February 21, 2005 2005 Automobile Insurance Review

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February 21, 2005 2005 Automobile Insurance Review Powered By Docstoc
February 21, 2005                                      Multi-Page                  2005 Automobile Insurance Review
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 1   (9:32 A.M.)                                                 1      presentations that Mike McNiven--Mike is at
 2 CHAIRMAN:                                                     2      this table here on the right--is available to
 3     Q.   Good morning everybody. I’d like to welcome          3      assist with any Powerpoint presentations that
 4          you to week two, I guess, of this automobile         4      might be necessary or any audiovisual aids
 5          insurance review. I don’t see too many new           5      that might be required, and I’d also note
 6          faces here. There is some information outside        6      again that all these presentations will be
 7          the door in relation to an information               7      transcribed and the transcriptions will be
 8          brochure, I think the terms of reference and         8      available overnight for posting on the website
 9          other things. I don’t intend to review those         9      the next day.
10          again, but certainly that information is            10         There is a motion before the Board by Mr.
11          available for your review.                          11      Kennedy and that motion will be dealt with, as
12             Just on a couple of housekeeping matters,        12      I indicated on Friday, by a separate set of
13          I guess, before we begin here this morning,         13      Board Commissioners and that motion is
14          the normal sitting times that we did schedule       14      scheduled, I understand to be heard this
15          throughout last week, I think, was 9:30 to          15      afternoon.
16          12:30 with a 15-minute break at around 11, and      16         I don’t have anything else. Just to
17          2 to 4:30 with a 15-minute break around 3:15.       17      perhaps remind people, last people we did
18          I think most mornings and afternoons during         18      have, as most of you are aware, the
19          the week are occupied with presentations and I      19      presentation and discussion among the
20          think we’ll play the--or decide on the break        20      actuaries and for the most part that did
21          around those presentations. It will probably        21      centre around some of the technical
22          be more appropriate than setting hard and fast      22      considerations surrounding the issues before
23          break times at this point in time. So we’ll         23      the Board and that was intended certainly to
24          do that.                                            24      assist with presentations this week. We have
25             I would advise those who are making              25      close to 30 presentations scheduled throughout
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 1          the week and they are indeed quite an                1      March the 1st and to Gander on Wednesday,
 2          extensive and varied list, consumers,                2      March the 2nd. Those particular sessions will
 3          insurance companies, MHAs, industry and              3      indeed be held from 7 to 9 in the evening and
 4          professional associations, labour, community         4      the venues are on the back of the public
 5          activists and other individuals, interested          5      information brochure that has been distributed
 6          individuals and organizations, and again, I          6      by the Board.
 7          believe that the schedule is outside the door        7         I would note that the process also
 8          here and I would draw your attention to the          8      provides for relevant written questions in the
 9          fact we should probably keep a--you should           9      form of RFIs to the industry, the consumer
10          keep a running check on this, to be honest          10      advocate and to the Board and any other
11          with you, throughout the week because it seems      11      participating party to the hearing, and apart
12          to change on a daily basis. So you’d be best        12      from these presentations this week, the Board
13          advised to do that.                                 13      indeed will continue to receive feedback on
14             There is a presentation scheduled for            14      the issues until March the 11th, which would
15          each day during the week, as I said, and there      15      be considered the last filing day. And again,
16          is an evening session planned for Thursday,         16      that feedback can be accommodated in a number
17          February the 24th at Holiday Inn for those who      17      of ways and those ways are listed on the back
18          are unable to make it during the day, and at        18      of the information brochure.
19          the present time, we only have two                  19         So that’s about it. We’ll move forward
20          presentations scheduled for that evening. I         20      now with the presentations, and I’d like to
21          don’t know if more will ensue throughout the        21      welcome--good morning, Mr. Forgeron and Ms.
22          week or not.                                        22      Voll.
23             The following week, the Board will be            23 MR. FORGERON:
24          travelling to Corner Brook on Monday, February      24   A. Good morning.
25          the 28th, Happy Valley-Goose Bay on Tuesday         25 MS. VOLL:
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Discoveries Unlimited Inc., Ph: (709)437-5028
February 21, 2005                                      Multi-Page                  2005 Automobile Insurance Review
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 1   A.   Good morning.                                         1            These are the topics we want to try and
 2 CHAIRMAN:                                                    2        cover off this morning, not in a tremendous
 3   Q.   Mr. Forgeron is the Atlantic Vice-President of        3        amount of detail. That can be found in our
 4        the Insurance Bureau of Canada and Ms. Voll is        4        submission, but we certainly do want to touch
 5        the Vice-President of Policy Development and          5        on some of the highlights from that
 6        Chief Economist with the Insurance Bureau of          6        submission.
 7        Canada. They have a presentation which I              7            The nature of the auto insurance market
 8        understand is a Powerpoint presentation. Is           8        is a unique one. It is a product that’s
 9        that correct? And in addition to it being             9        required by law. One of the key features of
10        seen on the screen, I understand there are           10        the product, which is again a rather unique
11        hard copies available as well. If you don’t          11        feature, is the fact that the people selling
12        have one, I think they’re over on the side           12        the product won’t know until much later into
13        here. So you’re welcome to pick one of those         13        the future, sometimes years, whether or not
14        up, either now or later on.                          14        they got the price right, and that’s very
15           Once again, good morning to both of you.          15        unlike most other products or services that
16        Good to see you again, and you may wish to           16        are sold out there.
17        begin your presentation when you’re ready,           17            We’ll talk a little bit about the auto
18        please.                                              18        insurance consumer, some of their desires, if
19 MR. FORGERON:                                               19        you will, with respect to our industry, some
20   A.   Thank you, Chair, and good morning,                  20        of the views that they have, and what their
21        Commissioner Whalen. It’s good to be back.           21        requirements are out of the system.
22        We were pleased to present this morning a            22            We spoke to the Board in December a
23        presentation in support of the submission that       23        little bit about the regulation of automobile
24        we filed with the Board on February 10th. If         24        insurance. We want to go back and revisit
25        we could just go to the next slide, please.          25        some of those themes, as well as introduce a
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 1        few others. Spend a little bit of time on             1        over to my colleague, Jane Voll.
 2        auto insurance prices and the factors that            2 MS. VOLL:
 3        affect them. There’s often much talk and much         3   A.   Thank you, Don. If you don’t mind, we’ll go
 4        debate about why auto prices go up or down.           4        through these together in sort of an informal
 5        We’d like to spend a few moments on what we           5        way rather than reading directly from the text
 6        feel are the primary drivers behind the rising        6        of the paper and I look forward to your
 7        cost of automobile insurance.                         7        questions, if there’s anything that I can
 8           Newfoundland is one of the highest--one            8        clarify throughout, just let--I look forward
 9        of the most heavily taxed jurisdictions in            9        to being able to do so.
10        North America when it comes to automobile            10           This chart is include in our submission,
11        insurance. Almost 20 percent of the product          11        and if you don’t mind, I’d like to spend a
12        goes out in the form of taxes. We’d like to          12        couple of minutes on it because it’s a very
13        highlight some of the work that we’ve done on        13        important part of understanding car insurance
14        that over the last several years here.               14        and car insurance from a public policy
15           Insurance fraud and auto theft have been          15        perspective. We’ve looked at what we’ve been
16        in the news lately, again, especially the auto       16        doing together with consumers and governments
17        theft side. Want to talk about that. And             17        for the past several years and found it’s a
18        finally, a little on insurance profitability.        18        very predictable pattern and one that we think
19        Industry earning results were recently               19        could be improved upon, and for this reason, I
20        released. There was also a study more                20        think it’s worth spending a little time.
21        particular for Newfoundland that was put out         21           As Don mentioned, car insurance is a
22        by Mercer’s in 2004 and we’d like to reference       22        unique product and one of the things that
23        that as well, just by way of providing some          23        makes it unique is that, as Don mentioned, the
24        context.                                             24        price of the product isn’t known at the time
25           I’d like to turn the next several slides          25        of sale, and you only find out for certain a
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Discoveries Unlimited Inc., Ph: (709)437-5028
February 21, 2005                                     Multi-Page                    2005 Automobile Insurance Review
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 1     number of years later. Related to that is the             1           That’s good for consumers because it
 2     fact that insurers don’t have control over the            2        keeps prices low while costs are rising. But
 3     cost of goods sold like many other--most other            3        we get a bit stuck because the third block
 4     businesses do. By and large, the key features             4        there, industries call for government
 5     of the product and the key cost drivers are               5        attention ignored, this is because the issue
 6     determined by government in legislation. And              6        is often framed as one of insurers’ income.
 7     it’s the two of these factors together that               7        Insurers incomes falling. We’re losing money,
 8     help produce this pattern of cyclicality and              8        so therefore we need some public policy
 9     let me spend a couple of minutes on this.                 9        attention. And it’s actually the wrong
10        If we start over on the left-hand side,               10        presentation of the issue.
11     we see cost pressures begin to rise. Normally            11           Since that’s not a very compelling
12     an insurance cycle would include a phase where           12        argument for getting public policy action to
13     post reform, elements of the cost of the                 13        address costs, insurers are often left back to
14     product would start to increase and insurers,            14        deal with the issue on their own, without a
15     together with IBC, would be looking at that              15        change in the public policy environment and
16     saying which aspect of the cost is increasing,           16        the only driver that insurers have at their
17     how fast is it increasing, to take a closer              17        disposal are premium changes. So then
18     look. At the same time as claims costs are               18        applications are made to rate boards, such as
19     rising, we have a competitive marketplace                19        this, saying "here’s my costs. Therefore,
20     where insurers would compete, take a loss on             20        this is the premium increase that’s needed."
21     their ultimate returns to shareholders in                21        And lo and behold, the rate increases are
22     order to stay in the marketplace while costs             22        approved because they bear out the cost
23     are rising, in the anticipation that something           23        trends, and then you see double digit premium
24     would be done to address the cost pressures              24        increases.
25     and eventually a balance would be restored.              25           At the same time, in looking at the
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 1     environment, insurers are less willing and                1        add to this?
 2     more reluctant to continue to offer coverage              2 MR. FORGERON:
 3     in a marketplace where they know that claims              3   A.   Just another comment or two on the cycle.
 4     costs are going to out pace premiums and that             4        Jane mentioned that at the top of the chart,
 5     action won’t be taken to stem the underlying              5        the industry’s call for government attention
 6     cost pressures. This causes both availability             6        is usually framed in the media as the industry
 7     and affordability problems for consumers                  7        is in a cycle of negative earnings and
 8     leading to complaints and political attention             8        therefore changes are needed. The issue, as
 9     and so forth.                                             9        Jane said, is not that the industry is in a
10        What’s most disappointing about this                  10        loss position because they won’t be for a very
11     cycle that we all engaged in over and over               11        long period of time. They need to be
12     again, decade after decade, in province after            12        profitable. In order to be able to stay in
13     province, is that we could do so much better.            13        business, to stay solvent and to meet the
14     If at the time that cost pressures are evident           14        regulator tests and demands, they must be
15     and substantiated in the data, government’s              15        profitable. So when they go through these
16     policy makers realize that this is an early              16        periods, the question becomes in order to
17     warning sign, this is an indicator of price              17        return to a position of stability, they do
18     increases around the corner, if at that time             18        only have one response, as Jane said, which is
19     action were taken to address the features of             19        premium increases. And so the question
20     the product that were producing the increases            20        becomes to government at what cost to
21     in cost, we could avoid the whole ring around            21        consumers is industry stability? What is the
22     the rosie and avoid the premium increases and            22        balance there? Because insurers will return
23     availability problems that consumers have                23        to profitability. The question is what are we
24     trouble with.                                            24        wanting our customers, our consumers to pay
25        Don, is there anything that you wanted to             25        both in terms of premium and other costs in
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Discoveries Unlimited Inc., Ph: (709)437-5028
February 21, 2005                                  Multi-Page                  2005 Automobile Insurance Review
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 1     order for that reality to happen.                    1        started to come down.
 2        This cycle has happened in Newfoundland           2           And you’ll see in the charts that Jane
 3     and Labrador at least twice over the last ten        3        has in the next few slides, you’ll see how
 4     years. In the late 1990s, we went through            4        premiums have risen and fallen over the last
 5     this. In the early--probably even one could          5        eleven years and you could superimpose that
 6     stretch the argument and say that we’ve gone         6        over this and you would see that they’re just
 7     through this three times in the last ten             7        out of step by a half a step out of cycle and
 8     years. In the early 1990s when pressure first        8        they’re removing sort of that political
 9     began to build for change and nothing was            9        pressure to warrant some action. Go to the
10     done. Again in the late 1990s, pressure built       10        next slide.
11     for change and there was quite a vigorous           11 MS. VOLL:
12     debate and no real change took place. And           12   A.   The next slide here, we set out some
13     then again, most recently, over the last two        13        observations about auto insurance consumers.
14     or three years, where we have finally seen a        14        Insurers understand that the highest priority
15     modicum of change in terms of new legislation.      15        for car insurance customers is stable and
16        And it seems that the political cycle,           16        affordable premiums. Customers rely on their
17     because there is a political cycle to all of        17        cars to get to and from work, to school, their
18     this as well, seems to have been a half a step      18        livelihood. It’s a basic tool of family life,
19     out of the insurance cycle. So that when            19        and while on average insurance isn’t a large
20     elected officials are focused and the debate        20        fraction of a typical household budget, the
21     is at its most fever pitch, the cycle has run       21        way that shelter, for example, would be, but
22     its course and rates have begun to abate, and       22        not all households are typical. Not all
23     so it removes the critical element, which is        23        drivers are typical and certainly for lower or
24     the pressure on politicians from their              24        fixed income Canadians, when you get to that
25     constituents for action because rates have          25        period where there’s a sudden change, a sudden
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 1     increase in premiums, that can have a                1        out that you might think of three purposes of
 2     meaningful impact upon individuals’ budgets.         2        regulation. One being to insure the industry
 3        And so availability, affordability,               3        is competitive and that consumers get the full
 4     stable premiums, these are all important to          4        benefit of competitive pressures working in
 5     consumers. As well, we’ve conducted research         5        their favour. Two, that there is a regulatory
 6     showing us that consumers want stable,               6        environment that is ahead of the situation to
 7     predictable premiums year to year and they           7        maintain market stability and avoid crisis of
 8     also want choice. They want to be able to            8        availability and price. I would call this a
 9     choose the kinds of products they need, to buy       9        stewardship. And a third function of
10     no more, no less, and also to be able to            10        regulation is to ensure that companies are
11     choose the way they want to purchase, through       11        solvent and consumers can be assured that they
12     a broker, an agent, internet or whatnot.            12        will be there to fulfil their obligations to
13        So with this as a backdrop and for any           13        claimants.
14     kind of business, the customer’s king, and          14           With 52 companies competing in the
15     insurance is no different. Insurers want to         15        insurance marketplace in this province, I
16     put the customer at the centre. What can we         16        think this regulatory setting is doing a good
17     do to help deliver to our customers stable,         17        job of ensuring competitiveness. We have some
18     affordable insurance premiums that also allow       18        recommendations though for improving the
19     for some choice?                                    19        province’s performance on the other two
20        Our proposal would be that taking a hard         20        regulatory objectives, stability and solvency.
21     look at that insurance cycle and trying to get      21           In the late 1990s, the cost of paying
22     ahead of it a step would be the way to do           22        claims rose faster than premiums and while the
23     that.                                               23        industry drew the government’s attention to
24        On the next slide, we offer a couple of          24        the issue, little was done from the public
25     points on regulation. In our paper, we set          25        policy side, leaving the Board to fulfil the
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Discoveries Unlimited Inc., Ph: (709)437-5028
February 21, 2005                                          Multi-Page                   2005 Automobile Insurance Review
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 1          function of approving rate increases totally             1        premium increases that happened in 2001-2002
 2          25, almost 26 percent in 2001-2002 because it            2        could have been avoided by public policy
 3          was justified on the basis of costs. But had             3        action and they were not, so consumers had to
 4          action been taken again to reduce those cost             4        see their premiums increase.
 5          pressures, consumers never would have had to             5 MR. FORGERON:
 6          have seen that 25 percent, 26 percent increase           6   A.   Just to add and draw the parallel back to the
 7          in premiums. That’s the unfortunate part of              7        cycle chart that we had up a few minutes ago,
 8          the situation.                                           8        you’ll see the catch up in ’01 and ’02 for the
 9             If we look at the next slide, you can see             9        tremendous growth in claims for the three
10          this in a graphic form. Here we’ve put in               10        prior years.
11          dark blue, total claims costs, the year-over-           11           The claims costs have now been matched
12          year percentage change and total claims costs,          12        with premiums. Insurers return to
13          and the year-over-year percentage change in             13        profitability. Competition begins to flourish
14          premium. So here you see claims rising at ten           14        again and you see rate decreases or the
15          percent, followed by fifteen percent, followed          15        reduction in those increases, I guess, in ’03,
16          by another eight percent, and premiums not              16        and in ’04, probably somewhere between and ten
17          rising to stay in step with the increase in             17        and fifteen percent overall reduction. And
18          claims costs. At that time, the government is           18        while we’re all awaiting the publication of
19          made aware of these underlying cost pressures.          19        the benchmark, the preliminary indication from
20          The choice is made not to act to address them           20        the Benchmark Report last fall was for a
21          and accordingly, in 2001-2002, we see in light          21        further reduction in ’05, and the pressure
22          blue now a seven, followed by fifteen percent           22        that was built in the late 1990s, you’ll see
23          premium increases approved by the Public                23        here that the premium increases simply weren’t
24          Utilities Board to catch up with the costs              24        there to motivate consumers, if you will, to
25          that were evident in the system. Again, those           25        call for substantive change.
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 1           In ’01/02, the calls came out again for                 1        the cost of goods sold, which as we mentioned
 2        reforms to the automobile sector because of                2        earlier the government controls through
 3        these increases. Government’s attention is                 3        defining legislation, the premium catches up.
 4        now focused on the subject, testament these                4           So again, what happens to claims
 5        hearings, and now we see that premiums are                 5        eventually happens to premiums and to be
 6        headed in the other direction, leading some to             6        proactive about this then, we have to take a
 7        speculate that, you know, we’ll repeat the                 7        hard look at what’s happening to claims costs
 8        practices of the last ten years whereby we’ll              8        and say do we want premiums to follow that
 9        have a good healthy debate, but nothing much               9        same pattern? Do drivers in this province
10        will come of it at the end of the process. I              10        want premiums to follow that same pattern?
