FACILITY ASSOCIATION RESIDUAL ARKET · in January 2013. The process was completed in April 2013 with the Facility Association Board of Directors accepting the recommendation of the

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FACILITY ASSOCIATION RESIDUAL MARKET

FEBRUARY 2013 PARTICIPATION REPORT

ACTUARIAL HIGHLIGHTS

Related Bulletin:

Related Operating Results:

F13-027 FARM February 2013 Participation Report

For your convenience, bookmarks have been added to this document. To view them, please click on the BOOKMARK tab at the left.

Summary of Operations – Calendar Year Results

Should you require any further information, please call Norm Seeney, Vice President, Finance & Member Services at (416) 644-4914.

http://www.facilityassociation.com/docs/bulletin/2013/F13-027 FARM - February 2013 Participation Report.pdf

http://www.facilityassociation.com/docs/calendar_result/FARM%20Calendar%20Year%20Jan%202013.pdf

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ACTUARIAL HIGHLIGHTS RESIDUAL MARKET

PARTICIPATION REPORT FEBRUARY 2013

TABLE OF CONTENTS

1. New this Month ............................................................................................................................. 3 1.1 Actuarial Services RFP Process ............................................................................................. 3 1.2 Retroactive Claims Fee Adjustments ..................................................................................... 3

2. Summary ........................................................................................................................................ 4

3. Updated Valuations in Fiscal Year 2013 ..................................................................................... 5

4. Transition to Hybr id Model for Actuar ial Services................................................................... 6

5. Activity Dur ing the Month ........................................................................................................... 6 5.1 Recorded Premium and Claims Activity ............................................................................... 6 5.2 Actuarial Provisions ............................................................................................................... 8

6. Ultimate Loss Ratio Matching Method ..................................................................................... 10

7. Calendar Year-to-Date Results .................................................................................................. 10

8. Current Par ticipation Repor t – Additional Exhibits ............................................................... 11

9. EXHIBITS ................................................................................................................................... 12

Actuarial Highlights – Residual Market

Participation Report February 2013

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1. New this Month 1.1 Actuarial Services RFP Process

As part of its governance framework, Facility Association completes a “Request for Proposal” (RFP) process in relation to the provision for external professional services on a regular basis (approximately every five years). An RFP process for actuarial services was approved to be initiated in January 2013. The process was completed in April 2013 with the Facility Association Board of Directors accepting the recommendation of the Audit & Risk Committee to engage Ernst & Young LLP (“E&Y”) as the service provider effective in April 2013, with E&Y’s Liam McFarlane, FCIA, FCAS, appointed as Actuary effective June 1, 2013. Any questions regarding the RFP process may be directed to:

Shawn Doherty, FCIA, FCAS SVP Actuarial & CFO (416) 644-4698 Email: [email protected]

Facility Association’s current providers will complete work already initiated at the time of the Board’s decision. In particular, Eckler will complete the December 31, 2012 valuation work for the Risk Sharing Pools and Facility Association Residual Market with the support of Facility Association’s in-house actuarial resources, and the Uninsured Automobile Funds’ valuation as at April 30, 2013 (to be completed in May 2013).

1.2 Retroactive Claims Fee Adjustments

Annually, retroactive claims fees adjustments are paid to Servicing Carriers in accordance with the Plan of Operation for the final adjustment, and Bulletin “All-Canada SC2004-12” for interim adjustments. These adjustments were paid and taken into account for this month’s Participation Report, with accident year 2007 receiving final payment, accident year 2010 receiving 2nd interim payment, and accident year 2012 receiving 1st interim payment. The payments and changes in provision are summarized below. Note that for accident year 2007, the provision at the end of January was based on valuation assumptions, including an adjustment to estimate recorded claims amount (which the final adjustment is based on) from the selected ultimate loss ratio. The actual recorded level overall was higher than determined through this process, resulting in an unfavourable final adjustment of $3.7 million for 2007 (see below).



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2. Summary There has not been an updated valuation for the Facility Association Residual Market (“FARM”) since last month’s Participation Report (the most recent valuation was based on data as at September 30, 2012). However, the annual retroactive claims fee adjustment process was completed this month, resulting in an unfavourable impact in relation to accident year 2007 (see section 1.2 for more information).

