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					MELOCHE   MONNEX   COMMENTS ON

“THE REVIEW OF AUTOMOBILE
INSURANCE” IN NEWFOUNDLAND AND
LABRADOR




Presented to the

Board of Commissioners of
Public Utilities




   February 2005
TABLE OF CONTENT

PREAMBLE ................................................................................................................................................. 3
INTRODUCTION ........................................................................................................................................ 4


MELOCHE MONNEX COMMENTS ON THE AUTO INSURANCE REVIEW IN
NEWFOUNDLAND AND LABRADOR

1.      RATING FACTORS AND ALTERNATIVES FOR CURRENT RATING MODEL.................. 5
             Elimination of age, gender and marital status as rating factors ......................................................................... 5
             Affordable Insurance for young drivers ............................................................................................................ 5
             Alternative rating model and All comers rule ................................................................................................... 6
             Auto Insurance Access Office........................................................................................................................... 6
2.      ADDITIONAL COSTS SAVINGS MEASURES............................................................................. 7
             Implementation of a cap on minor personal injuries ......................................................................................... 7
             Direct Compensation Arrangement................................................................................................................... 7
3.      GROUP RATING ............................................................................................................................... 8
4       MANDATORY ACCIDENT BENEFITS......................................................................................... 9




Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                                                                                            Page 2
Preamble

Founded in 1949, Meloche Monnex Inc. is a member of the TD Bank Financial Group
(TDBFG), one of the largest financial services organizations in Canada. Meloche
Monnex is the largest direct-response insurer and one of the country’s top four property
and casualty insurers in personal lines, serving more than 1,400,000 policyholders with a
total of $1.5 billion in written premiums for 2004.

Meloche Monnex Inc. provides home and auto insurance services to individuals,
operating under two major brands – TD Meloche Monnex and TD Insurance Home and
Auto. The company is also the leading organization in affinity marketing in Canada,
offering its services to members of professional, university alumni organizations and
employer groups. The company operates with a direct-response model, providing services
directly to clients through client service centres. Meloche Monnex now employs 3,000
people across Canada with offices located in Alberta, Ontario, Quebec, Nova Scotia and
New Brunswick.

Although we are the largest provider of group home and automobile insurance in Canada,
we also offer our products and services to the public. Our range of products includes
home and automobile insurance, international assistance, travel insurance, insurance for
self-employed professionals and their micro-enterprises. Our home and automobile
insurance products are provided through four wholly owned insurance companies,
Security National Insurance Company, TD General Insurance Company, Liberty
Insurance Company of Canada and Primmum Insurance Company.

Meloche Monnex is the 10th largest auto insurer in Newfounland with over $5.1 million
in premiums for 2004. Our number of automobile policyholders has not significantly
increased; in fact, it is the only market where we have not experienced a sustain growth
during the last few years. We now insure 3,400 drivers throughout Newfoundland and
Labrador. Our processes and technology allow us to provide quality services on a timely
and efficient basis. This shows in our expense ratio, which is the best in the Industry.




Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                   Page 3
INTRODUCTION

Meloche Monnex is pleased to participate in the review of auto insurance issues
undertaken by the Board of Commissioners of Public Utilities (the “PUB”). Meloche
Monnex supports the government’s initiatives to review the province’s automobile
insurance system. We encourage the Newfoudland government and the PUB to continue
its reform of the current system, as further changes are necessary to adequately address
problems associated with increasing claim costs and affordability of auto insurance
products.

There is no perfect insurance system. Each system has inherent strengths and
weaknesses. The PUB recommendations as to what changes should be made in the
system depends on the government’s objectives. It is critical that theses objectives are
clearly established before solutions are designed. Any auto insurance system reflects a
choice, implicit or explicit, as to the balance between first the conflicting objectives of
affordability and compensation, and then as to how the available money will be allocated
between the various types of victims and injuries.