11        guess, only time will tell if that’s going to             11        And if in general drivers like the package of
12        be the case.                                              12        benefits that they have in their current
13   (10:00 A.M.)                                                   13        policy and they’re willing to pay an extra ten
14 MS. VOLL:                                                        14        or fifteen or twenty percent in order to
15     A.   On the next slide, again and you’ll detect a            15        continue to receive that same package of
16          theme in here, and this illustrates the same            16        benefits, well then, the answer is yes, fine,
17          theme that what happens to claims happens to            17        let’s carry on then. Let’s make the premium
18          premiums. What happens to claims happens to             18        adjustment and have drivers pay that.
19          premiums. So here we see, through the, you              19           But if the package of benefits and the
20          know, ’97, ’98, ’99, 2000 period, total claims          20        cost of the package of benefits is going up
21          costs are increasing dramatically.                      21        and reaching a point that consumers may or may
22          Competitive pressures are keeping the average           22        not want to actually pay, well then, we need
23          premium rate low and there’s calls for                  23        to take a look at the costs. But again, what
24          government attention to address the claims              24        happens to costs happens to premiums, unless
25          costs, but eventually barring action to change          25        something changes.
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Discoveries Unlimited Inc., Ph: (709)437-5028
February 21, 2005                                      Multi-Page                  2005 Automobile Insurance Review
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 1            On the next slide, we break this down a           1        injuries can claim more often and receive more
 2        little further. Again, but drilling into the          2        generous settlements then the equation works
 3        total claims number, we can identify which            3        and its fine. But if the drivers told the
 4        element of the cost of goods sold it is that          4        province, no, they don’t want to pay twenty or
 5        is problematic so that we can be more pointed         5        twenty-five percent more, well then, we would
 6        in knowing which element of the cost of goods         6        need to look at which element of the cost of
 7        sold needs attention.                                 7        goods sold is part of the problem and from
 8            Here we’re looking at the frequency of            8        this chart points out that through ’97 and
 9        claims. For every hundred vehicles, how many          9        ’99, the frequency of bodily injury claims in
10        claims are there, and for every hundred              10        this province was part of the problem.
11        vehicles, how many bodily injury claims are          11           On the next slide, we show that this is--
12        there? And we see over the period ’97 and            12        of total claims costs, how much more of total
13        ’99, we see the frequency of bodily injury           13        claims dollars were going to these types of
14        claims happening more often than claims on           14        claims. So for every dollar in premium paid,
15        average. What this means is that an                  15        a greater fraction of it is going towards a
16        increasing share of the total claims dollars         16        claim of this kind.
17        paid to people in the province are for bodily        17           Now as Don mentioned before, this issue
18        injury kind of claims and they take up a             18        has come up for discussion a couple of times
19        relatively greater portion of the pie. This          19        in the recent past, but little has changed to
20        puts upward pressure on total claims, which as       20        make the cost environment more amenable to
21        I said earlier, what happens to claims happens       21        long-term stability, little has changed to
22        to premiums. So as long as drivers in the            22        really address these underlying cost factors.
23        province are okay with that, and they’re             23        Temporarily premium adjustments happened, so
24        willing to pay ten, twenty, twenty-five              24        there was a better match, but very soon the
25        percent more so that those with bodily               25        cost pressures started to pick up again. I
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 1        don’t know if you wanted to add more onto      1               on claims, sales tax on premiums, premium tax,
 2        that, Don?                                     2               health care levy, adding up to some hundred
 3 MR. FORGERON:                                                3        million dollars. For perspective, a hundred
 4   A.   No. Only to just reinforce that point that            4        million exceeds the total claims payments for
 5        unless you deal with the significant cost             5        bodily injury in the province of 88 million.
 6        driver, to suggest that stability is going to         6        So while we’re here talking about cost drivers
 7        be realized in the auto insurance marketplace         7        affecting the product amounting to 88 million
 8        is, you know, is a false hope. It’s simply            8        and growing at a rate that’s concerning, we
 9        not going to happen. And these slides clearly         9        have a significant cost item here, 100 million
10        show, and there’s a couple more later on, they       10        dollars that is a consistent and expensive
11        clearly show that bodily injury claims are our       11        part of the product that warrants noting.
12        most significant cost driver.                        12           Also in speaking about the cost of the
13 MS. VOLL:                                                   13        product it’s important that we also mention
14   A.   While we’re talking about the total cost of          14        insurance fraud and auto theft. We estimate
15        insurance to consumers, we thought it’s              15        that for Canada there were over 132,000
16        important to also point out how much taxes           16        private passenger car thefts in 2003 at a cost
17        contribute to the overall price of insurance         17        of 610 million, adding an extra $43 per
18        in this province. Twenty percent of the              18        insured vehicle. Canada ranks fifth out of 17
19        premium collected and paid by consumers in           19        countries for the highest rate of auto theft.
20        this province goes to government taxes. This         20 MR. FORGERON:
21        is the highest rate of taxation in North             21   A.   Just a couple of points. There’s clearly a
22        America, the highest rate of taxation of             22        typo in the third bullet here. That should
23        insurance in North America is right here.            23        read 610 million, not 610,000. And just a
24        It’s a combination of a number of taxes,             24        broader comment on what the industry has done.
25        including income tax, payroll tax, sales tax
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Discoveries Unlimited Inc., Ph: (709)437-5028
February 21, 2005                                     Multi-Page                    2005 Automobile Insurance Review
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 1     In both of these lines on the issue of                    1        is under way now to review how those crimes
 2     insurance fraud, we have had a very successful            2        will be prosecuted in the future.
 3     coalition against insurance fraud in operation            3 MS. VOLL:
 4     for quite a number of years, trying to raise              4   A.   Just one more point on the cost, and this
 5     customer awareness, consumer awareness about              5        relates to profitability, which we’ll turn to
 6     the issue of fraud. And some of the early                 6        now. It’s often times presented in, you know,
 7     public opinion poling we did back in the early            7        in public circles that insurers want to cut
 8     to mid ’90s was somewhat disconcerting in                 8        benefits or insurers want to take things away
 9     terms of the public’s perception of what--of              9        from consumers. And it’s incorrect to present
10     where insurance fraud ranked in the scale of             10        the issue in this manner. Insurers in this
11     sort of wrongdoing, if I could put it in that            11        country operate under a number of different
12     way. And we’ve been successful in changing               12        car insurance regimes and have experience
13     public opinion to the point where people do              13        operating in many other types of regimes all
14     recognize that insurance fraud is a crime and            14        over the world. And they can operate in all
15     that they themselves end up paying the cost of           15        these different settings, providing that
16     insurance fraud in the end.                              16        premiums equal claims. So, again, whatever
17        On the issue of auto theft, we’ve been                17        happens to claims happens to premiums. The
18     very active the last, over the two to three              18        equation falls out, you pay your overhead and
19     years on this file. There has been,                      19        your salaries and earn a profit, the capital
20     unfortunately, as a result of some very tragic           20        stays and away you go. It doesn’t
21     accidents across the country, there has been a           21        particularly matter so much how the product is
22     focus placed on auto theft by ministers of               22        defined, providing the prices are allowed to
23     justice across the country who recently met in           23        match claims and the firms are allowed to meet
24     Ottawa. IBC was involved in those meetings               24        their other costs and so on. The reason why
25     with the Federal Minister of Justice and work            25        the industry gets into the debate is that
                                                      Page 27                                                           Page 28
 1     when, we’re the harbinger, you know, the first            1        worse thing for a consumer is to have an
 2     ones to see the cost trends, the first ones to            2        insurance company with declining returns
 3     see, hey, these costs are going up. We know               3        because you know this is going to spell
 4     the consumers want stability and affordability            4        availability problems, you know, this is going
 5     and availability and so the issues are brought            5        to spell the need for premium increases. But
 6     to the table that way. This is how the                    6        it’s often times presented backwards. And we
 7     industry gets into the discussion. And as Don             7        offer this chart to illustrate that point.
 8     said, at the end of the day prices will match             8        It’s the same chart holds for every province
 9     costs and capital will be either retained or              9        across the country and for Canada as a whole
10     will leave. But, it’s, it would be incorrect             10        as well as for other markets not in the
11     to say that insurers want to take anything               11        Canadian system.
12     away from consumers or whatnot. What the                 12           Insurance is a risky business. And for
13     insurers try to call for is the balance, the             13        27 years there have been four distinct earning
14     balance between costs and premiums and                   14        cycles and each cycle lasts about seven years.
15     realizing if costs have a trend that                     15        Typically there is about five years of
16     ultimately we don’t think consumers will                 16        declining earnings followed by two, three
17     support, then sometime would need to be done             17        years of recovery. Over the same 27-year
18     to costs.                                                18        period Newfoundland and Labrador auto
19        Another misperception sometimes is that               19        insurance industry has had five cycles. Each
20     well, earnings of insurers are rising, it’s on           20        cycle has lasted about five and a half years.
21     the backs of consumers, it’s because premiums            21        When we take a look at earnings in this
22     are rising. And the truth couldn’t be further            22        industry, we find that on a national basis
23     from that point. History shows that when                 23        from peak to peak, sort of, you take the peak
24     earnings in the industry rise, premiums fall,            24        return on equity and then the five years of
25     and when earnings fall, premiums rise. The               25        declining returns and then two years of
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 1     recovery, typically is how a cycle goes. And            1          not understand the typical returns to a
 2     you say, well, what was the average return to           2          shareholder for undertaking these activities
 3     shareholders over that whole, you know,                 3          and might not understand the returns that are
 4     tumultuous period. And on average each cycle            4          actually generated within the home, car and
 5     over the last 30 years has produced an average          5          business insurance industry.
 6     return on equity of 10.8 percent. But if we             6 MR. FORGERON:
 7     look at this most recent cycle from 1998 to             7     A. We’d like to turn now and talk specifically
 8     2004, and even though earnings have been very           8        about reforms here in the province that we
 9     strong for the year 2004, the average return            9        think would offer some relief to consumers and
10     over the cycle is only around eight percent.           10        some stability going forward. We want to talk
11     And I offer you that as just some context for          11        a little bit about what we feel is the right
12     understanding any particular year’s earnings,          12        type of auto insurance product in this
13     because it is important that they’re looked at         13        marketplace, talk a bit about pricing and some
14     over the cycle.                                        14        of the myths about removing some of the rating
15        Also, here’s some comparisons over a                15        variables that companies currently use and
16     five-year average. This is a five-year                 16        just close with a few comments about the
17     average return on equity for Loblaw’s, the             17        proper regulatory approach that we feel ought
18     five-year average return on equity for the             18        to be in place.
19     Royal Bank and so on down to the five-year             19   (10:15 A.M.)
20     average return on equity for property and              20           We talked a little bit about this, we’re
21     casualty insurance at eight percent. Again,            21        just illustrating it in a different way here,
22     just for context, Canadian Tire, you know,             22        again, to show the components of claims cost
23     Royal Bank, Loblaw’s, McDonald’s, companies            23        and why we have said for many, many years that
24     and industries the consumers might be familiar         24        bodily injury claims costs is the most
25     with in conducting their day-t-day life, might         25        significant factor in our ability to control
                                                  Page 31                                                              Page 32
 1     or not control the cost of automobile                   1          was 57 percent, in New Brunswick it was 61
 2     insurance, not just here in Newfoundland, but           2          percent, and in Nova Scotia it was 67 percent,
 3     in any of the provinces that our member                 3          indicating to us that these studies were
 4     operate. And you’ll see that it constitutes             4          pointing to the real problem and the
 5     over 60 percent of the overall claims cost and          5          consistency tells us that the studies have a
 6     is far more volatile than any of the other              6          high degree of credibility. So, again, if
 7     lines. And you’ll see from ’98 to 2001 the              7          we’re going to focus on longer term solutions,
 8     tremendous increase in bodily injury claims             8          this has to be the area that we focus our
 9     costs. And if you go back to some of the                9          attentions.
10     earlier charts, you’ll see how that was tied           10             It’s our view that the cap currently in
11     in to premium increases starting in 2000,              11          place in New Brunswick and in Nova Scotia and
12     2001, 2002. So, there’s no secret, there’s no          12          PEI has been tremendously effective in
13     rocket science to a lot of this. It’s very             13          reducing the cost of auto insurance to
14     simply the cost of doing business and the              14          consumers and providing a degree of stability
15     biggest factor is claims and the biggest chunk         15          for the industry in maintaining those cost
16     of that is bodily injury claims. It’s                  16          reductions that we have not seen in many, many
17     interesting to note that the closed claim              17          years. Ron Miller’s report to the Board
18     study done by the Board this time around found         18          estimated that there has been an approximate
19     that pain and suffering awards within the              19          40 percent reduction in BI claims costs in New
20     context of bodily injury claims constituted            20          Brunswick from the early data that we’ve seen
21     somewhere around 60 percent. I don’t have the          21          and we expect that that experience will be
22     exact figure in front of me, but studies that          22          similar in the other two maritime provinces.
23     IBC did through the 1990s in other provinces           23          And this underpins our call for a similar cap
24     and in Newfoundland came up with remarkably            24          here in this province for two reasons, one, it
25     similar numbers. In Newfoundland the figure            25          works, it’ll provide relief, it’ll provide
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 1     stability are the two things that have been              1    a dramatic increase with literally thousands
 2     sorely lacking in this marketplace for many              2    of drivers being removed from facility
 3     years and allow us again to fulfil a pledge              3    association from a high of 6.6 down to a
 4     that the premiers have made with respect to              4    history low of 2 percent, in fact, below 2
 5     harmonization within the region making that              5    percent at one point over the last several
 6     possibility more likely.                                 6    months. Over 60 new broker appointments in
 7        Additionally, accident benefits continue              7    New Brunswick, primarily in northern New
 8     to be mandatory in this province. And we                 8    Brunswick where the problems were particularly
 9     think that just from a social policy                     9    acute where we had a large number of brokers
10     perspective that the time for that to be                10    there with, in some cases, no insurance
11     changed has long since passed, in fact. But             11    markets, so no product to sell, effectively,
12     we recommend to government that they do make            12    and hence, the high population in the facility
13     accident benefits mandatory.                            13    association. So these 60 new broker
14        Again, just a comment about the reforms              14    appointments have increased competition
15     in New Brunswick. Premium reductions in                 15    significantly in northern New Brunswick and
16     excess of 26 percent and news last week that            16    consumers are the primary beneficiary of this.
17     one of the largest insurers in New Brunswick            17    Government has introduced new products. There
18     has filed for an additional seven percent               18    is now a no frills product that is offered in
19     decrease in response to these reforms. And              19    New Brunswick. And for young drivers, there’s
20     these reductions are easily determined from             20    a first chance discount that is available,
21     the Public Utilities Board website and the new          21    both of those are of January 1 of this year.
22     New Brunswick insurance board website where             22    And as I said, there’s a tremendous amount of
23     insurers are filing, been filing rate                   23    stability in the marketplace now that we have
24     reductions since the summer of 2003.                    24    not seen in many, many years. And it’s clear
25     Increased availability of the product has seen          25    to those of us observing that the cap is
                                                     Page 35                                                     Page 36
 1     working, it’s early stages yet and, of course,           1    removal really have not been met and
 2     we have to wait for all the data to come in.             2    unintended consequences have not been
 3     But certainly, the early indications are that            3    considered. In any event, age and marital
 4     the cap in New Brunswick has done what                   4    status have been removed. And the
 5     government had hoped it would do, which is to            5    misconception that existed out there was that
 6     reduce prices, provide some stability and                6    this would simply reduce premiums for young
 7     increase availability of auto insurance.                 7    drivers and that there would be no balancing,
 8        In terms of pricing, it’s our industry’s              8    which is a pretty naive position to take when
 9     view and long held view that risk and price              9    one considers the pooling of insurance
10     have to be matched if we’re going to have a             10    premiums and that the pool has to produce a
11     system that works effectively for consumers.            11    certain amount of premium in order to pay
12     If the prices are not matched, what you end up          12    those claims. And if we artificially reduce
13     with is insufficient premium collected to               13    the cost of insurance for young drivers by
14     support certain risks in the pool and                   14    removing age as a rating variable, we’re not
15     subsidization at work where low risk                    15    going to artificially remove the cost of
16     individuals end up subsidizing higher risk              16    claims. And young drivers have historically
17     individuals. And if you take that argument              17    been over represented when it comes to
18     further, it removes the incentive for low-risk          18    accidents, when it comes to injuries, deaths
19     behaviour, because, in fact, it’s cheaper if            19    and when it comes to claims costs. So in New
20     you are a poorer driver in the pool.                    20    Brunswick, as an example, we have a first
21        There’s been talk about removing age and             21    chance discount that provides a significant
22     gender as rating variables. Age and marital             22    premium reduction for young drivers, but we
23     status has been removed in Nova Scotia and New          23    have done nothing to effect the claims
24     Brunswick. It’s interesting that the policy             24    experience that that group is going to have.
25     reasons that we’ve been given for their                 25    And in order to support this first chance
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 1     discount, the industry was forced to create a                1        would cause decreases for those drivers under
 2     pool, a risk sharing pool that would see those               2        the age of 25 and increases for drivers over
 3     claims costs spread out over the rest of the                 3        the age of 25. And there’s a certain appeal,
 4     driving population. So the rest of the                       4        public appeal to saying we’re going to remove
 5     driving population is going to see a one to                  5        discrimination based on age. It seems to be
 6     two percent increase in their premiums in                    6        it’s the wrong thing to do, and in many cases
 7     order to support a first chance discount, the                7        and in many walks of life discriminating on
 8     discount that’s given without a corresponding                8        the basis of age is perhaps going against sort
 9     claims cost or actual claims cost reduction.                 9        of accepted norms. But in this case using age
10        We conducted a couple of studies in Nova                 10        is a legitimate reflection of the risk being
11     Scotia and in New Brunswick that showed the                 11        presented by the individual. And we think
12     impact of removing age and/or age and gender.               12        that matching premiums an risk is the right
13     And in Nova Scotia we found that newly                      13        way to go. And it’s our view that the public
14     licensed principal male drivers would see a                 14        also believes that matching risk and premium
15     decrease of 15.1 percent while newly licensed               15        is the right way to go as well.
