Frequency
Foundation
People, Processes, Technology
Corporate strategy – areas of focus
Influence Control
9/10/2014
23
Legislative framework and product
• Legislation
– Tort system with full right of recovery
– Provides less certainty over claims costs
• ICBC’s dual role
– Coverage, service, fair compensation
– Duty to defend and manage claims costs
• Legal representation
44
Claims is focused on areas of greatest opportunity
• Sections/areas of focus:
– Organizational capacity
• Significant transformational change
– Claims cost management initiatives
• Managing represented claims
• Reducing number of pending claims
• Addressing fraudulent claims
45
9/10/2014
24
46
Transformational change enables greater capacity to achieve results
Foundation People, Processes, Technology
Claims Transformation
• New organizational model/structure (People)
– Claims functional organizational model - 2011
– Claims job hierarchy - 2013
• New systems and business processes
– Roll out first phase new systems and business processes – November 2013
– Roll out final phase of new systems and business processes - April 2014
Claims initiatives mitigate cost pressures
47
$20,000
$25,000
$30,000
$35,000
$40,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Severit
y
Accident Year
Selected Severity Without Impacts of Claims Initiatives
9/10/2014
25
Claims initiatives moderate cost pressures
• Improvements to first contact
– Claims process; benefits; file assignment
• Information campaign
– Improved understanding of claims process
• Proportional legal process and costs
• Working with stakeholders
48
49
Rate of representation is increasing
9/10/2014
26
Legal representation is occurring earlier in the process
50
Customer Attitudes Survey
• Historical approach
– Claims focused investigation
• Customer experience/interactions
• Early representation by area or office
• Customer Attitudes Survey
– Identify and investigate the key factors (drivers) that influence customers’ decisions to seek representation
• Cross-divisional expertise and analytic data modelling were used
51
9/10/2014
27
Key driver of representation: perceived lawyer benefits
52
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
0 10 20 30 40 50 60 70 80 90 100
Rel
ativ
e Im
pac
t o
n P
rop
ensi
ty t
o R
ep
Composite Score
Perceived Lawyer Benefits 9.9%
Tolerance of Lawyer Detriments3.6%
Deserving Attitude 3.2%
Expect Difficult Process 2.9%
Expect Unfair Compensation2.4%
Economic Motivation 1.4%
Expect Unfair Treatment 0%;Expect Biased Adjusters 0%
Managing pending bodily injury claims
• Growth in number of pending claims during TP transition
– File moves during implementation of new org structure and job hierarchy
– Training, adapting to the new system, working in co-existence
• Increased focus on settling older, represented claims in 2014
53
9/10/2014
28
Fraud strategy aligned to corporate bodily injury strategy
• Claims Adjuster and SIU infrastructure
– Training, process, alignment
– Improved resource utilization
• New system benefits will take time
– Improved data collection and analysis
• Developing a fraud roadmap
– Alignment to the corporate BI strategy
54
Summary
• Resolve claims in fair and reasonable manner through effective and efficient interactions, recognizing ICBC’s dual role
55
• ICBC took steps to address emerging pressures and is seeing some success
• ICBC must remain focused in implementing the new Claims system
• Going forward, areas of focus leverage research and new systems over time
9/10/2014
29
INVESTMENT INCOME CHAPTER 5
56
Components of 2014 rate indication
57
0.0%
-0.1% 0.3% 5.2%
6.6%
2.9% -3.0%
-1.5%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
PY 2013Rate Level
Prior RateExclusion
Loss CostVariance
Loss CostTrend
InvestmentIncome
OperatingExpenses
Other Rate Changeto Cover
Cost
2013
Co
mp
ared
to
201
4Im
pac
t o
n R
ate
Leve
l
9/10/2014
30
Investment Income
• Favourable impact on rates due to:
– Higher New Money Rate due to:
• Increase in interest rate forecast and
• Proposed revised formula
– Higher income from Basic equity
• Proposed revised formula for New Money
Rate
