Alberta Automobile Insurance Rate Board 2006 Annual Adjustment - - PDF document

Alberta Automobile Insurance Rate Board 2006 Annual Adjustment Review

A submission by Facility Association

June 15, 2006

1 May 31, 2006

BACKGROUND 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Facility Association is an administrative residual market mechanism that administers involuntary residual market automobile insurance on behalf of the voluntary/private sector automobile insurance industry across Canada. Created by the industry, Facility Association’s mission is to guarantee the availability of automobile insurance coverage for consumers who require it to legally operate their vehicles. We do that with a full-time staff

• f twenty people and a network of outsourcing arrangements.

In Alberta, for private passenger vehicles, we administer the Alberta Risk Sharing Pool (in reality two pools, one for Grid and the other for Non-Grid risks) and a very small “Residual Market Segment” with very tightly defined risk criteria. For non-private passenger vehicles, we administer the Facility Association Residual Market, or FARM. We will not address the actuarial issues mentioned in the Annual Review Notice in this submission, but rather the two other subjects mentioned in the Notice: the premium grid and the Risk Sharing Pool. THE PREMIUM GRID 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 When the premium grid was implemented, we were surprised by the magnitude of the impact we saw on the previously approved rates for some driver and vehicle profiles. For example, we had cases where we saw rates go down by nearly 57% for drivers with two at- fault accidents in the previous three years. Even more startling, for underage drivers with two at-fault accidents in the previous three years, we saw rates go down by 82%. Please keep in mind that unlike the rates of member companies, our rates have always been regulated in Alberta for all coverages on all vehicle types. More recently, we saw a case of a twenty-nine year old driver with seven speeding tickets. The Residual Market Segment premium would be $5,961, while the grid caps the premium at $2,852—less than half. More examples of this type can be found in Appendix A. We understand that the Board is in the process of investigating and possibly addressing the issue of rates for “bad drivers” so we will not dwell on this aspect of the premium grid any further other than to say we would be pleased to share further examples with the Board if it is useful for us to do so. The remainder of this submission will be devoted to the Alberta Risk Sharing Pool.

Facility Association Submission AIRB 2006 Annual Adjustment Review 2 May 31, 2006

THE RISK SHARING POOL - AUTHORIZATION 37 38 39 40 41 42 43 44 45 46 47 48 49 50 In Alberta, we administer the Risk Sharing Pool as authorized by our Plan of Operation, which is approved by the Superintendent of Insurance. (The Plan may be viewed and downloaded at our website, www.facilityassociation.com.) All companies licensed to sell automobile insurance in Alberta are required to abide by the provisions of the Plan. The Plan requires us to maintain and report separate financial results for risks ceded to the Alberta Risk Sharing Pool(s) split between those that are subject to the premium grid and those that are not. So, this creates the need for two Risk Sharing Pools, commonly referred to as the Grid Risk Sharing Pool and the Non-Grid Risk Sharing Pool. Both are for private passenger automobiles only. All financial results of the Alberta Risk Sharing Pools (and the Residual Market Segment and the FARM) stay in Alberta. That is, they are not spread across the other jurisdictions we serve. THE RISK SHARING POOL - OPERATION 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 Essentially, a Risk Sharing Pool is a residual market that acts as an industry-wide reinsurance mechanism that is largely invisible to consumers and intermediaries. A consumer buys insurance in the normal way, and the application is forwarded to a company underwriter. The underwriter assesses the risk, decides whether to keep it on the company’s own books or to transfer the risk to the Risk Sharing Pool, subject to the

• perational rules and eligibility guidelines of the Pool.

For both Alberta Risk Sharing Pools, companies receive an expense allowance to cover costs such as those incurred for acquisition, policy issuance and policy administration. That expense allowance is set annually by the Facility Association Board of Directors in consultation with the Superintendent. For both Pools, companies are required to submit 100% of all premiums for all coverages on a policy and are eligible for 100% reimbursement for eligible claims and related expenses. Financial results of the Pools are shared among companies based on the proportion of a company’s exposures not ceded to a Risk Sharing Pool divided by the number of industry exposures not ceded to a Risk Sharing Pool. As Facility Association is simply an administrative mechanism, all companies receive a monthly report reflecting the operations of the Pool providing them with the amounts they are then required to book into their own financial statements.