16     female drivers would see an increase of 26.6                16 MS. VOLL:
17     percent as a result of removing these two                   17   A.   Finally, last time we were here we spent a
18     variables. And in New Brunswick a study there               18        little time on regulation. And here I just
19     showed that with the removal of just age a                  19        wanted to flag that in our view it would be a
20     reduction in the cost for young drivers while               20        good goal if the system were oriented to words
21     rates for mature drivers would go up quite                  21        insuring that we’re informed and empowered
22     significantly depending on the experience that              22        consumers, timely fair claims, choice and low
23     they had.                                                   23        system costs and stability. And that it would
24        And Mercer’s study is consistent with                    24        be helpful to look at the regulatory system
25     this, that shows that removing these variables              25        that we currently have and see how well it’s
                                                         Page 39                                                          Page 40
 1     helping to achieve these things, particularly                1        submission, and this table was on your, this
 2     stability. And there could be a role for                     2        table was a slide, but again, I don’t remember
 3     greater stewardship over the system as a whole               3        which one it was, but’s the year-over-year
 4     to try to curtail, avoid and prevent some of                 4        percentage change of claims costs, total
 5     the crisis that will otherwise produce                       5        claims costs and the premium rate in
 6     themselves.                                                  6        Newfoundland and Labrador. And I guess the
 7 MR. FORGERON:                                                    7        questions just really relate to some of the
 8   A. Mr. Chair, the following couple of slides are               8        comments you had made in respect of that
 9     just our recommendations. And we’ve touched                  9        table. Go back to my notes now. It was
10     on all of them. I don’t think there’s any                   10        really with respect to the box that you’ve
11     need to go through them individually. And                   11        drawn around the ’97 to 2000 experience there.
12     they’re certainly in our written submission.                12        And I think the comment was made that the
13     That concludes our formal part of the                       13        premium increases that subsequently followed
14     presentation. We’d be happy to take                         14        that experience as indicated there could have
15     questions.                                                  15        been avoided by public policy action, I think
16 CHAIRMAN:                                                       16        that was the comment that, I’m not sure who
17   Q. Thank you, Mr. Forgeron, Ms. Voll. We do have              17        was speaking, I think it was Ms. Voll. I came
18     some questions. Ms. Whalen, Commissioner                    18        to the Board in 2000, but my recollection in
19     Whalen?                                                     19        terms of dealing with the benchmarks on a go
20 COMMISSIONER WHALEN:                                            20        forward basis from that period is that there
21   Q. Most of my questions are actually reference to             21        hasn’t been a whole lot of change in the
22     your report itself. And I wouldn’t dare try                 22        actual benchmarks themselves, relatively
23     to go back to try to find the corresponding                 23        speaking. There have been year-over-year ups
24     slides, but Mike is usually pretty good, so he              24        and downs, but if you look at the benchmarks
25     can--in reference to page 4 of your                         25        themselves, it’s been, you know, the ban has
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 1        been fairly constant over that period.                    1        couple of reasons why, before I get to the
 2   (10:30 A.M.)                                                   2        public policy changes that we were talking
 3        And I look at the premium rates for that                  3        about. In the late 1990s, you’re right that
 4        period. My recollection is that companies,                4        competition played an important role in
 5        the average rates for companies in this                   5        companies not wanting to lose significant
 6        province for that period were actually at or              6        market share by raising premiums excessively.
 7        below the bottom range of the benchmark. Does             7        That’s always a balance that a company has to
 8        that match with your--and I’m trying to get a             8        find. There’s also a sense, I think, in ’98,
 9        handle on what action, public policy action               9        ’99 that no one quite believed how bad it was
10        could have been taken if the companies, for              10        and there seemed to be an awakening within the
11        competitive reasons, I assume, had chosen not            11        industry perhaps in 2000, thereabouts, that,
12        to request rate increases. I mean, there was             12        you know, this was not a one-year abberation,
13        actually an opportunity there for companies to           13        that we have a serious problem here that is
14        file for 20 percent increases that would have            14        not going to go away, and market share or not,
15        been within the benchmark range and it                   15        we have to address significant loses. And
16        wouldn’t have required any actuarial                     16        through that period, the late 1990s, there
17        justification under the regulatory scheme as             17        were significant loses in automobile insurance
18        is present here. So, I’m trying to match the             18        in Newfoundland. So there are a couple of
19        call that the industry would have had for                19        reasons why there’s this lag before companies
20        public policy action with the inaction of                20        introduced the rate increases. And the
21        industry to apply for increases in a period of           21        increases in ’01 and ’02 are really, as I
22        increasing claims costs. Does that make any              22        said, to reflect those claims costs that
23        sense?                                                   23        hadn’t been caught up in previous years and
24 MR. FORGERON:                                                   24        those claims costs were now a part of the
25     A.   Yeah. No, absolutely. I think there are a              25        system annually. Because when I say caught
                                                         Page 43                                                         Page 44
 1          up, there’s a sense by some people that we’re           1      mentioned. But had legislation been brought
 2          just going back and recouping what we should            2      in, as it has now in the other three maritime
 3          have, but it’s not the case. It’s just that             3      provinces, that explosion in bodily injury
 4          claims costs have now reached a new level,              4      claims costs likely would not have taken
 5          premiums have to catch up to that. The public           5      place.
 6          policy change could have happened in the early          6   Q. Just bear with me for a second now, I had a
 7          1990s. These increases were primarily driven            7      bunch of notes here. In terms of the
 8          by bodily injury costs. There’s another slide           8      discussion that you had on taxation, the
 9          that Ms. Voll had up that showed in 1997 and            9      numbers that you have in your submission of
10          1999 a 20 and a 25 percent increase in bodily          10      100 million dollars taxes paid to the
11          injury claims frequency. And public policy             11      Newfoundland Government, 2003, is that just
12          changes, government legislation back in the            12      with respect to automobile insurance or is
13          mid 1990s to deal with that problem would have         13      that the overall P and C industry?
14          prevented those significant increases in               14 MS. VOLL:
15          claims costs and it would have prevented the           15   A.   All lines.
16          need for increased premiums. So, there’s some          16   Q.   All lines?
17          timing issues in terms of when the claims              17 MS. VOLL:
18          growth came and premium responses and how              18   A.   Yeah.
19          companies work within the benchmark. And               19   Q.   What would be the corresponding book of
20          there’s quite a generous range within that             20        business that that 100 million then would
21          benchmark to allow them to take those                  21        correspond to in terms of dollars? You said
22          increases and even though there’s not been a           22        20 percent, so is that 20 percent then across
23          huge change in the overall benchmark, there is         23        the entire industry?
24          still sufficient room within the benchmark for         24 MS. VOLL:
25          companies to respond to these things, as you           25   A.   The 20 percent of premiums for--is that 20
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 1        percent?                                               1      to be applied to insurance products, and we
 2   Q.   Yeah, when you mentioned 20 percent taxation,          2      thought this was our opportunity, consumers in
 3        that was with respect to just automobile               3      Newfoundland were about to see an 11 percent
 4        insurance. So that 20 percent is not 100               4      reduction in their premiums. Much to our
 5        million, it’s some other number with respect           5      chagrin, the new HST was applied to insurance
 6        to automobile insurance?                               6      premiums. So instead of an 11 percent
 7 MR. FORGERON:                                                 7      reduction, they saw a four percent net
 8   A.   That’s right, yes, that’s correct.                     8      increase as a result of that change. That’s
 9 MS. VOLL:                                                     9      the only significant change that I’m aware of
10   A.   Yeah.                                                 10      over that period of time.
11   Q.   All right. And also with respect to taxation          11   Q. Are we the only province that has that aspect
12        in the insurance industry in this province,           12      to our insurance premium, that taxation in
13        has there been much change over the last five         13      terms of a sales tax?
14        to ten year period in terms of new taxation or        14 MS. VOLL:
15        changes in taxation levels or has that been           15   A. Yeah. To this degree Newfoundland really
16        fairly -                                              16      stands out, not just within Canada, but within
17 MR. FORGERON:                                                17      North America for the way that the taxes are
18   A.   It’s been fairly consistent with one major            18      applied first on claims and then again on
19        exception. I can’t remember the precise year,         19      premiums.
20        but when the Atlantic Provinces moved or three        20   Q. But in terms of retail sales tax, is that
21        of them, I believe there’s three that moved to        21      consistent across other provinces or -
22        the harmonized sales tax from the provincial          22 MS. VOLL:
23        sales tax and GST tax, the provincial tax was         23   A.   Ontario has announced their elimination of
24        applied to insurance products. And we thought         24        that within their tax system, so this is why
25        that it would be because GST and HST were not         25        Newfoundland stands out as a special case
                                                      Page 47                                                       Page 48
 1        still.                                                 1        I believe the Board heard about this back
 2   Q.   I was just following your discussion on                2        during the benchmark hearings, a project
 3        insurance fraud and auto theft, and I note             3        that’s been ongoing in Ontario for the better
 4        that there’s nothing in your report that               4        part of ten years and it still is not
 5        actually deals specifically with the issue of          5        functional. Very, very expensive, very time
 6        uninsured motorists. Is that an issue for the          6        consuming. And then I think, you know, one
 7        IBC in respect of the impact of uninsured              7        needs to have a discussion about the
 8        motorists on the total cost for insured                8        percentage of the driving population who would
 9        motorists?                                             9        be motivated to purchase the appropriate
10 MR. FORGERON:                                                10        coverage if the fines were higher. If the
11   A.   We did a study in the region, I’m pushing my          11        fine for driving without insurance was such
12        weak memory, but it’s back in the mid to late         12        that it was less than the cost of buying the
13        1990s we did a study to try and determine how         13        product itself, then I’m sure there are
14        many drivers were driving without proper              14        decisions being made out there that I’ll take
15        coverage in the region, and the figure of             15        my chances and pay the fine. And also, how
16        three to six percent comes to mind for                16        many would be motivated to buy the coverage if
17        Newfoundland. And I’ve heard there have been          17        a linkage was set up between the industry and
18        various suggestions put forward as to how one         18        government to be able to verify insurance
19        could go about setting up a system so that at         19        coverage. And then once you strip away those
20        roadside police would be able to determine            20        people that could be motivated, there’s going
21        whether or not the individual has proper              21        to be a core group that will never buy the
22        coverage. And the cost of putting in place            22        product, regardless of what penalties you put
23        that type of a system would be in the tens,           23        in place and what systems you put in place.
24        perhaps the hundreds of millions of dollars           24        And then I think you’ve got to do a cost,
25        here in Newfoundland. There’s a project, and          25        benefit analysis of what you’ve put in, what
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 1      are the various measures you could take and              1        hand and that first step can be quite
 2      ultimately what you’re going to achieve at the           2        problematic in itself. So, I seem to remember
 3      other end in terms of getting more people into           3        work under way in Alberta as well.
 4      the system, and are those people bringing a              4 MR. FORGERON:
 5      disproportionate number of claims with them.             5   Q. And just came to mind, the Province of PEI
 6      You know, I don’t believe that that analysis             6      recently did a roadside blitz, and this has
 7      has been done to show which of these programs            7      been done, and this has been done effectively,
 8      would make sense for the province.                       8      it’s been done here in Newfoundland as well by
 9   Q. Is the IBC doing any work in that area in                9      law enforcement authorities. And the number,
10      terms of studies or analysis?                           10      again, I don’t have it at my fingertips, but I
11 MR. FORGERON:                                                11      believe it was less than, less than one
12   A.   There’s ongoing work in Ontario in trying to          12      percent of this weekend blitz in Prince Edward
13        get a program in place there. As I say,               13      Island found people driving without
14        that’s been ongoing for the better part of ten        14      appropriate insurance coverage.
15        years. And before one could look to any other         15   Q. Was that roadside blitz announced in advance
16        provinces to try and emulate that, you’d want         16      or?
17        to have a program that was working and working        17 MR. FORGERON:
18        well, and we haven’t realized that yet.               18   A.   No, I don’t believe.
19 MS. VOLL:                                                    19   Q.   In terms of the options that the Board has
20   A.   I seem to recall we also studies it together          20        been asked to review, the cap versus
21        with the government in Alberta within the past        21        deductible, had the deductible been
22        year or so, again, just trying to get a handle        22        implemented in anywhere else in Canada?
23        on what the number was. It’s as with any of           23 MR. FORGERON:
24        these types of things, it’s like asking               24   A.   There is a deductible in Ontario as part of
25        everyone who’s not in the room to raise their         25        the product, but I’m not all together familiar
                                                      Page 51                                                          Page 52
 1        with the current amount of that deductible or          1 MR. FORGERON:
 2        how it’s working. But it’s once an individual          2   A.   Yeah. There’s a, well, there’s not a cap, but
 3        gets through the threshold there is a                  3        there’s a threshold that a claimant has to
 4        deductible applied to any award. But again,            4        meet a test before they’re eligible for
 5        in terms of its effectiveness or any recent            5        recovery through torte. If they don’t meet
 6        changes, I can’t tell you.                             6        the test, then the schedule of Section B
 7 MS. VOLL:                                                     7        benefits and rehab that takes care of them.
 8   A. But I don’t think it affects the majority of             8        So, as Jane was indicating, once you get
 9      the coverage because so much of the settlement           9        through the threshold and an award has been
10      happens below the threshold level that it               10        provided, then the deductible applies. So,
11      really pertains to those more higher cost               11        it’s quite a significantly different scenario
12      claims that are on the other side of the, the           12        than we have here in terms of how the
13      other side threshold. And I know that the               13        deductible applies to all awards from the
14      claims costs on torte claims in Ontario is              14        first dollar.
15      showing a rising trend, a concerning trend for          15 MS. VOLL:
16      writers in that, in the province. So there’s            16   A.   We can--I’d be happy to follow up with the
17      a few, yes, but it’s on a portion of the                17        figures if that would help.
18      coverage, it’s not the bulk of it.                      18 CHAIRMAN:
19   Q. Don’t know what the level of that deductible            19   Q.   In terms of your discussion of your steps to
20      is?                                                     20        achieve long-term stability in the auto
21 MS. VOLL:                                                    21        insurance market for here, your discussion,
22   A. Again, because it’s applying to only the                22        and I’m at page 11 of your report, on the
23      claims that are on the other side of the                23        reforms in New Brunswick, there seemed to be a
24      threshold, it -                                         24        linkage there between the facility
25   Q. Is there both a deductible and a cap?                   25        association’s drop in market share from 6.6
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 1        percent to 2 percent and the reforms that have         1     would be presented to New Brunswick because
 2        been introduced. And I’m wondering if you              2     we’re talking about here, in terms of claim’s
 3        could explain how that linkage, because it’s           3     growth in the late 1990s, not followed by
 4        in the same paragraph and actually flows from          4     premium growth and then premium growth in the
 5        the same sentence, how that linkage, how you’d         5     early--in 2000 and 2001. And as companies are
 6        make that linkage?                                     6     writing, experiencing these losses, they’re
 7 MR. FORGERON:                                                 7     writing less and less business. Their
 8   A.   The population in the facility market is, in           8     underwriting becomes tighter and so more and
 9        some ways, it’s been described as the                  9     more people go into the facility association
10        insurance industry’s canary, that when you            10     marketplace. And when these improve and the
11        begin to see those numbers rise, it indicates         11     marketplace is returned to sort of a well
12        that there’s a problem in the marketplace,            12     functioning status, that there’s a degree of
13        something is amiss. For whatever reason,              13     stability, claim’s costs are controlled,
14        companies that have traditionally been writing        14     they’re predictable, companies have positive
15        that business are now not writing that                15     earnings that have been returned. They have
16        business and the market of last resort is             16     an appetite for wanting to write more business
17        picking it up. And we have seen that in those         17     because it’s a much more positive climate and
18        marketplaces that have facility association in        18     so they expand their writings. As they expand
19        advance of insurance reform, insurance crisis,        19     their writings, they take people that are
20        insurance debate, and we’ve seen an increase          20     insured in--have gone into facility over the
21        in the number of drivers and facility                 21     previous few years and they now start taking
22        association, usually because the marketplace          22     those people out of facility. So the two
23        has become for, whatever reason, somewhat             23     really do go hand in hand, a well functioning
24        dysfunctional. And that happened in New               24     marketplace will have a relatively low
25        Brunswick, very similar numbers and graphs            25     facility association population.
                                                    Page 55                                                            Page 56
 1   Q. Has--in terms of making accident benefits                1   A. Premium cost of bringing these in, presumably
 2      mandatory, has the IBC done any work in                  2      some projection as well about what claim costs
 3      determining what an estimate would be of the             3      would be under a mandatory system.
 4      premiums for accident benefits, if it was made           4   Q. Yeah, that would be the, yes. I just had a
 5      mandatory?                                               5      question as well, I know, Mr. Forgeron, you
 6 MR. FORGERON:                                                 6      participated, I guess, would be, well observed
 7   A. I don’t believe we did it in this round, but             7      by conference call on the presentations by the
 8      we have reports, we’ve been recommending this            8      actuaries on Thursday, I think it was, and I
 9      for a long, long time and at various stages              9      think I heard as a result of Thursday’s
10      analyses were done and those premiums provided          10      presentations that the--it’s more difficult to
11      to government, and I believe in the last                11      predict the impact because there’s so many
12      proposal put forward by the former government,          12      variables that go into the impact of
13      I believe they had provided for mandatory               13      implementing a cap, in terms of looking out
14      accident benefits and provided a cost as well.          14      then a deductible, that seems to be what I got
15      So again, if that’s information of interest,            15      out of it, that there was more variability in
16      we can make it available.                               16      terms--there seemed to be a wide range of
17   Q. Yeah, I think that would be--that is something          17      uncertainties that got associated with the--
18      that we need to report on. Have you done any-           18      and notwithstanding the, how the Courts are
19      -has there been any study done in terms of the          19      going to deal with the definition and all of
20      impact on total cost or the cost benefit of             20      those things as well, does IBC have any
21      the additional premium versus the benefit?              21      comment or position on that aspect of the
22 MR. FORGERON:                                                22      reliability or predictability of the impact on
23   A. I’m not sure I understand. What we had looked           23      cap risks to deductible. I’m just thinking in
24      at would be the additional cost to the system.          24      terms of the language we hear a lot from
25   Q. Uh-hm.                                                  25      industry is stability and predictability and I
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 1        guess the other side of it is the caps seem to        1       that a cap would offer a higher level of
 2        not have either one of those things, certainly        2       certainty and stability than would a
 3        in advance of -                                       3       deductible. Now there are as many versions of
 4 MR. FORGERON:                                                 4      that opinion as there are people in the
 5   A.   I don’t have Mr. Miller’s submission in front          5      industry who would offer, you know, some may
 6        of me, but I believe and I stand corrected on          6      offer another, but certainly in discussions
 7        this, that he felt the cap with the third              7      that I have had, the preponderance is to feel
 8        definition did provide a degree of stability           8      far stronger about the cap as opposed to a
 9        and predictability, longer term, far more so           9      deductible.
