FSRA's Summary of Consultation on Loss Trend Benchmarks for Private Passenger Automobile Major Rate Filings based on Industry Data as of December 31st, 2019 | Financial Services Regulatory Authority of Ontario

Loss Trend Benchmarks for Private Passenger Automobile Major Rate Filings based on Industry Data as of December 31st, 2019

Purpose of consultation

FSRA serves the public interest through protecting consumers and fostering a strong, stable, competitive and innovative auto insurance sector with just and reasonable rates. Ratemaking Benchmarks assist FSRA in determining whether an insurer’s assumptions are appropriate when the insurer seeks approval for changes to its rates. FSRA undertook this public consultation to continue its commitment to transparency and promote collaboration with insurers, whose rate filing assumptions are compared against the Benchmarks.

FSRA retained Oliver Wyman (the “Consultant”) to independently analyze loss trend rates and reform factors, the results of which were used by FSRA in setting its Benchmarks for rate filing reviews. The Consultant’s preliminary report was posted on our website and feedback was requested on their assumptions and methodologies.

Feedback gathered and response

FSRA is appreciative of the significant effort that went into the comments it received on the Consultant’s preliminary report outlining the proposed Benchmarks. FSRA received 12 submissions during the time period of July 6, 2020 to July 27, 2020. Given the similarity of submission comments, these comments were addressed by theme/topic, however all individual submissions have been made available in Appendix 1.

Responses have been broadly categorized as follows:

Technical feedback on the Consultant’s preliminary analysis: The Consultant addresses these submission comments in section 8 of their report, which can be found in Oliver Wyman Report: “Ontario Selected Private Passenger Vehicles Loss Trend Rates and Reform Factors”. FSRA has included a section below to emphasize certain points on Bodily Injury future loss trends.
General feedback addressed towards FSRA: These comments were generally beyond the scope of the Benchmarks exercise and have been addressed in Appendix 2.

Bodily Injury Loss Trends

Most of the submissions generally agreed that recent Bodily Injury (BI) losses were trending downwards. Many submissions questioned whether this decreasing BI trend can be expected to continue into the future and the appropriateness of applying the decreasing BI trend to prospective policy periods. While there is no definitive explanation for the decrease in BI frequency driving the change in BI loss cost trends, recent product changes (lower pre-judgment interest, higher tort deductible, higher momentary threshold) are contributing to driving the product cost downwards.

FSRA is aware of the uncertainty behind the projections but insufficient objective evidence has been provided in the submissions that would suggest it is appropriate to apply actuarial judgment to deviate from model results. With the current COVID-19 environment, it seems unlikely that loss trends will be higher than regular circumstances.

FSRA would like to emphasize that Benchmarks are updated twice a year to ensure responsiveness to loss trends. Additionally, as per the definition, Benchmarks are one input FSRA uses to evaluate what is “just and reasonable”. An insurer’s individual loss experience trends are also often considered.

FSRA Adoption of the Consultant’s Results

FSRA has undertaken a thorough review of the Consultant’s analysis on loss trends and reform factors and believes that the Consultant’s analysis is prudent and reflective of recent developments and current conditions. Furthermore, the Consultant’s analysis has been developed in accordance with accepted actuarial practices. Therefore, FSRA will be adopting the analysis results as FSRA Benchmarks for the purpose of rate filing reviews.

Appendix 1: Individual Submissions

Select a company to view the individual submissions provided for this iteration of the Benchmarks exercise.

Canadian Institute of Actuaries
Co-operators General Insurance Company
TD Insurance
Canadian Association of Direct Relationship Insurers
Aviva
Travelers Canada
Facility Association
Desjardins General Insurance Group
Insurance Bureau of Canada
RSA Canada
Intact Financial Corporation
Farm Mutual Reinsurance Plan

Appendix 2: FSRA Consultation Responses

This table addresses comments submitted that were intended for FSRA.