– Accommodates introduction of high yield bonds
into strategic asset mix
– Incorporates risk premium for credit assets
58
New Money Rate
Asset Type Current Proposed
Equities Forecast 30-year Canada bond yield plus Commission approved equity risk premium
Same
Real Estate Forecast CPI plus premium of 4.25%
Same
Fixed Income Forecast 3-year Canada bond yield
Same – but only applies to risk-free fixed income assets
Credit (corporate bonds, mortgages & high yield bonds)
N/A Forecast 3-year Canada bond yield + credit risk premium
59
9/10/2014
31
OPERATING EXPENSES CHAPTER 8
60
Loss Costs are the Primary driver
61
Loss and ALAE Payments
Operating Expenses
Other(including acquisition costs)
9/10/2014
32
Components of 2014 rate indication
62
0.0%
-0.1% 0.3% 5.2%
6.6%
2.9% -3.0%
-1.5%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
PY 2013Rate Level
Prior RateExclusion
Loss CostVariance
Loss CostTrend
InvestmentIncome
OperatingExpenses
Other Rate Changeto Cover
Cost
2013
Co
mp
ared
to
201
4Im
pac
t o
n R
ate
Leve
l
63
Operating Expenses: 2014 Outlook
• Minimally favourable impact on rate indication (-0.1 ppt)
• Growth of operating expenses outpaced by growth in ICBC’s business
• In 2014 facing compensation, technology, and inflationary cost pressures
• Proactive cost management continues: operational efficiencies and managing budgets within targets
9/10/2014
33
CUSTOMER RENEWAL CREDIT
CHAPTER 4
64
CRC Regulatory Requirements
Per Special Direction IC2 and 2013 Government Directive every year for which the Commission sets Basic insurance rates, it should approve a CRC if
– There is capital available “well in excess”
– CRC will not result in the MCT falling below the capital management target
– Rates will remain relatively stable and predictable despite the approval of the CRC
– It is cost-effective to implement
65
9/10/2014
34
66
Margin for adverse events
130% MCT
Margin for rate smoothing
145% MCT
Capital Management Target
160% MCT
Threshold for CRC
Outlook MCT
ratio for 2014
Per Decision on 2013 RRA
150% MCT
Pay CRC such that
MCT returns to
150%
Content of CRC chapter
• Guiding principles for framework
• Eligibility criteria for customers
• How the CRC will be calculated and how customers will redeem the CRC
• Cost effective implementation requires CRC system to be based on new Insurance system
67
9/10/2014
35
STRUCTURE OF APPLICATION
68
Structure of Application
• Chapters 1 and 2: Application and Introduction & Executive Summary
• Chapter 3: Actuarial rate indication level analysis
• Chapter 4: Customer Renewal Credit
– Draft framework with details to be settled as systems requirements completed
• Chapter 5: Investments
– Proposed revision to the formula for the New Money Rate
69
9/10/2014
36
Structure of Application
• Chapter 6: Claims Cost Management
– Responds to 2013 Decision, including:
• Results of claimant/customer attitudes survey
• Experience of other jurisdictions
• Fraud data and update
• Metrics during Claims transition
• Chapter 10: Performance Measures
– Metrics to support corporate BI strategy, including BI frequency
– Removal of New Claims Initiation 120 and 210 seconds measures
70
Structure of Application
• Chapter 7: Road Safety
– Proposal for streamlining Road Safety reporting
– 2014 Education and Awareness priorities included Distracted Driving Strategy
• Chapter 8: Operating expenses
– Focus on operating expense categories on corporate basis
– Allocation to Basic explained at outset of chapter
– New incentive pay plan explained
71
9/10/2014
37
Structure of Application
• Chapter 9: Government Initiatives with Service Agreement documents
• Appendices:
– Participants’ Reference Guide, including glossary
– Basic Insurance Info Sharing
– 2014-2016 Service Plan
– 2013 Annual Report
72
SUMMARY
73
9/10/2014
38
Summary
• 5.2% = required rate to cover costs
• Compliance with regulatory framework
• Corporate strategy to address BI claims
– BI frequency through road safety
– BI severity through claims cost management
• Favourable impact of investment income and operating expenses
• Information on CRC
• Improvements to structure of Application
74
QUESTIONS
75