10        than a deductible would. With a deductible,           10   Q. The New Brunswick definition of minor injury
11        the erosion, which I understand Mercer’s have         11      has been--is one of the definitions that we’ve
12        changed their erosion factors since the               12      been asked to look at in conjunction with two
13        benchmark hearings. There will be some                13      others. Is that definition that constitutes
14        erosion with the cap as well. We have seen            14      part of our terms of reference the same
15        the threshold in Ontario has undergone                15      definition that has been implemented in New
16        challenged over the years and there’s no              16      Brunswick, Nova Scotia and P.E.I.? Is it the
17        question that that, you know, some would say          17      same definition in the other three provinces?
18        that today that threshold is weaker today than        18 MR. FORGERON:
19        it was when it was first introduced, that’s,          19   A.   In P.E.I. it is; in Nova Scotia there was an
20        you know, testament to the abilities of many          20        added wrinkle, we enjoy a minority government
21        of the people in this room and they’re                21        in Nova Scotia and the original definition was
22        bringing cases forward and successfully               22        modelled on the New Brunswick approach and
23        arguing for expansion of the cap or a                 23        then there were subsequent changes in
24        threshold. But I think the industry would             24        legislation and regulation, so that it
25        have a greater degree of comfort going forward        25        physically does not resemble the New Brunswick
                                                      Page 59                                                            Page 60
 1      model, but in practice and from an actuarial             1        example, and the experience in publicly run
 2      point of view, it’s been perceived as being              2        jurisdictions where they brought in, you know,
 3      almost as effective, but because of these                3        where Manitoba and Saskatchewan have the
 4      legislative and regulatory changes that came             4        ultimate cap which is no one is able to get a
 5      along with it, there is not the same level of            5        tort recovery at all. So we can learn from
 6      confidence going forward as there is in New              6        many other jurisdictions and have a fair
 7      Brunswick and P.E.I.                                     7        degree of confidence that there will be
 8   Q. Has there been any challenges in the Courts to           8        savings. That’s not to suggest that you do
 9      or any cases presented to the Courts in either           9        this once and then go away and neglect the
10      of those jurisdictions that you are aware of?           10        system, and that goes to some of the comments
11 MR. FORGERON:                                                11        that Jane has been making for the last couple
12   A. Not that I’m aware of, no.                              12        to anybody who will listen, that we need a new
13   Q. Okay, so it’s still early. What if through              13        stewardship for the auto insurance product,
14      this current cycle of reform, what if the               14        that we have consumers that are far more
15      savings that a lot of the reforms that are              15        empowered today than they have ever been, but
16      being implemented, what if those savings don’t          16        we need a regulatory regime that’s sensitive
17      materialize? I mean, what if it doesn’t, five           17        to that and that doesn’t deal in this crisis
18      years from now, what will we be looking at              18        mode as the only way that we get reforms
19      then?                                                   19        through the system. So five years from now,
20   A. Well, first of all, I think it will                     20        we may be back at the table taking a look at
21      materialize, I think we’ve seen successes in            21        another aspect of automobile insurance, but I
22      other jurisdictions that while perhaps not              22        think the right way to do it is to continually
23      done precisely in a manner that is being                23        monitor and check and make changes as
24      proposed here, we can still learn from those            24        appropriate, as opposed to go through these
25      experiences, the experience in Ontario, for             25        boom and bus cycles that we’ve been through,
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 1        which are very, very difficult for consumers.            1        allow for as much stability on the cost side
 2        I don’t think consumers have particularly                2        as you can.
 3        enjoyed, you know, the large increases and               3 CHAIRMAN:
 4        then a period of flat increases and then more            4   Q.   Are you finished?
 5        increases. I think they would have preferred             5 VICE-CHAIR WHALEN:
 6        a period of sort of modest premium increases,            6   Q.   I think so.
 7        so that was appropriate, to these sort of                7 CHAIRMAN:
 8        highs and lows, and you do that by constant              8   Q.   It’s 11:00, Commissioner Whalen has completed
 9        monitoring and changes to the system, not by             9        her questions. I will probably have--consume
10        waiting for a crisis to hit, but seems to be            10        15 minutes or so, is your particular wish to
11        the way we do auto insurance reform in this             11        have a break at this point in time? Break?
12        country.                                                12        That’s fine with me. We’ll take 15 minutes
13   MS. VOLL:                                                    13        and return at quarter after. Thanks.
14   A.   To summarize that, if the reforms lower claims          14            (BREAK - 11:00 A.M.)
15        costs, then prices are going to come down as a          15            (RETURN - 11:15 A.M.)
16        result of it. And if the reforms put in a               16 CHAIRMAN:
17        formula that offers cost stability, which it’s          17   Q.   We’ll just wait a moment until everybody gets
18        been suggested that cap is a way to do that,            18        organized. Do you have any additional
19        if you have cost stability, you have price              19        questions?
20        stability. And with an eye on the cost where,           20 VICE-CHAIR WHALEN:
21        you know the stability begins to erode, then            21   Q.   No, I don’t. Thank you very much.
22        an early attention to it could again keep               22 CHAIRMAN:
23        availability in place and avoid the need for,           23   Q.   Thank you very much. Thank you for your
24        you know, a dramatic rate increase. But the             24        presentation this morning Mr. Forgeron and Ms.
25        idea is to put in a system that’s going to              25        Voll. I have a number of questions, I guess,
                                                        Page 63                                                            Page 64
 1        I suppose not unexpectedly in a presentation             1        our business and with that comes a
 2        to government or really, the regulator, I                2        responsibility to do all those things that
 3        suppose. I detect in the presentation, the               3        prudent business people do in terms of running
 4        industry is a victim mentality here, to be               4        their business properly and running it well,
 5        frank with you. There’s a number of times and            5        taking care of their customers, taking care of
 6        instances where there’s a, I think, a good               6        their legal and regulatory obligations. And
 7        deal of blame heaped on government and the               7        if we identify issues in that mix that require
 8        regulator. And I acknowledge the fact that               8        attention, then it behooves us to take
 9        the industry is a competitive free market                9        whatever actions we can, and there are things
10        system, certainly one would hope a dynamic              10        that the industry can do and does do on its
11        business, a dynamic industry. And looking               11        own. Individual companies take measures on
12        forward to, I think, what you would view as             12        their own if they are seeing an increasing or
13        being the future in terms of what consumers             13        a disturbing trend in claims costs or
14        would like to see in terms of long term                 14        insurance fraud, there’s a particular trend
15        stability and rates. What do you see as the             15        that’s developed in insurance fraud. The
16        industries role in this, I suppose? There’s a           16        industry in the past has responded to those
17        reference toward the end of going forward on a          17        things and individual companies continue to
18        partnership basis, how do you see the                   18        reponed to those things.
19        industry--just as a general comment, I                  19           I think where--what sets our industry
20        suppose, contributing to that stability?                20        apart from many other industries, however, two
21 MR. FORGERON:                                                  21        things. One we’ve mentioned already, which is
22   A.   I’ll provide a couple of comments, but I know           22        that when we sell our product, we’re not sure
23        that Jane will have some more on the issue of           23        that we’re selling it at the right price. We
24        redoing regulation. I guess we have a                   24        may be selling it at a price that’s far too
25        leadership role to play in all of this. It is           25        low or far too high. We simply won’t know
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 1     until many years later. That’s the first                 1        that time. We have largely the same system
 2     thing, I think, that sets us apart.                      2        today, with the exception of the deductible
 3        Secondly, control over the factors that               3        that was put in last summer. We have largely
 4     affect our costs is out of our hands. So if              4        the same system that we did ten, fifteen,
 5     you are in a manufacturing situation and the             5        twenty years ago, and you know, it’s that old
 6     cost of producing your product goes up, there            6        definition of insanity thinking you’re going
 7     is some control that you can exert over that             7        to get a different result and doing the same
 8     to try and bring those production costs in               8        thing over and over again. I mean, we
 9     line. There’s only so much that we can do                9        shouldn’t be surprised that we keep ending up
10     when over 60 percent of our claims costs are            10        in the same spot. We haven’t changed
11     bodily injury type claims, and government               11        anything.
12     legislation largely dictates how we pay those           12 MS. VOLL:
13     claims. And you described it, Mr. Chair, as a           13   A.   To build on that, it’s as if, you know, let’s
14     bit of a victim mentality. I say it’s just a            14        say you’re a manufacturer of chairs and you
15     reality that in order for us to be able to              15        need polyester and a little bit of steel and
16     control these costs, we need to partner. We             16        some rubber and, you know, a few other
17     need to partner with government and they need           17        materials to go in. Those are your main cost
18     to partner with us, and you know, we have               18        of goods sold, and labour. But you don’t have
19     been--we have that cycle chart again. We have           19        control over where you purchase or the amounts
20     been talking to governments since the early             20        of purchase that you acquire your costs at.
21     1990s about the need for reform here and we             21        Let’s say the analogy would be the government
22     haven’t had any. And so our costs go up and             22        defines, and together with the courts, define
23     our only response is to raise premiums. And             23        what proportions of those different materials
24     unfortunately, we haven’t had that partnership          24        go into making that chair. The only way to
25     that has seen changes made to the system over           25        manage the business in that model is to then
                                                     Page 67                                                        Page 68
 1     manage it collaboratively because unlike other           1        injury research and the work that we do
 2     businesses, you look for another supplier.               2        together with traffic injury research
 3     You look for an alternative product that could           3        foundation.
 4     fit the same bill. You change to plastic feet            4           We have engineers on staff that regularly
 5     instead of rubber feet on the chair. But                 5        share work and do work together with the
 6     insurers don’t have that flexibility to                  6        engineers of the major car manufacturers,
 7     redesign, look for alternative materials, if             7        having to do with what safety features, you
 8     you will, because of the way that the costs              8        know, airbags and so forth, how do they work?
 9     are set. One by product definition, two by               9        What’s the best kind? What’s their role in
10     product definition interpretation in the                10        accidents? Through the Institute for
11     Courts. That’s why it has to be                         11        Catastrophic Loss Reduction, the industry has
12     collaborative. But it is quite a unique                 12        probably spent over three million dollars on
13     business model compared to any other business           13        disaster research, based on campus at
14     that you could think of normally the way it             14        universities across the country, and some of
15     operates.                                               15        this has to do with weather and roads. You
16         I’d like to elaborate though. There is              16        know, if you salt at the right time, if you
17     very much a role for the industry on two                17        don’t use salt, what else? How else does
18     fronts, the regulation and on what would I              18        weather affect accident patterns and what can
19     call, you know, corporate citizenship, having           19        we learn about that?
20     to do with loss reduction, and I believe the            20           The industry has probably also spent two
21     industry has a very important role to play on           21        million dollars on health care research in the
22     loss reduction. There are things that as an             22        last couple of years. This is funding
23     industry we can do that benefit the system,             23        research at organizations like, you know,
24     benefit consumers, that any one company may             24        Mount Sinai Hospital in downtown Toronto or at
25     not do, and these include things like traffic           25        other major hospitals across the country on
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 1     pain. What works? What doesn’t work when                1    change some of their practices in the
 2     you’re dealing with a client with pain?                 2    following ways. One is we are drafting what
 3     Working with the rehab professions on what              3    are called standards of sound business and
 4     particular treatment protocols work and what            4    financial practice, and what these will be is
 5     doesn’t work and sharing that collaboratively           5    a set of guideline policies and procedures
 6     within the industry.                                    6    that companies ought to have in place if
 7        Most recently, there’s been research on              7    they’re going to have sound practices in the
 8     whiplash and head rest positioning. It sounds           8    area of complaints handling, of claims
 9     like a minor feature of riding in your car,             9    settlement, of underwriting, of sales. These
10     but it can have a very significant impact on           10    would be requirements that Board of Directors
11     reducing the number and severity of whiplash           11    on boards of each companies then would be
12     injuries.                                              12    asked to assess their own company’s
13        So I think on an ongoing basis, there’s a           13    performance on. How well are we doing? How
14     very, very important role the industry plays.          14    timely are we at settling claims? How clear
15     Graduated licensing is another one. In                 15    is the information we’re using to market our
16     fostering a culture of prevention, risk                16    products? To self assess themselves and have
17     prevention, loss prevention and doing the              17    that information be available to regulators to
18     research that maybe is not going to show up on         18    come in and check, you know. Are products
19     the bottom line, but is going to help our              19    being sold in a clear and fair manner? This
20     collective understanding of what could or              20    would offer one tool for checking whether or
21     couldn’t be done.                                      21    not, in fact, that that’s happening.
22        It gets a little bit more tangible for              22       This is big deal for insurance companies.
23     companies when we look at the model that we’re         23    It puts onus on Boards of Directors and it
24     advocating for regulation and this sees over           24    sets out in black and white some of the
25     companies, over the next number of years               25    accountabilities for market behaviour, which
                                                  Page 71                                                        Page 72
 1     is new. It exists in the solvency aspect of             1    recently with New Brunswick and the Federal
 2     regulation, but not yet on the market conduct           2    Government to try to come up with a new tool
 3     side and it will be new for companies and               3    for measuring, in a proactive way, how well
 4     their Boards of directors.                              4    we’re doing on achieving important public
 5        We are just launching, in the next three             5    policy objectives like availability,
 6     months, the platform for a national complaints          6    affordability, stability. So that instead of
 7     database and complaints monitoring system.              7    having it come to the public policy arena in
 8     This is happening jointly with the Ontario              8    the guise of an insurance income problem, we
 9     regulator and the Quebec regulator and this             9    can have a conversation at a different stage
10     will see companies filing on a regular basis           10    in the game about availability, about
11     the type and nature of complaints that they            11    affordability and the early warning signs that
12     receive, as an input to supervisors to help            12    one of these things is about to go off the
13     them with their surveillance and stewardship           13    rails. Don mentioned populations in the
14     role. The idea being, again, that sometimes            14    Facility Association can sometimes be a clue
15     you can catch things in an early warning               15    that things are going awry in the marketplace.
16     basis. This means reporting time. It means             16        This is a contribution on the part of
17     administrative costs to companies. But it’s a          17    insurers because there will be data
18     feature of a new regulatory model that our             18    requirements to populate and make all this
19     members are telling us they believe will do a          19    happen. There’ll be internal forms to fill
20     better job at helping us curtail some of the           20    out and data to send in and that sort of
21     crisis and reform cycle.                               21    thing, and all of this would help--you know,
22        The third thing is, if it’s loosely been            22    would help a new regulatory system work.
23     three, the balance score card. We maybe                23        So in sum, loss reduction and new
24     mentioned that last time we were here. We’re           24    regulatory methods, I’m hoping, I’m not sure
25     working with the Ontario Government and more           25    if that’s what you were looking for, would be
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 1        two important ways the industry would                1         cycle of consumer complaints. Elected
 2        contribute.                                          2         officials got interested. There were
 3   (11:30 A.M.)                                              3         proposals coming out. There was some product
 4     Q. I think I heard most of that at the Benchmark        4         change which takes us full circle over to the
 5        hearing, and I’ll perhaps come back to it, and       5         other side of the chart and you know, it’s a
 6        I’ll get to where I’m leading later on. In           6         fairly apt description that it leaves
 7        terms of the cycle of crisis and reform that         7         loopholes. That we don’t feel that a twenty-
 8        you have here, where are we now in your              8         five hundred dollar deductible is going to be
 9        estimation in that cycle?                            9         in any way effective in controlling costs and
10 MS. VOLL:                                                     10      while costs have not begun to rise, one could
11     A.   In a hearing.                                        11      see over the next couple of years, if the last
12 MR. FORGERON:                                                 12      twenty are any guide, that cost pressures will
13     A.   Yeah, I mean, it depends on whose -                  13      rise because we’ve done nothing to control
14     Q.   Pardon? I didn’t see the point.                      14      them. So I guess if we had to pick a spot, we
15 MR. FORGERON:                                                 15      would be over on the left-hand side of this
16     A.   It was for my benefit. It depends on one’s           16      chart.
17          perspective, I guess, as to where on this            17   Q. Is this--you mentioned about a five-year
18          cycle you would put us.                              18      cycle. Would you view this cycle as lasting
19 MS. VOLL:                                                     19      five, seven years? What’s your -
20     A.   Well, prices are about to come down.                 20 MS. VOLL:
21 MR. FORGERON:                                                 21   A. On average, it’s five to seven year cycle,
22     A.   Yeah. The top right-hand corner, which is            22      yeah.
23          hard market premium increases, we saw from           23   Q. Would you--I guess I’ll get into some of the
24          other charts in 2002, 2001, ’02 and ’03, there       24      information that would have been released last
25          were premium increases, and that began the           25      week or on the weekend, I would think, in
                                                       Page 75                                                          Page 76
 1          terms of profitability. One of your vice-             1        where you would see this for the industry?
 2          presidents, I think of Federal Affairs, the           2 MS. VOLL:
 3          name escapes me, I think it was in the Globe          3   A. This would be the second year of two years of
 4          and Mail on Saturday, assured--I think he             4      recovery on a national level. Earnings were
 5          referred to I can say the policy holders,             5      declining, declining and declining. In 2003,
 6          government and shareholders that the industry         6      they rose for the first time in five years,
 7          is strong. So would you concur with that at           7      and in 2004, they rose again for the second
 8          this point in time?                                   8      time. This would put us at the peak of an
 9 MR. FORGERON:                                                  9      earnings cycle and, you know, if history
10     A.   Absolutely. I mean, and I think part of those        10      repeats itself, we’d be about to enter a phase
11          comments are borne from the number of                11      of deteriorating earnings for a five-year
12          companies that the Federal regulator had on          12      period.