Item	Submitted By	Theme	Comment	Response
1	Co-operators General Insurance Company	Loss trend usage	"It is not clear to CGIC how FSRA intends to use its loss trend benchmarks."	We have modified our guidance to better explain how the loss trend benchmarks are used when reviewing rate filings.
2	Insurance Bureau of Canada	Flexibility	"Accordingly, it is important that FSRA recognize that despite operating in the same market, insurers have very different claims development expectations. It is critical that FSRA permit Ontario insurers to use different trend rates based on their individual experiences."	We fully agree that insurers should be able to reflect individual claims experience when setting rates - there is no provision in the major filing guidelines that restricts an insurer from doing so. However, insurers are expected to demonstrate that their claims experience is suitable - as per section 4 of the Major Filing Guidelines, "insurers are required to provide adequate actuarial documentation and support for the rate levels subject to prior approval". We are committed to understanding insurers’ experience with our approach to reviewing rate filings and will work with insurers to improve overall alignment with our Rate Regulation Principles.
3	Facility Association	Other benchmarks	"More broadly (i.e. beyond just a focus on reform factors and trends), there are areas of uncertainty where we believe FSRA should allow flexibility for companies selecting assumptions supporting their applications."	This comment / recommendation relates to FSRA’s overall administration of the legal framework for rate regulation set out in the Insurance Act and the Automobile Insurance Rate Stabilization Act, 2003. FSRA has prioritized transforming its approach to rate regulation and will be engaging with stakeholders on that work through a Technical Advisory Committee and other mechanisms for targeted and public consultation.
4	Aviva Canada	GISA Loss Development Factors	"Oliver Wyman states that FSRA believes that the GISA final selected development factors have 'fully accounted for all known reporting issues'. No explanation is provided of the adjustments that FSRA applied to the GISA data. It is also surprising that FSRA has been able to successfully apply suitable adjustments to this data to make it usable given GISA’s clear position on how uncertain it is. Insurers should be provided with more information about these adjustments."	The guidance has been modified to explain how FSRA gains comfort with GISA's final selected development factors. Please see the "Derivation Process" section.
5	Desjardins General Insurance Group	GISA Loss Development Factors	"In our opinion a review is only comprehensive and complete if the underlying assumptions are also reviewed. Therefore we encourage that Oliver Wyman review the loss development assumptions for BI and AB based on GISA data and publish the details of the review in the report. This is the approach that Oliver Wyman was asked to take by the Alberta Insurance Rate Board for their comparable annual cost benchmarking process."	We will explain FSRA’s benchmarks process and then explain why the alternative approaches is less optimal for FSRA. When GISA loss development data is ready, GISA's consulting actuary performs a development factor analysis for incurred losses and claim counts. FSRA's Actuarial Services (A/S) unit works closely with GISA's consulting actuary in this exercise by reviewing its analysis and providing relevant information on individual insurer’s data quality, insurer operational changes related to claims handling practice and case reserve setting, etc. Once GISA’s consulting actuary finalizes its factors report, FSRA engages Oliver Wyman (OW) for the loss trend and reform impact analysis. OW uses GISA actuary’s factors report for its loss trend and reform factor analysis. In section 3.3 of their report, OW confirms they "reviewed the factors published by GISA in AUTO 0002 for reasonableness." In the alternate approach, the data would be sent to GISA’s consulting actuary and OW simultaneously, each performing the same analysis. It would be an unnecessary duplication of work especially given that OW has already expressed satisfaction with GISA’s consulting actuary’s figures. Given that OW would produce the analysis independently then FSRA would not be able to support it with insurer specific information that may aid in its analysis. Given these considerations, FSRA will continue with its approach but does appreciate the recommendation.
6	Farm Mutual Reinsurance Plan	Reform Factor Application	"It appears that June 2020 report did not apply reform adjustment factors to adjust historical costs to a common cost level before performing statistical regressions, which is contrary to the standard procedure."	FSRA has reviewed OW's work and does not see any procedural flaws. Coverages with a reform factor not equal to 1.000 (as well as 1.000) had reform factors applied first, after which statistical regressions were applied.
7	Multiple	Comprehensive Granularity – Theft	The trend model should be separated between theft and non-theft.	FSRA will adopt this recommendation in the next iteration by splitting Comprehensive coverage by kind of loss (KOL) level, where theft is one of the KOLs.
8	Canadian Association of Direct Relationship Insurers	Rate regulation principles	"In its May 15 Loss Trends Approach document, AU0132APP, FSRA notes that it has put more emphasis on the principles of Transparency and Simplicity. CADRI argues that guidance posed by Consumer Focus and Sustainability are also important principles to consider. Taking a risk-based approach, fostering competition and choice, allowing insurers to be accountable for their pricing and planning, encouraging insurers to be fair, and keeping the industry in a sustainable position, serves the interest of both consumers, industry and government."	The principles Transparency and Simplicity were strictly related to FSRA's new process to creating benchmarks. We agree that Consumer Focus and Sustainability are important principles to consider in FSRA’s overall administration of the legal framework for rate regulation set out in the Insurance Act and the Automobile Insurance Rate Stabilization Act, 2003, which this comment / recommendation relates to. FSRA has prioritized transforming its approach to rate regulation and will be engaging with stakeholders on that work through a Technical Advisory Committee and other mechanisms for targeted and public consultation.