The PUB’s mandate to review the issues included in the document entitled “Terms of
reference” all relate to the establishment of a fair, accessible and affordable automobile
insurance system. This objective can more particularly be achieved by addressing the
rising bodily injury costs that leads to increase premiums. However, control over rising
bodily injury costs and other claims costs will impact the level of compensation. The
government’s goal will be to achieve the appropriate balance between both compensation
and affordability.

We appreciate the opportunity of commenting on these important topics and hope our
submission will be of some assistance to your review.




Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                     Page 4
      MELOCHE MONNEX COMMENTS ON THE AUTO
     INSURANCE REVIEW IN NEWFOUNDLAND AND
                    LABRADOR


1. RATING FACTORS AND ALTERNATIVES FOR
   CURRENT RATING MODEL
The Terms of reference suggest that the implications of eliminating rating factors such as
age, gender and marital status as well as alternative rating systems such the Alberta rating
grid with an All comers rule, should be reviewed.

Again, we must emphasize that before implementing any changes, the PUB and the
government must identify the objectives of the reform. If the objectives of the reform are
to make auto insurance products more affordable and more accessible to young drivers,
the elimination of these rating factors will not necessarily achieve this objective and the
consequences of eliminating these factors will cause significant rate dislocation.

Elimination of age, gender and marital status as rating factors

Age, gender and marital status are amongst the strongest auto insurance risk predictors.
To do away with those factors could have a significant impact on rates that consumers
currently pay. Depending on what alternative criteria are adopted, consumers (young
females and more experienced drivers) will pay more and others (young males) could pay
significantly less than today .We believe that age remains a very useful rating factor.
However, should the government and the PUB feel that it has to be replaced, then it
should be replaced by years of driving experience. This would still result in premium
levels roughly comparable with today’s premium. Furthermore, we don’t believe that
marital status is necessary. On the other hand, gender is an essential rating factor. If the
government’s objective is to reduce insurance premiums for young drivers, we suggest
that there are other alternatives than eliminating gender as a rating factor.

Affordable insurance for young drivers

We believe that implementing a system similar to the New Brunswick First Chance
Discount for new drivers, supported by a risk sharing pool would provide insurers
additional flexibility to handle the cases of drivers whom they perceive to be priced at
less than a sufficient actuarial level. A new driver could be defined as anyone with less
than 5 or 6 years of driving experience. In order to be eligible for the discount, new
drivers must have and maintain a clean driving record (i.e. no at-fault accidents or motor
vehicle violations). The new driver would be credited with a number of years of claim

Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                      Page 5
free driving experience (6 years in New Brunswick). The discount would only apply to
private passenger automobiles.

The risk sharing pool would allow insurers to serve new drivers placed under the pool as
any other client. There would be no distinctions between their coverage and level of
service. The advantage of the risk sharing pool mechanism is that it is invisible to the
public and does not carry the stigma attached to the Facility Association (FA).

The establishment of a risk sharing pool involves a subsidy from good drivers in favour
of more risky drivers because the deficits incurred by the pool need to be shared among
insurers. Proper funding mechanisms of the pool would need to be set in place to insure
that it fulfils the role for which it was intended.

Generally, the risk sharing pool approach has proven to be effective in the Quebec auto
insurance market. A risk sharing pool was also implemented in Ontario and Alberta and
is managed by FA. We would be pleased to discuss this matter further with the
government in view of developing an efficient mechanism that will guaranty that auto
insurance remains accessible and affordable for young drivers in Newfoundland and
Labrador.

Alternative rating model and All comers rule

The Terms of reference suggest that alternative rating systems such as the Alberta grid
rating system should be examined. The Alberta grid rating system was implemented
mainly to deal with the issue of accessibility to affordable auto insurance for young male
drivers. Meloche Monnex was actively involved in the discussions leading to the
implementation of the grid rating system in Alberta.