13          his watch list just a couple of years ago.           13   Q. Yes, and I’ll come back to the--sorry.
14 MS. VOLL:                                                     14 MR. FORGERON:
15     A. Well, not even a couple of years. As of                15   A.   No, just, you know, to take that five to
16        October 2004, the Federal regulator, in his            16        seven-year cycle and try and predict--I’m not
17        annual report, had 46 companies on the                 17        suggesting that’s where we’re going, but to
18        solvency watch list and 41 in various degrees          18        try and predict, you know, when prices will
19        of staged regulatory intervention for solvency         19        rise or when costs will rise in Newfoundland
20        purposes. That’s just last--that’s 2004, just          20        is difficult to say the least. I mean, there
21        last year.                                             21        are so many unknowns out there in terms of
22     Q. So your comment was on the seven-year cycle,           22        things that affect our costs over which we
23        there’s generally five years of downturn, two          23        have little control. It’s difficult to say
24        years you see this emerging as the two good            24        how long we stay in each of these phases.
25        years over the next couple of years? Is that           25 MS. VOLL:
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 1   A. Well, we did include in the report, and I            1        part of the question is really in conducting
 2      think it’s important to highlight, that the          2        that, what point of reference or what
 3      figures released on Friday and discussed in          3        questions might have been there in asking
 4      the papers on the weekend were totals for the        4        questions pertaining to pain and suffering
 5      206 insurance companies operating in the             5        about focus on people’s rights and that sort
 6      Canadian marketplace in all jurisdictions, in        6        of thing? It’s an easy answer to say, I
 7      all lines of business, and in the report, we         7        guess, well, I would like reduced rates and
 8      note that the national insurance cycle for all       8        consequently in relation to reducing pain and
 9      lines of business is different from the cycle        9        suffering claims, but certainly, as I think we
10      for Newfoundland auto, and we point that out        10        saw last week, and as I think you mentioned
11      in terms of the number of cycles over the same      11        again in your report, that there’s a
12      period of time.                                     12        considerable consumer education aspect
13   Q. I’ll get there in a moment. On page three,          13        associated with the foregoing of rights, and I
14      you essentially refer to some consumer              14        suppose while it’s one perspective to place on
15      research, and I believe you, as well, put it        15        the consumer research, it would have to be
16      up on the screen with regard to research that       16        done in a context in my view. So I’d like you
17      you’ve conducted, that consumers would require      17        to comment on that as well.
18      relatively stable and predictable pricing. I        18 MR. FORGERON:
19      think there was another study that you              19   A.   The polling, which I obviously don’t have with
20      referred to in one of the Atlantic Provinces,       20        me, but I think I recall the context. It was
21      is too much paid out for pain and suffering         21        in the midst of a similar debate as to what is
22      and too little on medical rehab and auto            22        currently underway here. I can’t recall
23      repairs. Can we get a copy of that research?        23        specifically which province it was, but the
24      Is that readily available?                          24        questions were around how you apportion the
25         And the other--and the second, I guess,          25        claims dollar and how consumers wanted that
                                                  Page 79                                                            Page 80
 1      claim dollar spent. And did they want it             1        and as I read some of the information, in any
 2      spent on medical rehabilitation, on                  2        event, it would appear, on an aggregate basis,
 3      compensation for economic loss, on                   3        in any event, that the industry experienced
 4      compensation for physical damage, or on              4        4.2 billion in profits in 2004, which is up, I
 5      compensation for pain and suffering? So we           5        think, from 2.7 billion in 2003, for a 1.5
 6      were trying to gauge where in that scheme do         6        billion dollar increase, and looks like about
 7      consumer priorities come down, and it’s in           7        a 56 percent or so increase.
 8      that context that those questions were asked.        8           The return on equity, as you mentioned,
 9         We can attempt to -                               9        Ms. Voll, I think, and it may be different for
10   Q. Is it possible to get a copy of that, please?       10        Newfoundland, but across the 206 companies was
11 MR. FORGERON:                                            11        20.6. My first question, does that include
12   A. Yeah, I’ll have to find--to see if it’s             12        the operating results of the Facility
13      something that had been made public and -           13        Association?
14   Q. Which Atlantic Province did you conduct that        14 MS. VOLL:
15      research in?                                        15   A.   Yes.
16 MR. FORGERON:                                            16   Q.   It does, does it? What portion of that would
17   A. I’m guessing it’s either Nova Scotia or New         17        be attributable to automobile insurance? Do
18      Brunswick, but again, we’d have to confirm it       18        you have any idea on an aggregate basis?
19      for you.                                            19 MS. VOLL:
20   Q. I guess get into the issue of profitability.        20   A. I don’t have any breakdown by lines of
21      I figured I was going there at some point in        21      business. You could do a back of the envelope
22      time. Any comments that are contained in your       22      based on what share of the total business is
23      presentation are likely eclipsed by the press       23      auto, you know.
24      releases actually that would have come out on       24   Q. Would it be possible to get, as an
25      the weekend showing industry profits for 2004       25      undertaking, it broken out by line of
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 1        insurance for this province? Which would look            1        province?
 2        at auto, general liability, property insurance           2 MS. VOLL:
 3        for residential and commercial and marine?               3   A.   No.
 4        And also by year over the past ten years?                4   Q.   No?
 5        Would that be possible as an undertaking?                5 MS. VOLL:
 6 MS. VOLL:                                                       6   A.   No, this was done by a special survey of
 7   A.   No.                                                      7        members of the Insurance Bureau asking for
 8 MR. FORGERON:                                                   8        their preliminary aggregate figures, and based
 9   A.   No.                                                      9        on that, we came up with a preliminary
10 MS. VOLL:                                                      10        aggregate figure for the industry as a whole.
11   A.   I only have a national aggregate estimate. I            11 MR. FORGERON:
12        don’t have any breakdown by province and I              12   A. Companies generally don’t supply us with
13        don’t have any breakdown by line of business            13      profit and loss data, either by line or by
14        at this time. I thought that there was a                14      province. I believe that was in a request by
15        study on the profitability of those lines of            15      one of the parties here and that was our
16        business done last year.                                16      response. Then they’ve historically not
17 MR. FORGERON:                                                  17      provided -
18   A. Mercer has provided a study here that looked              18   Q. The request by one of the parties here was
19      at profitability for non-auto lines of                    19      really with regard to individual companies.
20      business and I think it was--I think we                   20      I’m talking about aggregate data for the
21      referenced it.                                            21      province.
22   Q. How do you aggregate your 4.2 million--how do             22 MR. FORGERON:
23      you aggregate your 4.2 billion in profits?                23   A.   No, there was a request to us, an information
24      How do you report on that? How do you indeed              24        request to us for aggregate -
25      get those reports? Would it not be by                     25 MR. JOHNSON:

                                                      Page 83                                                         Page 84
 1   Q.   I made one, Mr. Chair.                                   1      has been done in the past. IBC has done that
 2 MR. FORGERON:                                                   2      in the past. So you can--those are two pieces
 3   A.   Yes.                                                     3      of data that are out there now.
 4 CHAIRMAN:                                                       4   Q. In terms of the Mercer report, would have been
 5   Q.   Oh, did you? I see. I’m sorry.                           5      completed, I think, a year and a half ago and
 6 MR. FORGERON:                                                   6      these profits certainly wouldn’t have been
 7   A.   By line, by province and again, we simply                7      reflected at that point in time.
 8        don’t have that information. This was, as                8 MR. FORGERON:
 9        Jane says, a special call and the data came in           9   A. True, yes.
10        in aggregate national form, and so we simply            10   Q. I guess just looking at--and this is probably
11        don’t have, you know, that kind of a                    11      more of a commentary and to take you where I
12        provincial breakdown, but the Mercer study did          12      was perhaps previously going before. I think
13        look at non-auto lines of business and                  13      it’s fair to say that insurance, the industry
14        provided their opinion, in Newfoundland and             14      is a complex business to some degree, as seen
15        Labrador, that with the exception of                    15      last week with regard to the actuarial
16        homeowners insurance for a one or two year              16      presentations, and I want to try and just
17        period, that all other lines produced "less             17      simplify, for the moment at least, some of the
18        than reasonable profit levels" according to             18      issues that at least come to mind on this
19        their definition of what a reasonable profit            19      whole sort of area of profitability.
20        level would be. So that’s the Mercer study              20         And it seems to me that the revenues
21        for non-auto lines.                                     21      attributable to the insurance industry are
22           An actuary could easily perform an                   22      attributable to two things. One is certainly
23        analysis on IBC’s green book data, for                  23      the premiums. The other, it would appear,
24        example, to produce some estimates on how               24      would be the return on the investment of the
25        profitable or not is the auto line, and that            25      fairly significant investment portfolio that
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 1     the industry would have in relation to unpaid             1    claims, and you could comment on that as well.
 2     claims. On the expense side, it would appear              2       In looking then, forgetting the revenue
 3     that there’s two areas. Again, this is fairly             3    side of things for a while, if you look at the
 4     simplified, but claims costs and other                    4    expense, and I referred to that as sort of
 5     expenses attributable to administration and               5    claims and other, I guess, and Ms. Voll, I
 6     commissions and things of that nature and                 6    think you said it quite aptly this morning,
 7     certainly the revenues less the expenses would            7    what happens to claims happens to premiums. I
 8     yield the profits to a degree. Again, fairly              8    think that was your comment, as I recall. And
 9     simplistic.                                               9    there is another reference in the report that
10        And looking at the revenues and holding               10    there’s only one way that will stabilize the
11     the issue of premiums aside for the moment, so           11    price of automobile insurance and there must
12     the other element of that would be the return            12    be control over the primary cost driver, which
13     on investment. Again, I was looking at one of            13    is the claims costs.
14     the items this week in the paper where, I                14       So just focusing for the moment on there
15     think one company reported, you know, about 97           15    appears to be a trend that’s developing and
16     of 132 million to be derived from about a                16    commented on as well, again, the question of
17     fifteen percent investment in terms of the               17    fewer claims, and I think, again, I read some
18     portfolio in the stock market. Admittedly,               18    suggestion of higher gas prices as being one
19     that’s only one company. And it seems to me,             19    issue. Better weather causing fewer
20     and I’ll get into this in a moment, that with            20    accidents. There’s a big question that seems
21     a view to the lower claims that to some degree           21    to be arising whether fewer claims are now
22     have been commented on as well, that there               22    systemic in the system given that people pay
23     would be an increasing investment portfolio              23    their own small repairs, essentially. There’s
24     relating to the size of that pot, if you will,           24    been suggestions that there may be a
25     that may or may not be derived from lower                25    substantive or dramatic impact in terms of the
                                                     Page 87                                                         Page 88
 1     people with 1500, 2000 dollar claims actually             1    there was also comments to the effect that
 2     going and undertaking their own repairs. I                2    there’s an uncertainty within the industry
 3     had some personal appreciation for that. My               3    itself as to whether this is a trend that
 4     son, who’s 25 now, I think when he was 18 went            4    would remain for a longer period of time. So,
 5     out and backed up his mother’s car into mine.             5    that’s one thing that’s impacting, I guess,
 6     Both of them totalled, I think, about $2000.              6    reduced claims. The other thing that could
 7     I looked at his age and I decided it was just             7    impact reduced claims is as we’re talking
 8     as well to bite the bullet on that and really             8    about here, is government reforms and what
 9     pay for it myself. And thankfully, since then             9    impact that would have depending on what’s
10     he hasn’t had any further incidents. And I               10    implemented over the next little while,
11     read somewhere again, to some degree it’s                11    particularly in this province, and as you’ve
12     anecdotal, but it did come out in press                  12    seen in other jurisdictions already perhaps to
13     releases on the weekend that 10 to 30 percent,           13    a greater degree. The government has also
14     there’s a, I guess in terms of repair shops              14    released a discussion paper just recently, I
15     and that report sort of an increase from 10              15    think, on other initiatives that could be in
16     percent a few years ago to 30 percent of the             16    addition to caps and deductibles that could be
17     people will pay for their own repairs.                   17    implemented. So, looking forward, I guess, on
18     There’s a trend that’s developing there. And             18    the claim side of things there seems to me to
19     that would seem to me to support, to some                19    be the impact of government reforms and some
20     degree, the systemic issue that may be there             20    of these other things questionable whether
21     around people paying for their own repairs               21    they’re systemic or not. The comment that I
22     that heretofore wasn’t there before. So, it              22    read, as well, is that of the 4.2 billion, 1.4
23     would seem that on the property side of the              23    billion will be, or one third of the profits
24     claims that indeed, there may be fewer claims            24    would be passed on through lower premiums in
25     in future for that reason. I think there’s,              25    2005 to consumers. And I guess the question I
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 1        would have on that is what impact would that              1        industry’s aggregate results for 2004 and the
 2        actually have on rates? I mean, it’s                      2        factors to the extent that they’ve been
 3        expressed as a percentage of profit there.                3        discussed pertains to last year and what had
 4        How do you--what do you see is the impact? I              4        happened last year, whereas as apart from a
 5        really don’t know what that might have on                 5        discussion of what is going to happen in 2005.
 6        rates, per se. So I guess it’s a fairly long              6        So, I would just like to suggest we try to be
 7        lead in, but it does relate back to my initial            7        clear about what happened before and what is
 8        question in the beginning and what does the               8        going to happen in the future. And two, to
 9        industry, I guess, see happening over the next            9        draw the distinction between an aggregate
10        little while in relation to some of these                10        national trend to specific trend for
11        points that I made, ie, it would appear there            11        Newfoundland auto. And three, the trend
12        may be some impact in relation to lower                  12        evident in one particular company’s result
13        claims. Certainly from the revenue                       13        versus the industry as a whole. And if we try
14        perspective it would appear at this point in             14        to put those three different lenses on it,
15        time that there’s a significant and a healthy            15        hopefully we can get to, hopefully we can get
16        return on investment. And I’ll stop there.               16        to some more clarity.
17 MS. VOLL:                                                       17           If I could start with the most, last
18   A. I’d like to discuss this together with Don, if             18        point you made, 1.4 billion in premium
19      you don’t mind, if we just go back and forth               19        reductions, where does that come from. I know
20      and try to -                                               20        Don can elaborate on this, but this is the
21   Q. Sure.                                                      21        tally for Newfoundland it was 15 percent
22 MS. VOLL:                                                       22        reduction announced last year that would roll
23   A.   - cover off all the points that you’ve raised.           23        forward to consumers in this province
24        A couple of perspectives I would like to                 24        throughout 2005, as the policies they have are
25        bring, though. One, the discussion about the             25        in force throughout this year. Probably more
                                                      Page 91                                                          Page 92
 1      premium reduction would be forthcoming if the               1      potentially some savings there, some cost
 2      freeze is lifted, but we don’t know that yet,               2      reductions. And so, the 1.4 doesn’t account
 3      so it would be even greater. What this is is                3      for any of those things. I won’t bother
 4      the sum of premium reductions that we know for              4      calling you now to say that we’re still
 5      sure have already been approved, applied for,               5      anxiously awaiting the benchmark. So that’s
 6      announced and are in the system.                            6      from this day looking back, it doesn’t account
 7   Q. So the 1.4 million relates--billion, excuse                 7      for anything else that may or may not occur
 8      me, relates primarily to reforms, is that                   8      going forward.
 9      correct?                                                    9   Q. So, the 1.4 relates primarily to automobile
10 MR. FORGERON:                                                   10      insurance, is that -
11   A.   In large part they are in response to reforms            11 MS. VOLL:
12        in the Atlantic Provinces, Ontario and Alberta           12   A. That’s entirely auto insurance.
13        and reductions by insurers in response to                13   Q. It’s entirely automobile, okay.
14        those reforms. So, it’s 1.4, as Jane said,               14 MS. VOLL:
15        already announced, approved and in the system.           15   A. Entirely. So it’s an understatement of
16        It doesn’t account, for example, for the                 16      overall, but it’s the easiest one to quantify,
17        reductions announced last week or filed                  17      the price pre reform and then the formal price
18        reductions announced in Nova Scotia by the               18      reductions filed for, approved, etcetera, post
19        largest auto insurer there of five and a half            19      reform, all amount to 1.4 billion back to
20        points and same insurer, 7 point reduction in            20      drivers as a result.
21        New Brunswick. It doesn’t provide--and I see             21         Two, you were asking for some perspective
22        Dwanda is in the room, so this will save me a            22      on claims and the role of claims frequency?
23        phone call. We’re eagerly awaiting the new               23   Q. Separate, I guess, from the reforms, the
24        benchmark here because we think that the                 24      reform impact.
25        preliminary indication is that there were                25 MS. VOLL:
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 1   A.   Yes.                                                   1   A.      I don’t have -
 2   Q.   What I read, in any event, there would, you            2 MR. FORGERON:
 3        know, appear to be some support for fewer              3   A.      The accident systemic or -
 4        claims for the reasons I described and where           4   Q.      No. The lower claim frequency.
 5        do you see that going and is it likely to have         5 MS. VOLL:
 6        a systemic impact because, as I refer to your          6   A.   So part, some of it appears to be a trend.
 7        comments specifically, I think as claims go,           7        And there might be some at the margin that is
 8        so goes costs, essentially, in the industry.           8        a one-year effect. I don’t have it with me,
 9 MS. VOLL:                                                     9        but I did do some analysis of the longer term
10   A. Yeah. A couple of points on this. Some of               10        trend in our newsletter Perspective, it’s on
11      the--first of all, claim frequency was down in          11        our website. And I can make sure that you get
12      2004, but there’s a ten year or more trend              12        a copy of that just taking a look at what some
13      going on in terms of frequency per 100                  13        of the factors are and the impact that that
14      vehicles. So it’s not a one year effect, and            14        would have on combined ratios and so on. Some
15      it’s not a--at the margin there was a marginal          15        of the claim frequency is due to reform. In
16      increase from ’03, to ’04, but it’s something           16        Ontario there were reforms made to the role
17      that’s been going on for some time, not just            17        that paralegals were playing in the system.
