[PDF] - Agenda Overview Investment income Bodily injury claims Operating PDF Document

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1/23/2012 1 Revenue Requirem ents Application Public W orkshop

January 23, 2012

Agenda

Overview
Investment income
Bodily injury claims
Operating expenses
Capital provision
Capital provision
Summary

1

B-4 ICBC 2012 REVENUE REQUIREMENTS

EXHIBIT

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How we set rates

Based on prospective costs
Premiums to generate enough money to

cover all costs

According to accepted actuarial practice

2

Pressure on basic rates

12% 14% 0.0% +2.5% +7.4% +1.3% +11.2% 0% 2% 4% 6% 8% 10%

2 0 1 0 Com pared to 2 0 1 2 I m pact on Rate Level

3

2%

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What is driving the rate increase?

External factors are contributing greatly

g g y to the need for an 11.2% rate increase

Significant unprecedented changes

are happening at the sam e tim e

– Recession and coming out of recession Recession and coming out of recession – Changing claims frequency – Low capital levels

4

The negative impact of these changes are magnified

Because, significant unprecedented Because, significant unprecedented changes are happening at the sam e tim e

1 . I nvestm ent incom e - 2008 and 2009 recession, slow recovery 2 . Claim s costs - increasing BI claims frequency in 2010 and 2011 3 . Capital – lower levels

5

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1. Investment income
Since the recession – earning a lower

yield on investments yield on investments

1% drop in the yield is equivalent to

$60M less investment income to offset costs

Therefore, premiums must increase to

, p cover more of the costs

This translates into a 2.5% rate increase

6

We are not alone

The market conditions have affected

many businesses many businesses

Insurance companies (life and P&C),

pension plans are all facing similar challenges

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2. Claims costs

Background B dil i j l i t th l t

Bodily injury claims costs are the largest

driver of the rate increase

Claims costs are approximately 75% of

the costs of the business

Bodily injury accounts for over 70% of

y j y all claims costs

In comparison, operating costs are

about 15% of all costs

8

What has changed with bodily injury costs?

In the past, the severity or average

f l i h i d b b cost of a claim has increased by about 6%

In the past, the frequency has always

decreased each year by 3-4%

The declining frequency rate helped
ffset the increasing severity rate

9

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35 000

Basic Bodily I njury Severity

Severity (average cost per claim)

10,000 15,000 20,000 25,000 30,000 35,000

Severity ( $ )

5,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Accident Year

10

Frequency (# claims/ 100 policies)

2.5%

Bodily Injury Basic Frequency

0 5% 1.0% 1.5% 2.0%

Frequency

11

0.0% 0.5%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Accident Year

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2010 rate filing

In 2008 and 2009, during the recession,

we observed a more dramatic drop in we observed a more dramatic drop in the frequency of claims

This meant we had a bigger offset to the

rising severity

– i.e. We did not need as much premium to l i t cover claims costs – No rate change in 2008 or 2009 – Small rate decrease in 2010

12

Frequency (number of claims per 100 policies)

2.5%

Bodily Injury Basic Frequency

1.0% 1.5% 2.0%

Frequency

13

0.0% 0.5%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Accident Year

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2011 rate filing

In 2010 and 2011, the frequency has

bounced back rather quickly bounced back rather quickly

Now the offset to the rising severity is

virtually nil

– We need more premium to cover the claims costs – Requires 11.2% rate increase

14

Frequency (number of claims per 100 policies)

2.5%

Bodily Injury Basic Frequency

1.0% 1.5% 2.0%

Frequency

15

0.0% 0.5%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Accident Year

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Insurance Research Council (IRC) December 2011

…

auto injury claim trends indicate that insurance claim costs countrywide have insurance claim costs countrywide have recently increased, reversing previous trends of declining or relatively stable costs.

…

injury claims severity has been i i t dil i th l t l increasing steadily in the last several years, much of the increase has been

ffset by declining claims frequency…

16

IRC findings cont’d

... claim frequency, on a countrywide

basis, is no longer decreasing.

... the effect of rising claim severity has

been magnified by the simultaneous increase in claim frequency … 2010 marks the last year since 1984 that BI claim frequency did not decline. claim frequency did not decline.