In our opinion, this system is very complex, expensive to implement and will not
necessarily deal effectively with the issue of providing affordable premiums for young
drivers. Another problem with the Alberta grid-rating system is that it allows for too
many risks to be actuarially subsidized (more or less 15% of the market). At the moment,
the grid-rating system is not only contributing to the subsidization of young drivers, but
also high risk drivers, which we believe was not the objective when the process was
developed. Newfoundland and Labrador is a relatively small market and we do not think
that the Alberta approach, which has not yet proved itself, should be implemented in
Newfoundland and Labrador. We believe that the New Brunswick approach is more
reasonable and more suitable for a small market like Newfoundland and Labrador.

Although we prefer to operate in a file and use rating environment, we do not mind
operating in the current benchmark system. The advantage of a file and use system
however, is that the government only need to intervene when rates are excessive or
inadequate and in the long-run, more effective companies would most probably be able to
reduce rates below their current level. This would in turn enhance competition to the
benefit of Newfoundland and Labrador consumers and trigger a shift in the market from
less effective insurers to more effective and more competitively priced insurers.
Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                    Page 6
On the other hand, we do not perceive a need to implement an all comers rule in the
Newfoundland and Labrador market if the accessibility issue can be effectively handled
otherwise. The non-sense of an all comers rule is that some insurers would be compelled
to accept to insure more consumers than their capital structure would normally allow
and/or even if they do not have the resources available to service them. This would
certainly represent a challenge for some insurers currently operating in the Newfoundland
and Labrador market.

Auto insurance Access Office

Other mechanisms can also be set in place to facilitate further access to auto insurance for
Newfoundland and Labrador drivers. One solution would be to create a central office
where drivers unable to find insurance could phone and be re-directed to one of the
various insurers providing automobile insurance in Newfoundland and Labrador. The
assignment to the automobile insurer would be made on a “market share basis”. The
insurer would be required to insure the risk but then would be able to cede it to a risk
sharing pool. Drivers with the most severe driving records would be referred to a FA
servicing carrier. The administration and delivery issues associated with this mechanism
would be resolved through discussions with the industry.


2. ADDITIONAL COSTS SAVINGS MEASURES

Implementation of a cap on minor personal injuries

Four provinces, Nova Scotia, New Brunswick, Prince Edward Island and Alberta, have
successfully implemented a cap on minor personal injuries. We believe that a cap on
minor personal injuries is a more effective approach to the reduction of claim costs than
a deductible. Deductibles tend to erode over time. Such erosion results from the
inflation of injuries and damages. Therefore, the long term impact on rates will be more
significant with a cap than a deductible. Furthermore, the use of deductibles creates
more administrative costs in the claims system because more victims are inclined to file
a claim. A cap is more effective than a deductible from an administrative perspective.
Changing the deductible approach for a cap would also present the advantage of
harmonizing Newfoundland and Labrador’s approach with the other Atlantic Provinces.

Direct Compensation Arrangement

A ‘Direct Compensation’ arrangement for property damage claims provides that the
consumer’s own insurer pay for the damage to his/her vehicle and for the expenses to
rent a car while repairs are done. This arrangement means that the consumer only deals
with his/her own insurer to collect reimbursement for damage to his/her vehicle. It
further eliminates administrative costs of subrogation that insurers would otherwise

Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                      Page 7
incur to recover payment from the at-fault insurer. Quebec, Ontario and New
Brunswick have also implemented a Direct Compensation arrangement.

Another important feature for consumers is that, under Direct Compensation coverage,
the premium for the mandatory liability coverage is tied to the type and age of the
vehicle insured and reflects the expected claim frequency and damageability of this
particular vehicle. This generally results in a lower premium for older vehicles, while
consumers with more expensive vehicles pay relatively more.