18      in Canada, but all around the world. And I              18        And part of the decline in the frequency of
19      don’t have it -                                         19        relatively small claims, those are the ones
20   Q. My son ran into his mother’s car seven years            20        that have dropped of the system, relatively
21      ago.                                                    21        smaller claims. The government is attributing
22 MS. VOLL:                                                    22        that to their deliberate effort to try to
23   A. So there you go. So, you know -                         23        change the incentives that were in the system
24   Q. I’m wondering if that’s systemic?                       24        for filing and cash settlement around smaller
25 MS. VOLL:                                                    25        claims. So, part of what we’ve seen in
                                                      Page 95                                                           Page 96
 1      Ontario auto in particular was due to a reform           1        deductible under your comprehensive was quite
 2      and was due to the government’s deliberate               2        common, I don’t know, say, 10, 12 years ago,
 3      effort to try to curtail some incentives that            3        it’s very uncommon today and consumers have
 4      were inappropriate that were in the system.              4        increased their deductibles. And some people
 5   Q. So apart from the reform, like I say, these              5        carry $1000 deductibles on collision, whereas
 6      other impacts that you would have on lower               6        years ago that would have been unheard of. I
 7      claim frequency, would that provide an                   7        think this is the same thing, just done
 8      opportunity for reduced premiums in the longer           8        unofficially, that consumers impose their self
 9      term?                                                    9        imposed deductibles, that they say if the
10 MR. FORGERON:                                                10        claim is less than this amount, depending on
11   A.   I share your experience, having just gone             11        my own circumstances, then I’m not going to
12        through it last fall with my daughter, a              12        file a claim, and preferring to, if they need
13        parking lot accident and the same kind of             13        to use their policy, it would be to respond to
14        decision making process that saw me pay the           14        a much larger, larger event. So, I think it’s
15        claim. And I think there’s no question that           15        a continuation of that trend that we’ve seen
16        we are seeing more Canadians do that.                 16        that consumers take on more and more of the
17 MS. VOLL:                                                    17        risk. Now they’re doing it perhaps a little
18   A.   Yeah. People are thinking more.                       18        bit more unofficially, if I could describe it
19 MR. FORGERON:                                                19        that way, than through official policy
20   A.   Is it a sustainable trend, are we going to see        20        deductibles and so on. The big question for
21        it at this level? We don’t know. We don’t             21        us and for those in the industry, and there
22        have a crystal ball. But, what I can say is           22        are many people in the industry who would
23        that it is very similar to a trend that we’ve         23        argue that they don’t expect it to continue,
24        seen in the industry over the last 10 or 15           24        that as the cycle changes, as we see price
25        years of increasing deductibles, whereas a $50        25        reductions, as we see stability, as we see
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 1        competition increase in the industry, that                  1 MR. FORGERON:
 2        there will be a return to where we were, you                2   A. Yes.
 3        know, pick the time frame and pick the                      3   Q. - or demonstrative reduction in premiums.
 4        province, but, say, ten years ago in                        4 MS. VOLL:
 5        Newfoundland where people, you know, were                   5   A.   Yeah. The overall claims dollars for the
 6        putting in those kinds of claims. Today they                6        country as a whole went up, you know,
 7        might be thinking twice before doing that.                  7        according to my preliminary estimate anyway,
 8        So, there are people out there who think that               8        from 2003 to 2004. So frequency not
 9        that, you know, we will return to that. There               9        withstanding, reforms notwithstanding, still
10        are others who say, no, that, you know, there              10        more claim--more dollars were spent on claims
11        has been a profound change with respect to our             11        in 2004 than in 2003. But to be sure, if
12        industry now because of perhaps the level of               12        frequency and reforms and the whole collection
13        the debate and the intensity of the debate                 13        of things that affect claim cost, fraud,
14        that Canadians have changed, that they have                14        theft, everything, if they produce a decline
15        changed their practices. So, you could argue               15        in claims cost, then companies will compete to
16        the case both ways. And -                                  16        lower prices and change product features and
17     Q. Seems to me you commented on the fact earlier,             17        whatever else to usher those forward to
18        I think, so goes the risks, so goes the costs,             18        consumers that’s happened time and again. And
19        something around that. If consumers are, it                19        the individual companies that have already
20        would seem to me, if consumers are accepting               20        released and publicly discussed their earnings
21        more of that risk and that’s a, you know, a                21        and outlook for 2005 have committed to do
22        longer, we’re talking about long-term price                22        this.
23        stability here, that indeed that would                     23 CHAIRMAN:
24        translate over a period of time,                           24   Q.   I guess the signal again, I was reading it on
25        notwithstanding reforms into some measurable -             25        the weekend, the signal that seems to be
                                                           Page 99                                                         Page 100
 1          coming out this despite what appears to be                1      one part of the country in particular product
 2          from your own comments, fairly strong industry            2      lines, companies still look at their pricing,
 3          now that there is a feeling--again, I think               3      as you well know, on an individual product
 4          I’m quoting from somebody from the IBC here--             4      line basis and get down to even finer detail
 5          that you do not believe that the premium                  5      than that within the province. And that’s
 6          decreases, I guess, or relief is the reference            6      what justifies the premiums. So, if we see
 7          that’s here of the past year sustainable. Is              7      trends and I believe, I haven’t seen the ’04
 8          that a fair statement?                                    8      data, but I believe there are indications that
 9 MS. VOLL:                                                          9      claims cost in Newfoundland in ’04 actually
10     A.   I’m not really sure what that means.                     10      rose for auto insurance. That has to get
11 MR. FORGERON:                                                     11      reflected in the overall mix. Now, companies
12     A. No, I’m not sure what the context that was                 12      don’t look at just one year in isolation and
13        provided. I mean, I think the short answer to              13      make their decision based on that. And again,
14        that is where claims cost shows a reduction,               14      that’s something the Board probably knows far
15        you know, we go back to what we mentioned                  15      better than I do, in terms of how rates are
16        earlier, that premiums will trend with claims              16      set.
17        cost. So, if in Newfoundland and Labrador for              17   Q. I’m just trying to--I’ve having a difficult
18        automobile insurance in 2005 there is a                    18      time in reconciling what, you know, what
19        reduction in claims to insurers.                           19      appears to be, at least some trending and
20   (12:05 P.M.)                                                    20      ultimately what impact that has on rates.
21           One would expect the competition would                  21      Again, we’re talking about longer term
22        reflect that in lower prices. The important                22      stability here and what might happen in the
23        thing is, is that companies price their                    23      industry. And to be perfectly blunt with you,
24        product by province and by line. So, while                 24      I guess the time during the recent benchmark
25        there may be very strong positive earnings in              25      review, your actuary would have been proposing
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 1        a 21 1/2 percent increase at a time when the             1        I, perhaps, would suggest that maybe we
 2        industry appears to be fairly strong and                 2        shouldn’t try to reconcile them that must and
 3        fairly stable. And, you know, notwithstanding            3        focus on them individually, but also on the
 4        the return on investment that’s been incurred,           4        earnings piece and I think Jane mentioned this
 5        3.75 percent or however high, so forgive me,             5        earlier, some context is required that one
 6        but I’m having a little bit of difficulty in             6        can’t take one year and say that’s a trend.
 7        trying to understand what’s happening here.              7        One only has to go back two year to when this
 8 MR. FORGERON:                                                   8        industry experienced historic low ROIs for two
 9   A. But I think if you look at Mr. Miller’s report             9        consecutive years. So, I think we need some
10      before the Board back in November, based on -             10        context on the earnings piece and on the rate
11   Q. I have, many times.                                       11        setting piece in this province. You know,
12   A. - his actuarial projections and those factors             12        that’s before the Board and the Board will
13      that he altered from the Mercer report, that              13        decide whether or not Mr. Miller’s assumptions
14      was his projection on a go forward basis in               14        were right, wrong or somewhere in between.
15      terms of what’s required in the marketplace               15 MS. VOLL:
16      here in Newfoundland. The earnings                        16   A.   I think the most important in each market
17      announcement of last week has nothing to do               17        place is to have the premiums in that market
18      with that. The rates that are charged in                  18        reflect the claims cost in that market. And
19      Newfoundland have everything to do with the               19        the sum of those from, you know, market to
20      actuarial reports that were and are before                20        market, province to province, they all add up
21      this Board and whether or not those                       21        to, you know, a big aggregate number that’s
22      assumptions are realistic and whether or not              22        blending everything, but actuarially, each one
23      the projections are realistic and that will               23        has to be treated separately in that the cost
24      drive what premiums are--I know it’s hard when            24        trends for auto insurance and this product
25      you have those two pieces to reconcile them.              25        have to be matched by premium trends for auto
                                                     Page 103                                                        Page 104
 1      insurance in this province. And they’re                    1 MR. FORGERON:
 2      looked that way for each product, each line of             2   A. We did two studies, Mr. Chair, one in New
 3      business. So, as Don said, I would think                   3      Brunswick and one in Nova Scotia and we can
 4      everything in the actuary’s analysis from last             4      make those available to you in terms of our
 5      fall is as true and relevant today as it was               5      assessment of what the impact would be. In
 6      the day it was tabled per the trends and                   6      Nova Scotia, the Board imposed a 10 percent
 7      issues in respect of Newfoundland auto                     7      cap on premium dislocation for the first
 8      insurance.                                                 8      filing period which was November 2004. Most
 9         As to the industry ROI, again the figures               9      companies had a self imposed cap because
10      that would have been used last fall as well               10      they’re really disadvantaging their own
11      that--if one company reported a 15 percent,               11      customers. But the Board, over and above
12      that certainly wouldn’t be an industry wide               12      that, imposed a 10 percent cap and it’s
13      figure and again, shouldn’t change any of the             13      unclear as to whether or not now, that cap
14      reports that were tabled last year. So, I                 14      comes off for the next filing cycle or how the
15      wouldn’t put too much weight on that number               15      Board is going to deal with it.
16      that you came across.                                     16   Q. You can provide us with that information?
17   Q. Well, 3.75, I guess. Anyway, do you have any-             17 MR. FORGERON:
18      just one final question, went well beyond 15              18   A.   Yes, we’ll provide both copies.
19      minutes, do you have any information on the               19   Q.   Thank you very much. I have no further
20      impact of the elimination of age, gender and              20        questions. Thank you for your presentation
21      marital status in any of the other Atlantic               21        here this morning. The schedule, I guess,
22      provinces at this point in time. I guess                  22        calls for Mr. Jack Harris and--if I can find
23      there has been a couple of cycles, 2003, I’m              23        my schedule--that is set for 2:00. That will
24      wondering if there’s any information that you             24        give us a little bit of time for lunch. Mr.
25      could provide us on that.                                 25        Harris is expecting about a 45 minutes
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 1        presentation. I believe that a hearing of the           1      and I see around the room very capable and
 2        motion is set for somewhere around 3:00, so             2      competent counsel on various sides of this
 3        that should provide the opportunity for that            3      issue, which I’m sure will regale you with
 4        to begin on time. Thank you very much.                  4      facts, figures and arguments about the various
 5         (BREAK FOR LUNCH - 12:15 P.M.)                         5      issues that are specific to this commission
 6            (RESUME - 2:07 P.M.)                                6      and spelled out in its Terms of Reference.
 7 CHAIRMAN:                                                      7   Q. Excuse me, Mr. Harris, if I just may
 8   Q.   Thank you, and good afternoon everybody.                8      interrupt. Did you distribute something here?
 9        We’ll continue on with our presentations this           9   A. No.
10        afternoon, and we have one scheduled. Good             10   Q. No? Oh, okay. Fine. I didn’t have anything
11        afternoon, Mr. Harris. How are you?                    11      and I thought you may have. Okay.
12 MR. JACK HARRIS:                                              12   A. No, I have a few items that I’ll provide
13   A. Good afternoon, Mr. Chairman.                            13      copies of, but I don’t have a written--
14   Q. I’ll give you--Mr. Harris is the MHA for                 14      prepared, written presentation.
15      Signal Hill-Quidi Vidi and leader of the New             15   Q. Sorry for the interruption, sir. Proceed.
16      Democratic Party. I’m sure I didn’t have to              16   A. But I understand from previous appearances
17      tell anybody in the room that. So when you’re            17      before the Public Utilities Commission that
18      ready, Mr. Harris, you may begin. You can                18      they have perhaps the most effective and
19      take your time, sir. There’s no rush.                    19      efficient transcribing system that I’ve ever
20   A. Okay. Thank you very much, and I appreciate              20      seen and that by 9:00 the next morning, you’ll
21      the opportunity to speak to this Commission.             21      have every word that I say typed up and double
22      I’m going to direct my comments towards an               22      spaced and ready to be criticized by anybody
23      issue that I am particularly interested in. I            23      who wants to criticize it.
24      know the Board has to consider a lot of                  24   Q. If not this evening, sir.
25      matters contained in its Terms of Reference              25   A. So that being said, I do appreciate the

                                                      Page 107                                                      Page 108
 1        opportunity to speak to this Commission and I           1     assured back in the spring was going to be
 2        want to raise something that’s mentioned in             2     studied by the Public Utilities Board and
 3        the Terms of Reference, but I really don’t              3     there was no need for a special committee of
 4        think is designed to be a major focus of your           4     the House to look at this because you can make
 5        work. And I say that for a couple of reasons.           5     your representations to the Public Utilities
 6        The Terms of Reference, as you’re well aware,           6     Board.
 7        detailed the issues that are to be reviewed             7        Well, I’m here to make some
 8        under automobile insurance, homeowners                  8     representations, but I really don’t believe
 9        insurance, commercial insurance and marine              9     that your mandate is to actually study public
10        insurance and I’m sure the Board will do a             10     automobile insurance. If that were the case,
11        thorough and complete study of these and make          11     I think we would have seen more emphasis on
12        recommendations to Government or at least              12     that in the presentation made by the
13        report on these matters to Government.                 13     actuaries. In fact, I was quite surprised
14           When the initial Terms of Reference were            14     that they even made any reference to it at
15        put forth for consideration, there were three          15     all. I do note that the February 1st document
16        words missing, and they were the three words           16     published by the actuaries, under "other
17        that appear at the bottom of the first                 17     issues," does have several pages, three or
18        paragraph, and that the Terms of Reference             18     four, on public automobile insurance and I
19        would have read without that, the last part            19     believe what is a rather superficial view of
20        would have been "in addition, shall detail             20     the notion, and I’ll detail my concerns about
21        other issues of concern raised by stakeholders         21     that shortly.
22        participating in the review." The three words          22        But I think when I spoke to officials in
23        "including public insurance" were added after          23     Government about the involvement of the
24        I complained that the Public Utilities Board           24     Commission in public auto insurance, basically
25        was not going to study what we had been                25     I was told that the Commission would report on
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 1        what it heard from people and wasn’t actually             1    have for consumers, for accident victims and
 2        studying public automobile insurance. And I               2    for the public in general. And what I want to
 3        think that that perhaps is the case.                      3    do is make, in a sense, the case for public
 4           But I do want to take this opportunity to              4    auto, in part because I think the case is
 5        talk about automobile insurance, public                   5    compelling, but also because I believe that
 6        automobile insurance in particular, and                   6    there are a lot of opinions out there that
 7        because it has been a matter of some debate,              7    tend to get to be given credence because of,
 8        both in this province and in other provinces,             8    in some cases, the source or because of some
 9        particularly in the Atlantic Provinces over               9    things, what they say, but also to respond to
10        the last couple of years, and certain                    10    some of those, to make the case for public
11        organizations with particular economic and               11    automobile insurance, and ultimately to ask
12        social agendas, such as the Fraser Institute,            12    you, as a Commission, to indicate that you’ve
13        have taken a big interest in it, and as has              13    heard things about public auto, but to suggest
14        been noted by the actuaries, and of course,              14    that because of the public policy implications
15        the Insurance Bureau of Canada has a                     15    that this is not something that this Board
16        particular interest in it, in defeating any              16    was--based on this mandate and based on the
17        attempts to introduce public automobile in               17    material available to it, is able to make a
18        replacement for the private system.                      18    recommendation, but that I would hope that you
19           So I do want to talk about a lot of the               19    would say in the end that this is something
20        issues that seem to come up from time to time            20    that deserves in-depth study from a public
21        in relation to public auto and explain to the            21    policy perspective and that that kind of study
22        Board why I believe that we do have a very               22    is more properly done by either by Government
23        serious interest, as a Province, in closely              23    itself or by--and this is my preference, by an
24        examining the public automobile insurance                24    organization such as a select committee of the
25        system to determine what advantages that would           25    House of Assembly that would hear all views,
                                                        Page 111                                                      Page 112
 1        have access hopefully to expertise, to be able            1    is a safety investment by the public system
 2        to look at the issue from the public policy               2    that you don’t find in the private system.
 3        perspective and not strictly from either an               3    I’ll deal with those first and then deal with
 4        accounting perspective or from an industry                4    the other advantages as I see it.
 5        perspective.                                              5       But first of all, if I may, when I first
 6           Let me say, first of all, that I believe               6    looked at the representations made in the
 7        that public automobile insurance is cheaper.              7    report of March--February 1st by Mercer,
 8        I believe that it’s fairer. I believe that it             8    Oliver, Wyman, I was somewhat surprised that
 9        offers considerable advantages to the public,             9    they dealt with the issue of public automobile
10        in terms of public policy and keeping jobs and           10    insurance. I was even more surprised to see
11        investment in a province such as Newfoundland            11    the cursory way in which the matter was dealt
12        and Labrador, and I believe that it has a                12    with and perhaps it is a superficial
13        distinct advantage to both consumers and to              13    discussion paper, but I would also argue that
14        accident victims.                                        14    it’s very incomplete. For example, the
15   (2:15 P.M.)                                                   15    studies that are referred to, after saying
16           In my view, there are four reasons why                16    there are numerous studies, there were four
17        public automobile insurance is cheaper, and              17    studies or so-called studies referred to, and
18        these are, first of all, lower overhead in a             18    then some reference from a September 2003
19        public system. Secondly, the lack of a profit            19    report by the Auto Insurance Consumer Advocate
20        and that money is available to benefit                   20    of Nova Scotia.