The charts below show the current levels of indemnity only1 claims amounts booked by accident year2

. The left chart below displays life-to-date indemnity payments, case reserves, IBNR and the total including actuarial present value adjustments against accident year earned premium. The right chart below shows the associated dollar amounts for the components of the unpaid claims liabilities and the current projected amount of 2013 full year earned premium (the red hash-mark line) to provide some perspective.

“M/S” refers to “Member Statement” values – that is, actuarial present value adjustments at the selected discount rate.

The current actuarial present value adjustments balance ($32.5 million – see table on next page) represents 15% of the earned premium projected for the full year 2013 (see the upper right corner of the right chart above). If our current estimates of the nominal unpaid amounts prove to match actual claims payments, the actuarial present value adjustments will be released into the net operating result over future periods as the associated claims are settled.

1 Servicing Carriers for the Residual Market are compensated via an initial claims fee paid as a percentage of earned premium. This fee is retroactively adjusted and settled at age 72 months for each accident year based on the formula as laid out in the Plan of Operation. The claims fee is meant to cover Servicing Carrier costs for claims management and adjudication except for certain categories of claims expenses (first party legal and professional consulting fees as described in the Facility Association’s “Claims Guide” manual under the “Litigation” section). These latter fees are directly reimbursable upon final settlement of the claim.

We refer to these fees/expenses collectively as “claims fees and allowed claims expenses” and these are generally NOT included in this discussion, although reference is made to them from time to time as deemed appropriate. The claims fees and allowed claims expenses may be reviewed in the valuation process and any associated changes in unpaid amounts are reflected in the Participation Report. The collective provision for the claims fees and allowed claims expenses is referred to as the “Retro Claims” provision and is presented in Table 02b in section 5.2. 2 The loss ratio chart has been limited to show the most recent 20 accident years; the unpaid provision chart has been limited to show the most recent 20 accident years, and show all accident years older than 20 years collectively as “PRIOR”.



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The table to the left breaks down the Member Statement (M/S) unpaid claims liability total into its component parts. The first four rows of this table reflect indemnity only as indicated, with the majority of the unpaid in case reserves. The unpaid claims fees and allowed claims expenses liability is shown in the row labelled “retro claims adj.” (see footnote 1).

3. Updated Valuations in Fiscal Year 2013 The February 2013 Participation Report does not reflect the results of an updated valuation, but relies on actuarial assumptions derived from the valuation as at September 30, 2012 (all jurisdictions).

The following table summarizes the schedule of valuations for fiscal year 2013. FARM

FISCAL YEAR 2013 – SCHEDULE OF VALUATIONS

Valuation Date

Discount Rate

(per annum)

Participation Report Notes

Sep. 30, 2012 1.20% Oct. 2012 updated valuation: all jurisdictions; cash flow projections updated for all jurisdiction; discount rate left unchanged; no change to margins for adverse claims development at government line level

Dec. 31, 2012 Mar. 2013 update valuation for Ontario, Alberta only; update actuarial present value assumptions for all jurisdiction

Mar. 31, 2013 May 2013 update valuation for Ontario, Alberta only; update actuarial present value assumptions for all jurisdiction

Jun. 30, 2013 Aug. 2013 update valuation for all jurisdictions except territories; update actuarial present value assumptions for all jurisdiction

Sep. 30, 2013 Oct. 2013 updated valuation for all jurisdictions; update actuarial present value assumptions for all jurisdiction

In each jurisdiction, development on prior accident years is monitored between valuations, as are the emerging volumes and loss ratios pertaining to the applicable current accident year. Actuarial present value adjustments (discounting of cash flows and the inclusion of provisions for adverse deviation) may be adjusted on an interim basis in the event of a significant change in Government of Canada yield rates and to ensure consistency with the discount rate assumptions selected for other jurisdictions.



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4. Transition to Hybrid Model for Actuarial Services The Board of Directors of the Facility Association approved a plan in 2010 to move to a “hybrid” model in relation to actuarial services, whereby an in-house actuarial group would be formed to manage all actuarial services. Under this model, actuarial services would be completed both in-house and via use of the Facility Association’s outside actuarial consulting resources. Cynthia Potts of Eckler Ltd. continues to be Facility Association's Appointed Actuary until the appointment of Liam McFarlane of Ernst & Young LLP takes effect on June 1, 2013.