Facility Association Submission AIRB 2006 Annual Adjustment Review 3 May 31, 2006

72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 The two Pools differ primarily in the number of risks companies can transfer to each Pool. For the Grid Risk Sharing Pool, companies can transfer risks without limit. That is based

• n the philosophy that companies are required to accept risks for which they have no

control over price and therefore little or no control over the financial results of that

• business. For the Non-Grid Pool, companies can transfer up to 4% of written exposures not

transferred to the Grid Pool. This Pool is designed to help companies cope with the “take all comers” environment in the province. In a competitive market, most insurers tend not to target the entire universe of private passenger automobile risks. Insurers generally each have their areas of expertise and a healthy competitive marketplace always tends to allow a proper mix of generalist and specialist/niche private passenger automobile writers Moreover, since it is a practical impossibility to have a perfect price for every risk, most insurers choose to have risk eligibility rules to complement and protect their respective pricing structures. An underwriter faced with a requirement to accept a greater degree of risk than that contemplated by the company’s classification system and rates can transfer that risk to the Non-Grid Pool. The Non-Grid Pool has a relatively low limit to ensure that it does not become used as a marketing tool. That is, without such a limit, companies could deliberately adopt a strategy of under-pricing certain risks to attract new customers. Because these risks could then be transferred to the Non-Grid Pool, and because of the way all insurers share in the results of the Pool, this would amount to companies growing their businesses at the expense of their competitors. The key point here is that Risk Sharing Pools are designed as a mechanism to promote stability in the marketplace by making it possible for companies to accept risks they believe are not adequately priced. The general expectation, therefore, is that Risk Sharing Pools by their very nature will operate at a financial loss. It is also important to note that because the Risk Sharing Pools also act as a cross-subsidization mechanism across the industry, at any given point in time, companies will have their own, unique, financial results vis a vis the Pools. RISK SHARING POOLS - SIZE 103 104 105 106 107 There are two ways to talk about the size of the Risk Sharing Pools: premium volume and exposure count. For calendar year 2005, the premiums written through the Grid Pool were $370.6M and $56.9M through the Non-Grid Pool. Taken together, they represent 22.2% of

Facility Association Submission AIRB 2006 Annual Adjustment Review 4 May 31, 2006

108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 the private passenger premium volume in the province. Put another way, if the combined Risk Sharing Pool was an insurance company, it would be the largest single automobile insurance entity in Alberta on a premium volume basis. In terms of exposure count (exposure defined as one car insured for one year), 207,381 exposures were transferred to the Grid Pool in 2005, and 54,650 to the Non-Grid Pool. Taken together, that approximates 13.9% of the private passenger vehicles in the province. As a sharing mechanism, this is high by historical Alberta standards, where the Facility Association Residual Market averaged 1.9% of private passenger vehicles in the five years prior to the introduction of the Risk Sharing Pools, going as low as .9% in 2000. The Risk Sharing Pool market share is very high by North America residual market standards as well, with Alberta’s being the third largest in the United States and Canada, behind that of only the Northern Territories and North Carolina. The size of the residual market is often looked upon as an indicator of the “health” of a competitive insurance

• market. Experience in North America suggests that a large residual market over an

extended period of time is symptomatic of widespread problems in the insurance system,

• ften related to inadequate pricing generally or and/or inappropriate relationships between

residual market and voluntary market pricing levels. Looking ahead, for the six months ended March 31, 2006, companies ceded an average of 22,154 exposures and $32.4M in premium volume per month to both Risk Sharing Pools. If that trend continues, we would expect to end 2006 with substantially the same volume of business in the Risk Sharing Pools as we saw in 2005, although perhaps with something of a shift in proportion, that is, fewer exposures ceded to the Grid Risk Sharing Pool and more ceded to the Non-Grid Risk Sharing Pool. RISK SHARING POOLS – FINANCIAL RESULTS 135 136 137 138 139 140 141 142 143 Why is the size of the Risk Sharing Pool important? The main reason is financial. As mentioned above, Risk Sharing Pools are expected to operate at a loss. When they are large, as they are in Alberta, the potential financial impacts on automobile insurance companies in the province are correspondingly large. According to the audited financial statements for the first 13 months of operation of the Pools, the Grid Pool showed a loss of $93.9M on $269M of earned premium and the Non-

Facility Association Submission AIRB 2006 Annual Adjustment Review 5 May 31, 2006

144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 Grid Pool showed a loss of $28M on $18.6M of earned premium. The combined losses of the Pools totaled $121.9M. Following the release of the statements, we asked our actuarial consultants to give us a breakdown of the loss ratios in the Grid Risk Sharing Pool by mandatory and optional

• coverages. That analysis is contained in Appendix B. For the mandatory coverages, the

discounted expected loss ratio is 96.6%, or substantially worse than the overall Grid Risk Sharing Pool loss ratio of 87%. This is because companies are required to transfer all coverages to the Grid pool and the optional coverages, which account for approximately 30% of premiums ceded to the Grid Pool, have a loss ratio of 58.5%. As the Rate Board indicated in its 2005 Annual Report, insurance accounting is based on estimates, and the actual results can take years to finalize. The notes to our audited statements make special mention of the uncertainty around the estimates supporting those

• statements. Risk Sharing Pools generally are subject to greater uncertainty in estimating

claims liabilities than a typical company by their very nature because decisions on what types of risks to transfer to a Pool happen at the individual company level as do decisions