21        claimants or consumers. Thirdly, there are               21       A number of conclusions are quoted here,
22        fewer uninsured drivers and as a result, more            22    and I guess it may just be that they’re
23        people are paying into the system, paying into           23    drawing the Board’s attention to certain
24        their premiums. And fourthly, and this comes             24    debates that exist out there. But for
25        from the British Columbia example, that there            25    example, I see that there’s reference to the
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 1     Consumer Association of Canada study which             1    Impact of Government Auto Insurance in New
 2     concluded that public auto insurance systems           2    Brunswick" and it states the conclusions there
 3     offer the lowest rates for consumers and then          3    as to what would happen if New Brunswick
 4     counter that with a November 2003 report from          4    changed to a government-run automobile
 5     the Fraser Institute which concluded that              5    insurance system that have an estimated ten
 6     B.C., Manitoba, Saskatchewan, the second most          6    percent reduction in premiums, a net loss to
 7     and fifth most expensive provinces in which to         7    the provincial GDP or GNP of 64 million a
 8     ensure an automobile, and they have their own          8    year, net loss of jobs and start up costs of
 9     second report from them.                               9    102 million dollars.
10        The second report here refers to a                 10        What I find surprising about the report
11     Insurance Bureau of Canada article entitled           11    that was put forth by the actuaries was that
12     "The Reality of Government-run Auto                   12    after mentioning that November 28th, 2003
13     Insurance." When you look at that, this is            13    report prepared by the Insurance Bureau of
14     basically a polemic by the Insurance Bureau of        14    Canada, they did not indicate that in April of
15     Canada basically called ten myths of public           15    2004, some six months later, that there was in
16     auto insurance and sets sort of the straw man         16    fact a study done or actually the study was
17     argument, we’ll set these arguments up and            17    probably underway in November, which probably
18     then we’ll defeat them one by one. It hardly          18    prompted IBC to put forth its own paper, but
19     constitutes, in our view, a study but is              19    there was a select committee on public
20     really obviously there for persuasive and             20    automobile insurance set up by the Legislature
21     polemic reasons and not for any real                  21    of New Brunswick which reported in April of
22     understanding.                                        22    2004 and I have a copy for the Board, since
23        Interestingly, the next report is a                23    it’s not in the index, or there’s a copy here
24     November 28th, 2003 report prepared by the            24    I’ll leave with the Board. But the actuaries
25     Insurance Bureau of Canada entitled "Economic         25    didn’t refer to that, and in fact, all of
                                                  Page 115                                                       Page 116
 1     those predictions that the IBC had were                1    in New Brunswick. So that was an interesting
 2     challenged--or not challenged, because they            2    contrast to the predictions of the paper that
 3     didn’t deal with them. I’m sure they were              3    was prepared by the IBC.
 4     aware of them. But they came to their own              4       The second key finding of that report,
 5     conclusions at the end of the day as to what           5    for example, was that the New Brunswick GDP
 6     the impact would be.                                   6    would experience a net loss of 64 million
 7        In fact, this select committee which                7    dollars annually. Well, the findings of the
 8     reported in 2004, and I’m looking directly at          8    select committee in their final report was
 9     the study now which is "The Economic Impact of         9    that there would be, in fact, in the start up
10     Government Auto Insurance in British                  10    year, a net increase of 46 million dollars in
11     Columbia". That would be at Tab or Appendix           11    New Brunswick gross domestic product and in a
12     10 of the February 2nd report. On that, for           12    regular operation year, a net increase of 37
13     example, on page two of the five-page report          13    million to New Brunswick gross domestic
14     of the Insurance Bureau of Canada, they say           14    product, obviously wildly different by about
15     "the key findings of the Economic Impact              15    100 million dollars from the IBC study.
16     Analysis include an estimate that there be a          16       The third finding was that not including
17     net long-term job loss of 830 jobs in the             17    initial start up costs of government
18     province." That was their conclusion. The             18    insurance, which they predicted, by the way,
19     study by the legislative committee of New             19    at 110 million--102 million, the New Brunswick
20     Brunswick, which was an all party committee by        20    committee said it would be about 80. But not
21     the way composed of Conservatives, Liberals           21    including that, the model suggested the
22     and chaired by a New Democrat, but they               22    provincial government would receive lower
23     concluded that, in fact, there would be a net         23    revenue and a worsening of its budget balance
24     gain of 275 jobs as a result of the                   24    by 17 million on average over this period.
25     implementation of public automobile insurance         25    Well, contrary to that, the findings of the
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 1     select committee on automobile insurance in              1    point of view, it’s of interest to government
 2     New Brunswick found that there would be, in              2    that we have an increase in local investment,
 3     the start up year, a net increase of 4.4                 3    that we have an increase in jobs, and that we
 4     million in provincial government revenues and            4    have an increase in government revenues.
 5     in a regular operation year, a net increase of           5       So I feel somewhat--I don’t want to
 6     3.5 million to provincial government revenues.           6    challenge and take on the auguste firm of
 7     And for those federalists amongst you, the net           7    Mercer, Oliver and Wyman. These are
 8     increase of 6.7 million dollars to Federal               8    internationally renowned experts and
 9     Government revenues resulting from increased             9    consultants, but it’s pretty obvious that they
10     economic activity in New Brunswick. So not              10    didn’t set out of do a thorough job here. And
11     only did it benefit the New Brunswick economy           11    the reason I say that is because if one uses
12     and government, but also increased revenues to          12    the popular search engine, Google, and looks
13     the Government of Canada.                               13    for pages in Canada and then search the word
14        Now I guess there are reasons for this               14    "public auto, automobile insurance" the first
15     and I’ll go into some of those later, but they          15    six of the ten--six of the first ten hits, in
16     have to do with the fact that the economic              16    fact, make reference to this report of the New
17     activity that might take place outside of New           17    Brunswick public automobile insurance report.
18     Brunswick in that case, or Newfoundland and             18    So it’s clear that they weren’t setting out to
19     Labrador here, whether in terms of claims               19    do that and only provided a sampling of
20     adjustment, investment management or other              20    opinion about the issue to this Board.
21     activities, those jobs and that investment              21       Now the second thing I should say about
22     would stay in the province and that’s an                22    the so-called studies, and I say so-called
23     obviously important public policy                       23    studies because frankly, and this is
24     consideration. It may not concern consumers             24    admittedly an opinion, but I don’t find the
25     directly, but certainly from a public policy            25    Fraser Institute to be an objective viewer of
                                                   Page 119                                                       Page 120
 1     public policy and a source of information that           1    Comparing Auto Insurance Costs across the
 2     public policy boards and public institutions             2    Country."
 3     such as this one should take too seriously.              3        Well, I prefer to compare apples to
 4     One needs to look at the headline, Fraser                4    apples rather than the kind of comparisons
 5     Alert, obviously alerting the public to                  5    that they make here, and I’ll explain why in a
 6     something, but they’re subheading is the                 6    moment. The one report, the one public
 7     "Fraser Institute Market Solutions to Public             7    report, not--sorry, the one public institution
 8     Policy Problems." So clearly, I mean, they’re            8    report that’s there is one from the Consumer’s
 9     wearing their bias on their sleeves and if one           9    Association of Canada. I don’t think they
10     looks at their analysis of public policy                10    take an ideological bias to this issue. They
11     issues, it seems that they do find ways of              11    commissioned a review of automobile insurance
12     finding statistics or numbers to help them.             12    rates in 40 Canadian cities in 10 provinces
13        In fact, during the period from the fall             13    which was released in September of 2003, and
14     of 2003 to mid 2004, there were three reports           14    they found, as their number one finding, that
15     from the Fraser Institute. The first one, you           15    there was a public auto insurance systems
16     don’t have, it’s not included here, and that            16    offering the lowest rates for consumers in the
17     was one where in September of 2003, "Public             17    country.
18     Auto Insurance: a Mortality Warning for                 18        And the study that they undertook, and
19     Motorists" and they suggest that in those               19    it’s on page two of the study, one of the
20     provinces where there are public auto                   20    appendices here. It says "this Consumers
21     insurance schemes that more people get killed           21    Association of Canada study on auto insurance
22     on the roads, and they offer some statistics            22    rates answer the following question: how much
23     to demonstrate that. Then in November, they             23    would the same driver pay for auto insurance
24     have this one, "200 Bucks More; the Premium             24    if they had the same vehicle, same driving
25     Cost of Public Auto" and "Lemons and Peaches;           25    record and same claims history and lived in
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 1        each of the 40 cities surveyed in the study?"             1    motorcycles, trailers, and ATVs. Such partial
 2        Now that seems to me to be a comparison                   2    comparisons under estimate the amount of the
 3        between apples and apples and they reached the            3    premiums paid and again owing to public
 4        conclusion that they did, based on their                  4    insurance policies by definition understate
 5        commission study.                                         5    the relative cost of basic insurance there."
 6           Now when the Fraser Institute had a go at              6       And then they state their comparisons and
 7        this, they concluded that the four public auto            7    their tables, talking about the average
 8        insurance provinces collectively had the                  8    insurance premium paid in each province, and
 9        highest average premiums in Canada, and part              9    by that comparison, we in Newfoundland and
10        of that study is quoted in the Mercer four-              10    Labrador are doing very well. Because the
11        page discussion.                                         11    average premium in Newfoundland, according to
12   (2:30 P.M.)                                                   12    them, and Labrador, is 661 whereas the average
13           Well, if you look, not to deeply frankly,             13    premium in British Columbia is 1,038. So
14        into this Fraser Alert, and I’m assuming                 14    whereby their analysis, British Columbians pay
15        they’re alerting people to the dangers of                15    $1,038 ranking first. Newfoundland and
16        public auto, but when they talk about this,              16    Labrador is only slightly ahead of PEI, which
17        they say "well, why is it that other people              17    is the lowest in the country. But what’s
18        say that the automobile premiums are cheaper             18    interesting is that they’re talking about the
19        in the public systems?" and their answer is as           19    average premium paid.
20        follows. "Second, insurers sometimes present             20       Now we do know, and I’m sure Mr. Johnson
21        premium estimates using only basic insurance             21    will tell you exactly how many people in
22        for private passenger cars rather than                   22    Newfoundland and Labrador only have the
23        including full coverage of optional or                   23    mandatory premium, and why is that? In most
24        extension insurance, commercial markets,                 24    cases, because that’s all they can afford. So
25        smaller markets like those for trucks,                   25    we can have the lowest average premiums in the
                                                        Page 123                                                      Page 124
 1        country if nobody can afford anything more                1    have market solutions to public policy
 2        than compulsory insurance. I don’t have a                 2    problems, and secondly, they seem to go try to
 3        problem with that, if that’s what they’re                 3    find statistics to support their particular
 4        saying. But that’s not what they’re saying.               4    point of view.
 5        What they’re saying, their conclusion is, and             5       And so I don’t want to be hypercritical
 6        this is quoted verbatim by Mercer, Oliver,                6    of Mercer Oliver Wyman, but I mention some of
 7        Wyman, the insurance consultants, actuaries,              7    these things to say, first of all, that they
 8        although they’re part of an insurance                     8    clearly didn’t look at the field of opinion
 9        enterprise, their quote is that it’s the                  9    about this, they missed a very important
10        highest cost, here we are, 200 bucks more,               10    report on automobile insurance in the Atlantic
11        page 33, the premium cost of public auto,                11    region refutes the predictions of the
12        "Concluded that British Columbia, Manitoba and           12    Insurance Bureau of Canada and they seem to
13        Saskatchewan are the most, second most and               13    give great weight to biased and ideologically
14        fifth most expensive provinces in which to               14    motivated opinions of the Fraser Institute.
15        insure an automobile respectively." And they             15       Our position is that there’s lower
16        say they’re the most expensive places to                 16    overhead for public systems. And that lower
17        insure an automobile because the average is              17    overhead is 15 cents per premium dollar or
18        higher in British Columbia than it is in                 18    less, whereas the overhead for the private
19        Newfoundland and Labrador. Well, maybe the               19    system appears to be in the range of 27 to 30
20        insurance industry is doing better in British            20    cents per premium dollar.
21        Columbia because a lot more people can afford            21       And if I can refer you, and I was trying
22        the optional coverages and other coverage.               22    to get a copy of it, but it’s not yet
23        And I would dismiss, frankly, out of hand, the           23    available. We may get a copy for--and I can
24        Fraser Institute report on the basis that (a),           24    submit it to you afterwards. But, MMC, which
25        it’s they start with the premise that they               25    I understand is Mercer Management Consultants
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 1     is one of the sister companies of Mercer                  1      therefore the amounts are available are lower.
 2     Oliver Wyman as part of the insurance                     2         The Manitoba public insurance system, for
 3     consulting group that they have out of New                3      example, publishes on the website the founding
 4     York, they found that the expense ratio, this             4      principals of the Manitoba system which
 5     is for Nova Scotia now, but it was reported               5      started in the late ’60s, but one of their key
 6     by the Nova Scotia equivalent of the Public               6      recommendations when they set out to create a
 7     Utilities Board, I think they call it the                 7      public automobile insurance system in Manitoba
 8     Utilities and Review Board, they looked at the            8      was to ensure that for every dollar collected
 9     cost of auto insurance administration in Nova             9      in premiums at least 85 cents was returned to
10     Scotia, and the table, an exhibit to a study             10      policy holders in the forms of claim payments
11     done by MMC showed that between 1997 and    2000         11      or benefits. And they say this contrasted
12     the expense ratio, which is the operating                12      with the private sector at the time, which is
13     expensed divided by written premiums for Nova            13      when they made this recommendation, which
14     Scotia private passenger automobile insurance            14      returned about 67 cents of every dollar in
15     varied from ’97 to 2000 as follows. In ’97 it            15      premium. And they say this measure is
16     was 27.8 percent, in ’98, 27.3, in ’99 28.8,             16      generally recognized as the key measure of
17     in 2000, 26.9 percent, so around 27 percent or           17      effectiveness and efficiency for automobile
18     thereabouts. The figures that we see for                 18      insurers because it can be applied without
19     British Columbia run about 15, 16 cents, for             19      having to compensate for differences between
20     Saskatchewan and Manitoba, less than 10                  20      coverage and insurance systems. In other
21     percent. And so, that’s one of the reasons               21      words, it shows how efficient the insurance
22     why the costs, the amounts available for                 22      system is in returning benefits to those who
23     claims and benefits are, in fact, lower for              23      are paying the premiums. And we see, you
24     the public system and therefore the prices--             24      know, that these overhead costs are part of
25     sorry, the amounts available are higher and
                                                     Page 127                                                        Page 128
 1     that, obviously profit is a part of it as                 1      result of joint industry and government
 2     well.                                                     2      efforts to manage insurance claims costs more
 3        And that brings me to my next point,                   3      effectively. I’m not sure what that means,
 4     that the not for profit public systems                    4      whether they’re going to give back some of the
 5     obviously don’t have that element of profit               5      profit next year because they’ve made so much
 6     that has to be extracted from the premium base            6      or whether they hope that the result of
 7     in order to satisfy the shareholders, to                  7      government and industry efforts to manage
 8     satisfy the management types who have                     8      insurance claims costs means that they’re
 9     discovered the pay yourself first rule that we            9      hoping that the claims experience will be even
10     hear about quite often in excessive management           10      better for them next year than this. They say
11     compensation and we don’t have to suffer the             11      that the reasons for the decrease in, sorry,
12     ups and downs of the stock market as being               12      in the increase in profits is related to the
13     reflected in premiums rates.                             13      fewer claims and to, I guess, an increase in
14        We see recently, in fact, the Globe and               14      investment costs as well.
15     Mail was quite helpful over the last several             15         We also see, and this is very anecdotal,
16     days in advising us on Friday and Saturday               16      of course, but it seems to be a big issue in
17     through the graces of the Insurance Bureau of            17      Ontario if you look at the coverage in the
18     Canada that the earnings for the property and            18      national media and the Globe and Mail, for
19     casualty insurers were doubled last year to              19      example, they’ve managed to scare off a lot of
20     4.2 billion record, and they suggest that                20      insurance consumers from making claims because
21     there’s a 20 percent return on equity. At the            21      of the fear of skyrocketing rate increases if
22     same time the insurers, according to Friday’s            22      they do make claims. That may have something
23     Globe, were predicting that these would result           23      to do with the fact that there’s lower claims
24     in about 14 billion to be saved in car                   24      in 2004. It may also have to do with caps and
25     insurance payments in 2005, then they say as a           25      other forms of restrictions on recovery.
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 1        But the profit I think is important.                 1    uninsured drivers in British Columbia because
 2     What does it represent? I don’t really know.            2    of, because of the fact they had a public
 3     I think there’s been some suggestion, some              3    system. But it’s a public system with a
 4     interest in having a look at what the profit            4    twist. The public system also looks after
 5     is on insurance claims here. I don’t know if            5    the, I guess, the bureaucracy that looks, that
 6     anyone has been successful at getting that              6    provides plates for vehicles. So you can’t
 7     information from the insurance companies to             7    get a plate for your vehicle unless you have
 8     date. They seem to be willing to go to                  8    insurance. And that’s one of the factors that
 9     whatever lengths not to let it out. But the             9    insures that there are fewer uninsured drivers
10     global figures are quite instructive. In any           10    in British Columbia. And unlike here, I
11     event, to suggest that a not for profit system         11    guess, if you don’t pay your premiums, you
12     is going to have more money to return to               12    have to return your plate or they--you’re now
13     consumers because they’re not paying out a             13    not only an uninsured driver, you’re an
14     profit I think is an unassailable point of             14    unlicensed driver and that causes you big
15     view.                                                  15    problems.
16        The third point, fewer uninsured drivers.           16       But, the figures, for example, for--you
17     This is again is a matter of debate by the             17    know, the figures for uninsured drivers across
18     Insurance Bureau of Canada when they deal with         18    the country had been estimated as anywhere
19     that as a myth. But, if I may offer two                19    between 10 and 15 percent. And that comes
20     things. One is the report that was prepared            20    from, you know, ministers of transportation in
21     several years ago, and it’s based on, quite            21    Ontario, for example, who estimated 15 percent
22     clearly, a defence of the Insurance                    22    at one point. The level of uninsured drivers
23     Corporation of British Columbia when they              23    in British Columbia are argued to be very,
24     talked about uninsured drivers. And the                24    very low. In 1998, and I’ll give you one
25     conclusion was that there were much fewer              25    attempt by the ICBC to verify this, in 1998
                                                   Page 131                                                     Page 132
 1     there were 1091 uninsured motorists involved            1    car unless you have insurance. BC has a
 2     in accidents for which ICBC was trying to               2    remarkably low level of uninsured drivers,
 3     collect and extract payment. In the same year           3    somewhere around 2 or 3 percent max. The
 4     ICBC handled 427,722 damage related claims,             4    national average is around 10 to 15 percent."
 5     not including windshield repairs. In other              5    So, you got 10 to 15, you got 10 to 12 percent
 6     words, of the 427,000 accidents, only .26               6    more people paying premiums. And that
 7     percent of them were the fault of uninsured             7    obviously contributes to the premium base, and
 8     drivers. That give you idea how small the               8    is available to be paid out to claimants.