The FARM September 30, 2012 valuation was undertaken by Eckler, using the same methodologies and the same approach to selection of assumptions (including the level of data segmentation) as the June 30, 2012 valuation completed by Eckler. The transition for the FARM and UAF valuations in-house was deferred to calendar year 2013 in order to ensure a smooth transition through fiscal year 2012 placing focus on the Risk Sharing Pools.

The transition to the UAF valuation in-house was completed for the UAF Participation Quarterly Report for February 2013. Progress towards full implementation of the hybrid model will continue with the December 31, 2012 FARM valuation.

5. Activity During the Month3

5.1 Recorded Premium and Claims Activity

The following table summarizes the extent to which premiums and claims amounts recorded during the month differ from estimates reflected in the prior month’s Participation Report. The tables below show two “views” of the overall results.

FARM Actual vs. Projected Summary: Recorded Indemnity Transaction Amounts ($ thousands) by Jurisdiction

(Recorded transaction amounts exclude IBNR & other actuarial provisions)

3 There may be differences between the values shown in this document and associated values in the Bulletin and / or Operational Report, due to rounding.



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FARM Actual vs. Projected Summary: Recorded Indemnity Transaction Amounts ($ thousands) by Accident Year Group

(Recorded transaction amounts exclude IBNR & other actuarial provisions)

Claims activity varies monthly in part due to “process variance” – that is, due to the nature of the claims reporting, recording and adjudication processes. Each month, the variances are reviewed for signs of projection bias and to identify potential ways to reduce the level of the variance (we have been tracking the monthly variances by jurisdiction, business segment, and accident year group over the last several months). The charts below show the actual less projected levels for the periods we have been tracking.

FARM Actual vs. Projected Summary: Paid Indemnity Variances by Calendar Month

The prior accident years’ (PAYs) paid variances (chart on left above) have fallen outside of the

period’s standard deviation approximately 57% of the time, being a higher percentage than indicated for a normal distribution (suggesting the projection process is poorer than simply projecting based on averages). However, that percentage drops to 23% if 2011 calendar months are excluded, indicating an improvement in the projection

process. As well, there does not appear to be systemic bias in the process when 2011 is excluded (that is, roughly equal number of months with positive as negative variances).

The current accident year (CAY) paid variances (chart on right above) had indicated a bias toward actual being lower than projection, but this appears to have been corrected over the last several months. Over the period, approximately 26% of variances have fallen within one standard deviation of actual experience, and this falls to 17% if 2011 calendar months are excluded, again suggesting an improvement in the projection process (and that the projection process is better than simply projecting based on averages).



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FARM Actual vs. Projected Summary: Recorded Indemnity Variances by Calendar Month

The prior accident years’ recorded (paid plus case changes) variances (chart on left above) over the

entire period indicated have fallen outside of the period’s standard deviation 38% of time, being more than suggested by the normal distribution (suggesting the projection process is poorer than simply projecting based on averages). During the 2011 calendar months, there appeared to be a bias toward high projections. Excluding 2011, a bias does not appear to be indicated, and the

percentage of variances outside of a standard deviation has fallen to 14%, indicating an improvement in the projection process.

The current accident year’s recorded variances (chart on right above) over the period has not indicated a bias, but the monthly variance fell outside of the period standard deviation 30% of the time (roughly in line with a normal distribution – this suggests the projection process is no better than simply projecting based on averages). However, with 2011 calendar periods excluded, the variances outside of one standard deviation falls to 9%, indicating an improvement in the projection process and suggesting the process performs better than simply projecting based on averages.

The method for establishing IBNR adjusts automatically for changes in earned premium and recorded claims activity level (see sections 5.2 and 6).

5.2 Actuarial Provisions

An “ultimate loss ratio matching method” (described in section 6) is now used to determine the month’s IBNR4

The loss ratios and the factors used to determine the actuals were based on the latest valuation (September 30, 2012 for all jurisdictions). The table below summarizes variances in provisions included in the February 2013 Participation Report and the associated one-month projections from last month’s Report.

for accident years 1994 and later (IBNR is kept at $0 for accident years 1993 and earlier). Factors are applied to the nominal unpaid claims liability (case plus IBNR – for indemnity only) to determine the discount amount (shown as a negative value to indicate its impact of reducing the liability) and the Provisions for Adverse Deviations. This approach was first used with respect to the March 2012 Participation Report.