17

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3. Basic Capital
We had higher capital levels in the past
Excess capital can be used to partially

mitigate rate increases

In 2011, the rising claims costs and

lower investment income resulted in a significant Basic loss, which reduced g , capital significantly in 2011

18

MCT Is Volatile

151% 158% 162% 167% 156% 165% 165% 155% 155%

160% 170%

136% 141% 138% 123% 141% 132% 143% 120% 115% 102%

100% 110% 120% 130% 140% 150%

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90%

2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q4 MCT Actual (CGAAP) MCT Actual (IFRS) MCT Outlook (IFRS)

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Summary

Investment income is lower by $60M
BI frequency increased, claims costs are $100M

higher higher

Lower capital levels

Result: Less ability to m itigate severity increases

Operating costs are not contributing to the

11.2% increase in rates

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Overview of Rate Change

Com ponent I m pact Investment Income and Premium Finance Plan + 2.5 ppt Investment Income and Premium Finance Plan + 2.5 ppt PY 2010 Loss Cost Forecast Variance + 5.5 ppt Loss Trend to PY 2012 + 1.9 ppt Trend in Average Premium + 0.4 ppt Operating Expenses (excluding IFRS changes) + 0.0 ppt IFRS change + 0.4 ppt

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Capital Provision + 0.3 ppt Other + 0.2 ppt PY 2 0 1 2 I ndicated Rate Level Change + 1 1 .2 ppt

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How investments impact rates

New money rate

BCUC d f l – BCUC approved formula – Based on average of six financial forecasts – Prospective

Return on equity

– Based on current investment holdings – Prospective

22

Rates highly sensitive to interest rates movements

L i t t t Hi h B i t Low er interest rates = Higher Basic rates Lower interest rates have negatively impacted the basic rate indication by 2.5%

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Interest rates have moved lower

%

1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 Mar 2010 Sep 2011

Government of Canada Yield Curves

Interest rates have dropped

Market expectations for interest rates to

24

0.00 0.50 2 year 3 year 5 year 10 year 30 year 3/31/2010 9/30/2011

stay low into 2012

ICBC’s investment portfolio

Portfolio valued at $11.5 billion

– Conservative investment policy to protect customers Conservative investment policy to protect customers

5 % 2 3 %

Real Estate Equity

7 2 %

Equity Fixed Income Assets

25

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ICBC’s investment portfolio

Premiums are invested in accordance

with ICBC’s strategic asset mix with ICBC s strategic asset mix

5 % 2 3 %

Real Estate E it Real estate assumed to deliver a premium

ver inflation

Equities assumed to yield at a premium

ver 30 year bond yield

7 2 %

Equity Fixed Income Assets Fixed Income assets invested at the 3 year bond yield

26

New Money Rate

Assets W eight Return 2 0 1 0 PY 2 0 1 2 PY Real Estate 5% Inflation + 4.25% 6.48% 6.29% Equity 23% 30 year Government bond yield + equity risk premium 10.07% 8.98% Fixed Income 72% 3 year Government bond yield 3.18% 1.91%

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New Money Rate 4 .9 3 % 3 .7 6 %

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Central banks reducing interest rates to stimulate growth

Government of Canada Yield Curves

%

1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 Mar 2010 Sep 2011

Government of Canada Yield Curves

Interest rates have dropped

Market expectations for interest rates to stay low into 2012

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0.00 0.50 2 year 3 year 5 year 10 year 30 year 3/31/2010 9/30/2011

stay low into 2012

3 00% 3.50%

US

Dropping Economic Growth Expectations

3 00% 3.50%

Canada

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 10-Dec 11-Jun 11-Sep Output 2011 2012 Source: IMF 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 10-Dec 11-Jun 11-Sep Output 2011 2012

Central banks dropping interest rates to stimulate growth

29

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Interest rates to stay low into 2012

ICBC monitors key economic forecasts

– Scotiabank Scotiabank – Bank of Montreal – National Bank – TD Bank – Royal Bank – Bank of America/ Merrill Lynch

All have indicated that interest rates will stay low in 2012 30

“Canada’s primary dealers now expect the Bank of Canada to raise interest rates in September 2012, signaling a gloomier outlook as concerns over stalled global economic momentum persist.”

Reuters, October 7, 2011

Global Challenges

Slowing economic growth

– Major economies at risk of slipping into recession Major economies at risk of slipping into recession

High unemployment
Government debt issues

– Large levels of Government debt – Large government deficits a ge go e e t de c ts – Potential European sovereign debt defaults

Volatile equity markets

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Rates highly sensitive to interest rates movements

L i t t t Hi h B i t Low er interest rates = Higher Basic rates Lower interest rates have negatively impacted the basic rate indication by 2.5%

32

Overview of Rate Change

Com ponent I m pact Investment Income and Premium Finance Plan + 2.5 ppt pp PY 2010 Loss Cost Forecast Variance + 5.5 ppt Loss Trend to PY 2012 + 1.9 ppt Trend in Average Premium + 0.4 ppt Operating Expenses (excluding IFRS changes) + 0.0 ppt IFRS change + 0.4 ppt C it l P i i 0 3 t

33

Capital Provision + 0.3 ppt Other + 0.2 ppt PY 2 0 1 2 I ndicated Rate Level Change + 1 1 .2 ppt