 9     number of uninsured drivers there are in a              9       And again, I guess one things goes
10     place like British Columbia. Now, it may be            10    against the other. The high cost of insurance
11     higher than that, but certainly one of the             11    in many provinces, and including this one,
12     arguments made and one of the--and this is             12    have driven people to avoid getting insurance.
13     widely supported to by, for example, the chief         13    So, there are people who drive around because
14     executive officer of ICBC, a very interesting          14    they either want to or need to or feel the
15     man by the name of Nick Geer, G-e-e-r, who             15    need to, but because the prohibitive cost of
16     came out of private industry, and if he had            16    insurance, they are prepared to take the risk
17     any bias at all, his bias was toward the               17    despite the high fines. And I’ve seen the
18     private sector. He concluded and--he was               18    suggestions that in many parts of the United
19     asked what were the other benefits aside from          19    States, for example, the 10 to 15 percent
20     sparing young drivers the increased costs, he          20    would be good in terms of uninsured drivers,
21     said as follows, "We link"--and I’ve got a             21    up to 20 percent and higher. So I think
22     copy of this for the Board, "We link vehicle           22    that’s an important consideration.
23     licensing with insurance. When you insure              23       The forth issue in terms of lower, why
24     your car, you also licence it at the same time         24    the costs are lower is the investment in
25     with your broker and you can’t licence your            25    safety. And this is something that British
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 1     Columbia, in particular, is very proud of.                1    Columbia head called "Keeping Premiums Down."
 2     They invest in fixing an intersection, for                2    It comes from McLeans of September, 2003.
 3     example, that may have resulted in a number of            3    It’s kind of interesting, September, 2003 is
 4     accidents and injuries and consequently costs             4    the same time as these other studies. It was
 5     the system and they’re prepared to invest in              5    obviously a big issue in Canada at that time.
 6     that to fix it. And they’ll fix it because it             6    And they talked about what was expected in
 7     obviously it’s a good thing to have less                  7    British Columbia when the new Liberal
 8     injury to people, but it’s also because                   8    government got it, in it was a fairly free
 9     they’re the one who are paying the costs of               9    market approach and it was assumed that there
10     the accident, they, in fact, benefit. If                 10    was an agenda to privatize. And Mr. Gear was
11     there was ten automobile insurers out there,             11    asked about that. He said, "Well, that wasn’t
12     if I spent the money as one insurer to fix an            12    really my agenda. I had to do the right thing
13     intersection, I may not be benefitting myself,           13    for the people of the province, and if that
14     I may be benefitting the other guy. And by               14    was to head off on the privatization route, I
15     one estimate, the Insurance Corporation of               15    would have taken it. We found things going on
16     British Columbia spends about 30 times what              16    inside this company that I had no idea
17     was--what all Ontario insurers combined spent            17    existed. This company has hidden its light
18     on issues of road safety and that type of                18    under a bushel for many, many years." And I
19     thing which reduces accidents and causes a               19    don’t know if that’s really true. There are
20     better rate of claims against insurance.                 20    those who have been defending public
21        So these are the four reasons, and these              21    automobile insurance an extolling the virtues
22     are the arguments that go with them. I think             22    of organizations such as IBC for many years,
23     they’re important arguments. I’m going to                23    ICBC for many years, and some of them are
24     leave you a copy of an article, an interview             24    people, consumers from this province who moved
25     with the Insurance Corporation of British                25    back to this province from British Columbia
                                                   Page 135                                                       Page 136
 1     and were astounded by the fact that they had              1    February, 2003. And which wasn’t the highest
 2     to pay an enormously higher rate for the same             2    in the country, it was the second highest.
 3     kind of insurance here in Newfoundland and                3    The highest was actually Ontario which
 4     Labrador.                                                 4    increased by 141.2 percent in the same period.
 5        The other advantages, and you know,                    5    What’s interesting about this is that in the
 6     there’s some argument, and I know the                     6    three provinces with the pure public system
 7     Insurance Bureau will say, no, it’s not really            7    for mandatory PLPD coverage, British Columbia,
 8     cheaper, it’s more expensive and they’re                  8    Saskatchewan and Manitoba, the changes from
 9     supported by, they’re supported in that by the            9    1992 to 2003 were 41.6, 42.2, and 44.2, an
10     Fraser Institute, and I’m not sure who else              10    average annual increase of between 3.8 and 4
11     supports them. But, I know that two things I             11    percent, whereas in Newfoundland and Labrador
12     can say is that the objective study by the               12    the average annual increase was 11.6 percent.
13     Consumers Association of Canada confirms a               13       Now, it’s been suggested, I guess, by
14     Statistics Canada study done in 19--sorry,               14    some that, well, you know, if you start off
15     2002. And I’ve got copies of this for the                15    high, then you’re not going to increase so
16     Board. I think Ms. Blundon has them over                 16    much, so that may be the excuse. But when you
17     there. It’s called "Automobile Vehicle                   17    compare that then to the Consumer Association
18     Insurance Premiums", and looks at the systems,           18    of Canada study of Appleton Apples done in
19     public and private systems from 1992 to 2002             19    2003 and they found that the lowest rates in
20     and this was done in around February of 2003.            20    the country were, in fact, in the provinces
21     And it shows that from 1992 to February of               21    with the public system, then we’re satisfied
22     2003 there were significant increases in                 22    that that demonstrates that, in fact, the
23     insurance of all, in all provinces of Canada.            23    public system is cheaper. And no one has
24     The Newfoundland and Labrador premiums                   24    given me any convincing argument as to why it
25     increased by 127.4 percent from 1992 to
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 1     would not be cheaper here in Newfoundland and             1    people think in this province as found in the
 2     Labrador.                                                 2    study that was done by the select committee of
 3        There are other advantages as we                       3    the house several years ago in terms of
 4     suggested. There’s an advantage of fairness.              4    wanting to keep the torte system, I understand
 5     And I know that one of your mandates is to                5    there’s a group that’s promoting that here,
 6     consider the gender, age and marital status as            6    that ICBC to me is the model that keeps the
 7     a rate making component. And I guess, you                 7    advantages of the torte system with the
 8     know, these gender and marital status                     8    advantages of the public system in terms of
 9     distinctions have been out of the public                  9    fairness, in terms of keeping rates down and
10     systems for going on 40 years now. That was              10    in terms of providing stable rates. Because
11     part of what they did when they set up these             11    it’s one thing to say that they’re lower,
12     systems, having what they believe to be a                12    they’re lower now. And maybe the insurance
13     fairer system. They do base their premiums on            13    companies will come up and say, oh, we must
14     history. So if you start off as a new driver,            14    made a billion dollars and we’re going to
15     whether you’re 19 or 30, you do pay a little             15    really actively compete next year and so we’re
16     higher. But, very quickly your experience                16    going to lower the rates even below the
17     rating gives you an opportunity to get                   17    benchmarks. And this happened here several
18     advantage of a lower premium. It’s the gender            18    years ago. But then when their investment
19     discrimination that we have is unsatisfactory            19    side of their business is tanked as it was in
20     to many people. It’s considered to be unfair.            20    2000, they go back to the consumer and ask the
21        And a system which basically looks after              21    consumer to pay for their bad performance in
22     public liability, and this is where I think a            22    their investments. The public system has
23     lot of people are perhaps confused. The model            23    stable, stable rates, they’re lower and
24     that I believe is most compatible with the way           24    they’re stable. They don’t jump around. And
                                                                25    they’re related to the--they’re related to
                                                   Page 139                                                      Page 140
 1     returning the premium dollar to the consumer              1    fair bit over time, but I’m told that these
 2     and to the claimants. So, there’s a fairness              2    days a lot of decisions are now being made in
 3     on the side of how the premiums are collected,            3    Nova Scotia and in Ontario on claims that were
 4     but there’s also a fairness in maintaining                4    formally made here. So, claims adjustment and
 5     stable rates.                                             5    that sort of stuff is done within the
 6        An important consideration, as well, and               6    Province. Investment decisions, investment
 7     this part of, again, a public policy issue,               7    management portfolio, all that would be done
 8     but the local investment of your reserves,                8    in the Province. And that returns--and I
 9     whether it’s a public system or a private                 9    guess that’s part of the return, that’s part
10     system, you’re going to have to have reserves            10    of the reason why there’s an increase in GDP
11     to pay your claims. Those claims, those                  11    and an increase in government revenue. And I
12     reserves, where are they going to be invested?           12    suppose that’s more of a factor here in
13     Well, in British Columbia there’s a mandate to           13    Newfoundland and Labrador. I mean, despite
14     ensure that a significant portion of those               14    Ontario’s claims of poverty that we hear in
15     premiums reserves for claims is reinvested in            15    the media lately, the facts of the matter is
16     British Columbia. And in Saskatchewan and                16    that a lot of this activity that happens in
17     Manitoba, the same, in local government bonds            17    Ontario, doesn’t happen here because it all
18     and hospital bonds and eduction bonds,                   18    gets sucked to the centre. And when you have
19     providing a steady return on investment but              19    a sort of decentralized system which a public
20     also providing much needed capital for                   20    auto insurance system would be, the decisions
21     development.                                             21    would be made here. The jobs would be here
22        The fourth advantage that I see is that               22    and frankly, I think we’re quite capable of
23     jobs stay at home, that increasingly, I think-           23    making those kinds of decisions, whether they
24     -lawyers tell me, I don’t do a lot of                    24    be investment decisions or whether they be
25     insurance work, I have historically done a               25    adjustment decisions or setting of rates and
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 1     doing that kind of work.                                  1    system, more stable system that keeps jobs and
 2        The reason why we’re all here is because               2    investment here, and still provides the kind
 3     insurance is compulsory. And insurance is                 3    of protection that people demand and need.
 4     compulsory for a very good public policy                  4    And I recognize that there are a lot of
 5     reason. That we want to ensure that people                5    interests at stake here and there’s a lot of
 6     who are engaged in an activity like driving an            6    money at stake for companies and private
 7     automobile which has the ability to endanger              7    investors. And this is a significant public
 8     the public and cause significant injury, loss             8    policy issue, but when I talk about public
 9     of life, property damage to innocent third                9    automobile insurance, again the model that
10     parties, there’s a good public policy reason             10    keeps coming back to me as being most
11     why it is compulsory, is that there is a                 11    appealing to people in this province is the
12     financial responsibility. And government has             12    British Columbia model because it has, first
13     seen fit quite rightly to make it compulsory             13    of all, a compulsory aspect to it where there
14     and has, I believe, a concomitant or going               14    is a monopoly by ICBC. The optional insurance
15     along with that decision has an obligation, I            15    that, above and beyond, what’s compulsory is a
16     believe to ensure that we have the fairest,              16    competitive system where ICBC competes with
17     the least cost and the most beneficial                   17    the private sector. You can’t buy insurance
18     insurance system for that compulsory coverage.           18    from ICBC, believe it or not. If you phoned
19     That’s why, when I look at the experience of             19    ICBC, they won’t even give you a rate.
20     British Columbia, Manitoba and Saskatchewan, I           20    They’ll send you to a private broker. And the
21     feel very positive about what has happened and           21    private broker will give you a rate and you
22     none of these systems are perfect, but I feel            22    have to buy your insurance through a private
23     very positive that there is an option                    23    broker who takes commission. That private
24     available that provides fairness to people,              24    broker can also sell you other products in
25     that provides a lower cost and a fairer                  25    addition, for the optional coverage, they can
                                                     Page 143                                                     Page 144
 1     sell you ICBC products or they can sell you               1       And I would urge you in dealing with this
 2     one of the products of members of the                     2    issue to consider some of the things that I’ve
 3     Insurance Bureau of Canada. And that’s a                  3    said. The mild criticism of Mercer Oliver in
 4     system that I believe that is least disruptive            4    terms of how they approach it. And I have to
 5     to the existing insurance market and job                  5    say this, I’m not here to criticism them. I
 6     structure. I think that the New Brunswick                 6    know they weren’t asked to do a complete,
 7     committee did an excellent job of looking at              7    comprehensive and thorough review of the
 8     what would happen in that province or what                8    literature of the arguments. They put
 9     they would like to see happen in that                     9    together some of the things that were out
10     province. They chose something that they call            10    there and they make a good point. At the end
11     the "made in New Brunswick solution". I think            11    they say, look any government that’s
12     we could have and should have a "made in                 12    considering to enter into a system of public
13     Newfoundland and Labrador solution". Frankly,            13    automobile insurance should be ready to
14     with all due, the respect, I don’t think that            14    consider the arguments that are being
15     this Commission and this Board is the place to           15    presented by ICBC which they understand that
16     design a system that’s best for Newfoundland             16    they come from a particular point of view.
17     and Labrador, certainly not based on the                 17       I do know there’s one report there that,
18     mandate that you’ve been given here. But to              18    from the Atlantic province or the Atlantic
19     me a committee of the House of Assembly with             19    Premier’s Council which sees no advantage to
20     the varying points of views and experience of            20    public automobile insurance, says that there’s
21     people there with the right expertise and                21    no real advantage in any province to having
22     advice from people who have experience in the            22    one. I’m sure that that was all available to
23     area would provide an opportunity to make and            23    the New Brunswick committee as well when they
24     design a system that we believe could work in            24    made their report six months later, but they
25     Newfoundland and Labrador.                               25    determined that in New Brunswick they could
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 1     provide a better product with advantages to               1          that this a finding as to whether it’s good or
 2     the consumer, advantages to the province in               2          bad for the provinces beyond your own mandate
 3     terms of revenue, GDP and more stability of               3          to consider, but that it’s a serious option;
 4     rates.                                                    4          one that deserves a full and thorough study
 5        So, I think this is a debate that will go              5          and consideration of the public policy
 6     on. I know there are other presenters on this             6          implications of going that route.
 7     issue. There was a 7000 signature petition                7 CHAIRMAN:
 8     presented by me in December that was gathered             8     Q.   Thank you very much, Mr. Harris. We are
 9     in the period of a couple of months from over             9          running a little bit over time. There is a
10     200 communities in the province by the                   10          motion to be heard here, I think, 3:00, but
11     Advocates for Fair Auto Insurance. I think               11          I’ll just entertain any brief--could you just-
12     there’s a presentation being made by them                12          -I just have one. Ms. Whalen doesn’t have
13     during these hearings. I think that we have a            13          any. You mentioned the BC model. Is there
14     strong case to be made and I think that we               14          any compromising of rights there in that model
15     have, we hope that there will be an                      15          versus the product that would exist in the
16     opportunity to study it in depth. I                      16          private sector?
17     understand that many of the issues that you’re           17 MR. HARRIS:
18     dealing with are technical and have to do with           18     A.   Well, I guess the compromise of rights, the
19     caps versus deductibles and the various                  19          insurance companies would tell you that
20     aspects of a policy. I’m going to refrain                20          they’re shut out of the compulsory, public
21     from commenting on all of those and                      21          liability market, but they--my understanding
22     concentrate my comments on the issue of public           22          is that they have a full tort system, that the
23     automobile insurance because I believe there’s           23          tort remedies are available and that they’re
24     a strong case to be made and I hope that you,            24          not interfered with with caps or--well,
25     as Commissioners, will indicate to government            25          deductibles as a--I don’t know what the--there
                                                     Page 147                                                          Page 148
 1      may be obviously some deductibles in terms of            1        and get knocked down and lose, get injured, by
 2      damages, but I don’t think they use                      2        a car, why should I have to bear the cost of
 3      deductibles as a method of controlling the               3        that myself in order to keep insurance
 4      overall damage. There may be a deductible                4        premiums lower or in order to keep the private
 5      from an administrative point of view, a                  5        system into healthy profits situation. I
 6      $1,000.00 deductible on a claim is more of an            6        think that the losses should be born by the
 7      administrative deterrent, than a deterrent               7        people who are driving the cars. And I think
 8      against injuries. But I don’t think they use             8        a full tort system, which I personally favour,
 9      deductibles in the same way as being proposed            9        will do that.
10      as the larger the deductible, the more money            10     Q. Thank you very much for you presentation, Mr.
11      the insurance system will save. I don’t think           11        Harris. That brings us to a conclusion for
12      it’s used as a way to do that. It seems to              12        the presentations for today. The motion was
13      me, and I’m subject to correct, that the BC             13        scheduled to be heard at 3:00. I’ll just take
14      system keeps the full tort system readily               14        the liberty of having a 10 minute break. I
15      available to claimants.                                 15        think everybody would appreciate that and then
16   Q. We’ll have a look at that. You have some                16        reconvene on the motion at quarter after.
17      information on that.                                    17        Thank you.
18   A. I think one of the other things that gets left          18   Upon conclusion at 3:00 p.m.
19      out in all--we talk about consumers and we
20      talk about automobile drivers, but there are
21      people who aren’t, who are neither consumers
22      of insurance or drivers of automobiles who are
23      affected by these deductibles and by this
24      caps. If I’m an innocent student walking
25      around waiting for a bus or crossing a street
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Discoveries Unlimited Inc., Ph: (709)437-5028
February 21, 2005                                      Multi-Page        2005 Automobile Insurance Review
                                                   Page 149
 1           CERTIFICATE
 2      I, Judy Moss Lauzon, do hereby certify that
 3   the foregoing is a true and correct transcript of a
 4   hearing in the matter of the 2005 Automobile
 5   Insurance Review heard on the 21st day of February,
 6   2005 at the Public Utilities Board, Prince Charles
 7   Building, St. John’s, Newfoundland and Labrador and
 8   was transcribed by me to the best of my ability by
 9   means of a sound apparatus.
10   Dated at St. John’s, NL this
11   21st day of February, 2005
12   Judy Moss Lauzon
13   Discoveries Unlimited Inc.

                                                                                       Page 149 - Page 149
Discoveries Unlimited Inc., Ph: (709)437-5028