We believe the implementation of a Direct Compensation arrangement in
Newfoundland and Labrador would also result in a fairer approach to pricing which is
more reflective of the true economic costs associated with driving different types of
vehicles. A deductible could also be required under such a regime as is currently the
case in Ontario. This would further reduce the costs by eliminating minor claims. We
find this is a very effective form of handling large numbers of property damage claims.


3. GROUP RATING

At present, Newfoundland and Labrador does not allow insurers to engage in group rating
and marketing of auto insurance. The Automobile Insurance Act prohibits application of
special “group” rates but in other jurisdictions insurers are permitted to offer discounted
rates to certain groups such as employees, alumni, unions and others. Many jurisdictions,
including Nova Scotia and New Brunswick now allow insurers to offer discounted rates
to certain groups such as employees, alumni, unions and others.

The discounted rates are based on the lower risk profile across all insurance coverage
sections for certain groups and the significant administrative cost savings of distributing
insurance through an established group. Group rates should be permitted through a clear
and strict definition of an eligible group to avoid abuse and we recommend that
regulation be adopted on this issue to establish an effective framework. We have enclosed
with our document copy of the relevant sections of the regulation recently adopted in
Nova Scotia on this issue (Appendix 1).

We think that the Nova Scotia approach is valuable except for the provision requiring the
insurer, agent or broker to make full and fair disclosure of the group marketing plan’s
provisions and financial interest of the person that entered into the plan with the insurer.
The relevant provision, section 6 (3), provide that the insurer, agent or broker must not
accept an application for insurance before making the above disclosure. We believe that
making this disclosure before the application is completed, result in a highly ineffective
process. Almost all auto insurance business is transacted over the phone these days, and
time starved consumers want an effective process and easy access to affordable products.
We would ratter have to comply with an obligation to make full and fair disclosure not
later than 30 days after accepting the application. This would allow the relevant
information to be forwarded to policy holders along with their policy and other material.
Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                      Page 8
This communication usually takes place a couple of weeks after the application was
accepted. Customers would receive the appropriate information and would be invited to
contact the insurer, agent or broker for more details.

Eliminating the restriction on group rating would allow insurers operating in
Newfoundland and Labrador to offer lower rates to many consumers and will enhance
pricing competitiveness for consumers. At the moment, the auto insurance market in
Newfoundland and Labrador is rather concentrated and the introduction of group rating
would allow effective group insurers to play a more significant role in the market place
and would increase competition.



4. MANDATORY ACCIDENT BENEFITS

The debate on the issue of whether or not Section B - Accident Benefits - of the standard
auto insurance policy should be made mandatory, has been going on for almost ten years
in Newfoundland and Labrador. According to industry statistics, almost 75% of all auto
insurance policies include this coverage. Making Accident Benefits mandatory would
certainly eliminate certain situations where the liability for an accident is in dispute and a
person has no collateral benefits but, in our opinion, it would be unfair to force every
consumer to buy an expensive coverage that not all of them will use. Auto insurance
Accident Benefits is a secondary coverage and presumably, consumers who have access
to other collateral benefits, like employment related health plans, do not require this type
of coverage. At the moment, the Ontario government is looking for ways to allow
consumers with collateral benefits to opt-out of this expensive coverage but there is no
easy solution to this issue once the coverage is mandatory. We recommend that the PUB
carefully assess all the impacts of making Accident Benefits mandatory before making its
recommendation to the government.




Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                        Page 9
                         Appendix 1




Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                              Page 10
 Automobile Insurance Prohibited Risk-Classification Factors Regulations

                             made under Section 159 of the
                                     Insurance Act
                                  R.S.N.S. 1989, c. 231
                 O.I.C. 2003-458 (October 31, 2003), N.S. Reg. 183/2003
           as amended by O.I.C. 2004-118 (March 12, 2004), N.S. Reg. 30/2004


Citation
1 These regulations may be cited as the Automobile Insurance Prohibited Risk-
Classification Factors Regulations.