4 For ease of discussion, “IBNR” is used in place of “provisions for incurred but not recorded (IBNR) and development”.



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FARM Actual vs Projected Summary: IBNR and APV Amounts ($ thousands)

The IBNR provision is $1.3 million lower than projected from last month, counterbalancing the recorded claims activity and earned premium variance impacts indicated in section 5.1.

Actuarial present value adjustments are derived by application of factors to the unpaid claims liability balance (case reserves and IBNR). Unpaid variances offset paid variances. In the tables above (01b and 02a), it is easier to relate the actuarial present value adjustment variances with paid claims variances as we do not provide the sum of case and IBNR variances. That is, where paid actual less projected is a negative value, the discount amount variance will usually also be negative, but the provision for adverse deviation variance will be a positive value. In addition to the provisions for indemnity amounts, provisions are established for certain adjustments to Servicing Carrier claims fees and for certain reimbursable legal and professional claims adjudication fees which we refer to as “allowed claims expenses” (see footnote 1). The table below summarizes the variances in these “Retro Claims Provisions” included in the February 2013 Participation Report and the one-month projections from last month’s Report. The variances reflect earned premium variances by jurisdiction, variances in payments for allowed claims expenses relative to projections, and updated provisions for the retroactive claims fees to reflect the annual settlements that occurred this month.

FARM Actual vs. Projected Summary: “Retro Claims Provision”5

and APV Amounts ($ thousands)

The table below summarizes the variances in the provisions for the deferred policy acquisition cost amounts (the FARM overall remains in a deferred asset position) included in the February 2013

5 “Retro Claims Provision” here refers to the provision for unpaid claims fees & allowed claims expense for Service Carriers in managing and adjudicating claims on behalf of the Facility Association.



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Participation Report and the one-month projections from last month’s Report. The variances are mainly driven by the unearned premium balance variance (at the jurisdiction level).

FARM Actual vs. Projected Summary: Premium Deficiency / (DPAC) Amounts ($ thousands)

6. Ultimate Loss Ratio Matching Method An “ultimate loss ratio matching method” continues to be applied to the current month and two projected months shown in the Participation Reports, with IBNR determined by accident year (for accident years 1994 and on) as follows:

(a) Earned premium to date (b) Ultimate loss6

(c) Estimated ultimate incurred = (a) x (b) ratio per latest valuation

(d) Recorded indemnity to date (e) IBNR = (c) – (d)

IBNR for accident years 1993 and earlier is kept at $0. For the two projected months, IBNR was determined in a similar way, incorporating the two-month projections of earned premiums and recorded indemnity. Prior to actuarial present value adjustments, any expected emergence of recorded claims amounts pertaining to “prior accident years”7

The procedure described above differs from past practice (i.e. prior the March 2012 Participation Report) in that the results of the valuation are considered to be the ultimate loss ratios, rather than projected monthly provisions for IBNR.

during the two-month projection period is assumed to be offset by changes in IBNR. Furthermore, the implied ultimate loss ratios pertaining to each accident year (including the current accident year) are the same in the current month as in the two projected months.

A similar approach is used in determining the part of the “Retro Claims Provisions” in relation to the allowed claims expenses. That is, an ultimate “ratio” is determined akin to the “loss ratio”, and the provision is set following a process as outlined above.

7. Calendar Year-to-Date Results The table below summarizes the calendar year-to-date results for indemnity as well as Servicing Carrier claims fees & allowed claims expenses.

6 “Loss” here refers to indemnity only unless otherwise noted. 7 “Prior accident years” and the “current accident year” are defined relative to the calendar year associated with the projection period.



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In determining the ratios to earned premium, the calendar year-to-date earned premium has been used, which includes earned premium associated with the current accident year but also earned premium adjustments related to prior accident years.

FARM Calendar Year-to-Date Indemnity, Claims Fees & Allowed Claims Expense Summary ($ thousands)

(“% EP” based on 2013 calendar year-to-date earned premium; ratios may not total due to rounding)

While a portion of the prior accident year changes from last month are due to the release of the actuarial present value adjustments with claims payments, the majority of the change is due to the final settlement of the retroactive claims fee payment for accident year 2007.