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Loss Cost Forecast Variance

Loss cost is the provision for claims

costs in the rates costs in the rates

Claims costs have emerged higher than

expected

– Provision for claims costs in the 2010 rates is not covering costs is not covering costs – Cost levels have returned to long-term trend line

34

Loss Cost Update

$ $700

Basic Loss Cost

$450 $500 $550 $600 $650

35

$400 $450 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Accident Year

Basic Loss Cost

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Loss Cost Update

$ $700

Basic Loss Cost

$450 $500 $550 $600 $650

36

$400 $450 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Accident Year

PY 2010 Projection at May 2010 Basic Loss Cost

Loss Cost Update

$ $700

Basic Loss Cost

$450 $500 $550 $600 $650 +5.5 ppt

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$400 $450 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Accident Year

PY 2010 Projection at May 2010 Basic Loss Cost PY 2010 Projection at Dec 2011

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Loss Cost Drivers

Increase is mainly in BI claims
Two factors influence the loss cost

– chance of having a claim (Frequency) – cost of claims that occur (Severity)

BI frequency is higher than forecast

BI frequency is higher than forecast

– Return to historical trend line after low points in 2008 and 2009

38

BI Frequency Forecast – 2010 RRA

2.0% 2.5%

Bodily Injury Basic Frequency

0.5% 1.0% 1.5% %

Frequency

39

0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Accident Year Actual PY 2010 Projection at May 2010 PY 2010 Projection at May 2010

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BI Frequency Forecast – 2010 RRA

2.0% 2.5%

Bodily Injury Basic Frequency

0.5% 1.0% 1.5% %

Frequency

40

0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Accident Year Actual PY 2010 Projection at May 2010 PY 2010 Projection at May 2010

BI Frequency Forecast – 2012 RRA

2.0% 2.5%

Bodily Injury Basic Frequency

0.5% 1.0% 1.5% %

Frequency

41

0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Accident Year Actual PY 2010 Projection at May 2010 PY 2010 Projection at Dec 2011 PY 2010 Projection at May 2010 PY 2010 Projection at Dec 2011

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BI Frequency

7% increase in BI claims = $100M
Means more uncertainty in pricing

– Actuaries being responsive to recent changes in frequency, but have not “gone all the way”

Higher frequency not fully understood
Higher frequency not fully understood

– Partly influenced by reduced travel during recession

42

Recession Impact

Travel in BC estimated from highway volumes and gasoline sales

52,000 44,000 46,000 48,000 50,000

Million Kilom etres 43

40,000 42,000 2004 2005 2006 2007 2008 2009 2010

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Recession Impact

Travel in BC estimated from highway volumes and diesel sales

4,500 3,000 3,500 4,000

Million Kilom etres 44

2,000 2,500 2004 2005 2006 2007 2008 2009 2010

BI Frequency – Key Factors

Causes of higher frequency not fully

understood understood

– Travel factor doesn’t fully explain recent increases

Currently researching other potential

factors

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Loss Cost Update

$700

Basic Loss Cost

$450 $500 $550 $600 $650 +5.5 ppt

46

$400 $450 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Accident Year

PY 2010 Projection at May 2010 Basic Loss Cost PY 2010 Projection at Dec 2011

Overview of Rate Change

Com ponent I m pact Investment Income and Premium Finance Plan + 2.5 ppt pp PY 2010 Loss Cost Forecast Variance + 5.5 ppt Loss Trend to PY 2012 + 1.9 ppt Trend in Average Premium + 0.4 ppt Operating Expenses (excluding IFRS changes) + 0.0 ppt IFRS change + 0.4 ppt C it l P i i 0 3 t

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Capital Provision + 0.3 ppt Other + 0.2 ppt PY 2 0 1 2 I ndicated Rate Level Change + 1 1 .2 ppt

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Claims Costs Increasing

$650 $700

Basic Loss Cost

PY 2012

+1.9 ppt $450 $500 $550 $600 $650 +5.5 ppt

48

$400 $450 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Accident Year

PY 2010 Projection at May 2010 Basic Loss Cost PY 2010 Projection at Dec 2011

BI Drives Loss Cost Trend

Bodily Injury Property Damage Part 7

$800

Basic Loss Cost Trends

$200 $300 $400 $500 $600 $700 $800

+1.6% per year +2.1% per year

$- $100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Accident Year

Total Plate Owner Basic Bodily Injury

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BI Severity

40,000 45,000

Bodily Injury Basic Severity

+8.3% PY 2012

5,000 10,000 15,000 20,000 25,000 30,000 35,000

Severity +5.7%

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Accident Year

Actual 2001 to 2005 Trend PY 2010 Projection at Dec 2011

Trend in Average Premium

Average premium is trending lower

M i – More seniors – More customers at higher discount levels

Reduces expected revenue and

contributes to increased rate indication

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Claims Initiatives

ICBC focuses on claims initiatives to

ensure it takes appropriate steps in ensure it takes appropriate steps in effectively managing BI claims costs