(…)

Membership in an organized group
5 (1) An insurer is permitted to use membership in an organized group as a risk-
classification factor for automobile insurance if the group is

(a) a group of employees, which may include retired employees, of the same employer;
or

(b) a group of persons that is

(i) a labour union,

(ii) a professional or occupational association,

(iii) an alumni association, or

(iv) a non-profit organization that has been in existence for at least 2 years, except an
organization that is formed primarily for the purpose of purchasing or providing goods or
services.

(2) A group referred to in subsection (1) may also include

(a) spouses and common-law partners of members of the group; and

(b) any child of members of the group or of their spouses or common-law partners, if the
child is under 25 years of age and who

Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                   Page 11
(i) resides in the same dwelling as a member of the group or the spouse or common-law
partner of a member of the groups, or

(ii) attends an educational institution on a full-time basis.

(3) An insurer is not permitted to use a risk-classification factor for automobile insurance
that results in the exclusion from coverage of a member of an organized group referred to
in clause (1)(a) if

(a) the insurance is sold under a group marketing plan, as defined in Section 6; and

(b) coverage is for a personal use private passenger vehicle, as defined in the plan of
operation established by the facility association.

(4) An insurer is not permitted to use a risk-classification factor for automobile insurance
that results in the exclusion from coverage of a member or associate member of an
organized group referred to in subsection (1) if

(a) the insurance is sold under a group marketing plan, as defined in Section 6; and

(b) coverage is for a private passenger vehicle, as defined in the plan of operation
established by the facility association.

(5) An insurer is not permitted to use either of the following circumstances as a risk-
classification factor for automobile insurance if it would result in a change in the
classification of an insured before the next renewal date of the insured’s policy:

(a) termination of a group marketing plan as defined in Section 6; or

(b) the insured ceasing to be a member or an associate member of an organized group
referred to in subsection (1).

(6) Except as provided in subsection (5), no element of a risk-classification system that
uses membership in an organized group referred to in subsection (1) may be applied to an
insured who ceases to be a member or associate member of the group.

Group marketing plan
6 (1) In this Section, "group marketing plan" means

(a) an arrangement between an insurer and a group of employees of the same employer to
market automobile insurance to members of the group;

(b) an arrangement between an insurer and an employer to market automobile insurance
to a group of employees of the employer; or


Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                       Page 12
(c) an arrangement between an insurer and a group referred to in clause 5(1)(b) to market
automobile insurance to members of the group.

(2) An insurer is not permitted to sell automobile insurance under a group marketing plan
if any person is required to purchase insurance under the plan or is subject to a penalty
for failing to purchase insurance under the plan.

(3) An insurer, agent or broker selling automobile insurance under a group marketing
plan must not accept an application for insurance coverage from a person unless the
insurer, agent or broker has made full and fair disclosure to the person of all features of
the group marketing plan and the insurance coverage, including

(a) the group marketing plan’s provisions relating to group discounts, policyholder
services, termination of the plan and termination of eligibility; and

(b) the financial interests in the group marketing plan of the person or body that entered
into the plan with the insurer.

(4) A person who collects premiums under a group marketing plan, other than an agent or
broker, must provide adequate administrative facilities for the collection of premiums and
is deemed to be the agent of the insurer for the purposes of collecting premiums.

(5) All premium funds received or receivable by a person under a group marketing plan,
other than by an agent or broker, are deemed to be trust funds held for the benefit of the
insurer.

(6) A person who receives or is entitled to receive premium funds under a group
marketing plan must not assign, pledge, mortgage or in any way charge the funds.

(7) An assignment, pledge, mortgage or other charge of premium funds contrary to
subsection (6) is void.

Effective date
7 These regulations come into effect on November 1, 2004.
Section 7 replaced: O.I.C. 2004-118, N.S. Reg. 30/2004.




Position Paper on the
“Automobile Insurance Affordability Plan for New Brunswick”
by Meloche Monnex Inc.
                                                                                       Page 13

				
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