Annually, retroactive claims fees adjustments are paid to Servicing Carriers in accordance with the Plan of Operation for the final adjustment, and Bulletin “All-Canada SC2004-12” for interim adjustments. These adjustments were paid and taken into account for this month’s Participation Report, with accident year 2007 receiving final payment, accident year 2010 receiving 2nd interim payment, and accident year 2012 receiving 1st interim payment. The payments and changes in provision are summarized below. For accident year 2007, the provision at the end of January was based on valuation assumptions, including an adjustment to estimate recorded claims amount (which the final adjustment is based on) from the selected ultimate loss ratio. The actual recorded level overall was higher than determined through this process, resulting in an unfavourable final adjustment of $3.7 million for 2007 (see below).

The loss ratio change year-to-date in Table 04 reflects not only changes in the prior accident year levels, but also the increase in the calendar year-to-date earned premium with an additional month’s earned premium.

For the current accident year, changes in the year-to-date total reflects the additional month’s exposure and regular changes to actuarial present value adjustments as the year ages.

8. Current Participation Report – Additional Exhibits Section 9 provides exhibits pertaining to the actuarial provisions reflected in the current month’s Participation Report.



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IBNR (including actuarial present value adjustments) presented in section 9, Exhibit A, were derived on a discounted basis, and therefore reflect the time value of money and includes explicit provisions for adverse deviations in accordance with accepted actuarial practice in Canada.

IBNR presented in section 9, Exhibit B, does NOT include any actuarial present value adjustments. The “Total IBNR” from this exhibit is shown in the Participation Report as “Undiscounted IBNR”.

As discussed in section 6, IBNR in the current month’s Participation Report was derived as the difference between the estimated ultimate for the claims amount (i.e. earned premium x ultimate loss ratio) and the associated current recorded amounts (life-to-date payments plus current case reserves).

9. EXHIBITS The exhibits listed below are provided on the pages that follow:

EXHIBIT A IBNR for Member Sharing – includes Actuarial Present Value Adjustments

EXHIBIT B IBNR

EXHIBIT C Retro Provisions

EXHIBIT D Future Expected Cost Ratios

EXHIBIT E Discount Rate & Margins for Adverse Deviations

EXHIBIT F Interest Rate Sensitivity

Please note that starting with the February 2013 Actuarial Highlights, we have removed “EXHIBIT G Summary of Operational Results” from inclusion in the Actuarial Highlights and instead have posted this exhibit to the website as a separate document. The associated link can be found on the cover page of this document.



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EXHIBIT A

IBNR ($s) for Member Sharing – includes Actuarial Present Value Adjustments

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EXHIBIT A IBNR ($s) for Member Sharing – includes Actuarial Present Value Adjustments

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EXHIBIT B

IBNR ($s) (does not include actuarial present value adjustments)

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EXHIBIT B IBNR ($s) (does not include actuarial present value adjustments)

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EXHIBIT C

Retro Claims Expense Provision ($s) for Member Statements (actuarial present value adjustments = 0)

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EXHIBIT C Retro Claims Expense Provision ($s) for Member Statements

(actuarial present value adjustments = 0)

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EXHIBIT D

Future Expected Cost Ratios - Member Statements

Future Expected Cost Ratios – Excluding Actuarial Present Value Adjustments



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EXHIBIT E

Discount Rate & Margins for Adverse Deviations

page 1 of 9

NEWFOUNDLAND AND LABRADOR

Private Passenger Non-Private Passenger



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page 2 of 9

NEW BRUNSWICK




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NOVA SCOTIA




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PRINCE EDWARD ISLAND




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ONTARIO




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ALBERTA




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YUKON




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NORTHWEST TERRITORIES




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NUNAVUT




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EXHIBIT F

Interest Rate Sensitivity ($000s)

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EXHIBIT F Interest Rate Sensitivity ($000s)

page 2 of 10 NEW BRUNSWICK



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page 10 of 10 ALL JURISDICTIONS COMBINED

Documents

FACILITY ASSOCIATION RESIDUAL ARKET · in January 2013. The process was completed in April 2013 with the Facility Association Board of Directors accepting the recommendation of the