How claims are handled can help

moderate BI claims costs

ICBC’s claims initiatives are believed to

have contributed to the lower BI severity trend that has emerged since 2005

52

BI Severity

40,000 45,000

Bodily Injury Basic Severity

+8.3% PY 2012

5,000 10,000 15,000 20,000 25,000 30,000 35,000

Severity +5.7%

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Accident Year

Actual 2001 to 2005 Trend PY 2010 Projection at Dec 2011

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Claims Initiatives

ICBC continues to enhance claims

processes, building on three strategies:

– Claims Handling – Management Accountability – Claims Analytics

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Claims Initiatives

Claims Handling:

Segmentation/ classifying claims by risk
Customer service initiatives
Quality file handling

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Claims Initiatives

Management Accountability:

Management oversight
Increased focus on a single line of business

56

Claims Initiatives

Claims Analytics:

Key measures reports provide managers a

better overall picture of their book of business

“Health Check” provides year-over-year and

adjuster level metrics

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Overview of Rate Change

Com ponent I m pact Investment Income and Premium Finance Plan + 2.5 ppt PY 2010 Loss Cost Forecast Variance + 5.5 ppt Loss Trend to PY 2012 + 1.9 ppt Trend in Average Premium + 0.4 ppt Operating Expenses (excluding IFRS changes) + 0.0 ppt IFRS change + 0.4 ppt Capital Provision + 0 3 ppt

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Capital Provision + 0.3 ppt Other + 0.2 ppt PY 2 0 1 2 I ndicated Rate Level Change + 1 1 .2 ppt

Operating Expenses

In early 2011

I t t i d l i t – Investment income and claims costs were not looking positive – Looked for opportunities to reduce rate increase – Re-evaluated 2011 expenses to reduce impact on rates impact on rates

Reduction of $ 2 6 m illion

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Operating Expenses

Cost control measures include:

Detailed budget review
Reductions in discretionary spending
Deferring expenditures where possible
Prioritizing projects to reduce # and $
Prioritizing projects to reduce # and $

60

Operating Expenses cont’d

Management of staff vacancies with

greater control on hiring greater control on hiring

Challenged all areas to

– Absorb work instead of adding to FTEs – Reduce lower priority work

Monthly tracking of savings

Monthly tracking of savings

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Operating Expenses

600 750 ions)

Compounded Annual Growth Rate (2002 to 2010) = 2.3% Average Increase (2009 to 2012) = 1.8%

$647 $582 $482 $496 $508 $515 $512 $523 $538 $569 $577 $591 $604 $615 150 300 450

rate Operating expenses ($ milli

Decrease from $630

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2000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (CGAAP) 2010 (IFRS) 2011 Forecast 2012 Forecast

Corpo

Operating Expenses

2012 Forecast ($615 million)

– Cost control measures will continue into 2012 – Operating expense increases will be below the level of inflation – Average increase from 2009-2012 targeted at 1.8%

63

– Operating expenses do not contribute to the rate increase requirement for the 2012 policy year

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IFRS impacts

First time adoption changes
Pensions

64

Capital Requirements

Office of Superintendent of Financial

Institutions (OSFI) Institutions (OSFI)

OSFI defines the Minimum Capital Test

(MCT)

ICBC regulatory level – MCT of 100%
Operating level – MCT of 130%
Today, no excess capital to reduce rate

requirement

65

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MCT in 2011 and 2012

Basic insurance MCT (IFRS):

( )

– December 31, 2010 actual = 155% – December 31, 2011 outlook = 115% – December 31, 2012 outlook = 102%

66

,

(if rate increase of 11.2% approved)

MCT Is Volatile

151% 158% 162% 167% 156% 165% 165% 155% 155%

160% 170%

136% 141% 138% 123% 141% 132% 143% 120% 115% 102%

100% 110% 120% 130% 140% 150%

67

90%

2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q4 MCT Actual (CGAAP) MCT Actual (IFRS) MCT Outlook (IFRS)

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Capital Provision

No capital build provision due to 2011

Government Directive Go e e t ect e

– Contributes to rate stability for 3 years

Capital maintenance provision has impact of

0.3 ppt on rate indication

– Required or capital will continue to deteriorate

68

Summary

Rate increase is driven by

D li i i t t t 2 5 t – Declining investment returns + 2.5 ppt – Rising bodily injury claims + 7.4 ppt – Capital too low to help offset rates

Operating costs are not contributing to

higher rates

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Summary – adding context

Last 5 years Basic rates increased on

average by 1 8% average by 1.8%

Last 10 year Basic rates increased on

average by 2.1%

Over the long term, rates have been

Over the long term, rates have been within the rate of inflation

70