• n claims handling and reserving practices. Not only can these decisions vary from

company to company, they can also vary through time as well. Other factors than those relevant to Risk Sharing Pools generally can and likely will have a material impact on the current estimates underlying the Alberta Risk Sharing Pools’

• statements. One is that during the startup phase, companies began using the Risk Sharing

Pool at different times and at different rates. Another is the timing and patterns of company claim submissions to the Risk Sharing Pool during the start-up phase. A third is the impact

• f the product reforms introduced in the province, particularly the cap on minor-injury
• claims. We expect all these factors to stabilize over a period of time, but right now, there is

no question that this is a challenging time for our actuaries. More details on the financial results of the Risk Sharing Pools and the estimates underlying those results are available in our audited financial statements and in the “Actuarial Report

• n the Valuation of the Policy Liabilities,” copies of which have been previously provided

to the Rate Board.

Facility Association Submission AIRB 2006 Annual Adjustment Review 6 May 31, 2006

RISK SHARING POOLS –MARKET IMPACT 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 In terms of financial impact, the key point for all stakeholders to remember is that a Risk Sharing Pool nearly half a billion dollars in size has the potential to have serious, negative financial consequences for companies and ultimately consumers. Simply put, we have a large amount of money likely to behave in a volatile manner, with unpredictable impacts

• n Alberta automobile insurers. As such, the Alberta automobile insurance marketplace is

at risk of becoming more unattractive for companies as the Risk Sharing Pool experience continues to develop. Experience in jurisdictions that have large residual markets (of whatever type) for extended periods of time, such as North Carolina and Massachusetts, shows they tend to have greater market concentration and fewer new companies entering the market, therefore offering less competition, choice and innovation for consumers. This is not to say that Risk Sharing Pools, in and of themselves, are necessarily harmful to a competitive marketplace. Properly designed and monitored, they can be used to guarantee availability and enhance stability in the marketplace to the benefit of the consumer by, for example, providing an opportunity for a company to accept a marginal risk on an otherwise profitable account thus allowing the intermediary to maintain their relationship with a client. RISK SHARING POOLS – REDUCING THEIR SIZE AND FINANCIAL IMPACTS 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 We believe it is to everyone’s benefit to keep the Risk Sharing Pools relatively small, thereby minimizing the impact of negative financial results on the marketplace. Since the Non-Grid Risk Sharing Pool is already capped at 4% of company exposures not ceded to the Grid Risk Sharing Pool, the greatest opportunity for reducing the size of the combined Risk Sharing Pool is to reduce the number of drivers on the Grid, as “Grid Risks” can be ceded to the Pool without limit. In the Insurance Bureau of Canada’s submission to the Rate Board in January of this year (“The Premium Grid: Focusing on Policy Objectives”) it was suggested that 4.6% of the driver population is an appropriate target size for the Grid Risk Sharing Pool. This was based on the concept that 4.6% of principal operators in the province are young drivers in need of grid protection. That submission contained constructive suggestions for achieving that goal, and we understand that the IBC submission to the current hearing process has a similar focus. In addition to reducing the number of drivers on the grid, it is essential that grid rates be maintained at adequate levels to minimize the subsidization of bad drivers by good drivers.

Facility Association Submission AIRB 2006 Annual Adjustment Review 7 May 31, 2006

215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 Another opportunity for reducing the size of the Grid Risk Sharing Pool could arise from limiting the Pool to those coverages that are capped by the grid, i.e., allowing only mandatory coverage premiums and losses on grid-rated policies to be ceded to the Grid Risk Sharing Pool. Originally, the decision was made to require all premiums for all coverages on a policy transferred to the Risk Sharing Pool be ceded largely because the industry was generally of the view that the “take all comers” environment combined with a rate freeze would require companies to take on grid risks with inadequate rates for optional

• coverages. As well, at the time the Risk Sharing Pool was being implemented, companies

were challenged in terms of information technology resources to implement the wide- ranging automobile insurance reforms in Alberta as well as those of other jurisdictions

• ccurring around that time. At the company level, programming resources needed to cede

policies on a ‘partial’ basis were simply not available. Now that the marketplace has had time to adapt to the many changes introduced to the Alberta automobile insurance system, it may be appropriate to limit coverages on grid risks ceded to the Risk Sharing Pool to the compulsory coverages only. This approach has the potential to reduce the overall premium volume submitted to the Grid Risk Sharing Pool. Currently, optional coverage premiums account for 30% of the Grid Risk Sharing Pool

• volume. It also has the potential to foster a more competitive environment by encouraging

the re-entrance of non-standard companies. These companies have a potentially viable business model by pricing and retaining optional coverages for their own books. Arguably, they have more experience with service requirements associated with ‘grid’ types of risks and could leverage their expertise on behalf of those consumers. The presence of these types of companies also has the potential to create specialized expertise wherein companies will segment the grid risks and offer lower premiums for the risks it wishes to attract, further reducing the size of the Risk Sharing Pool thus enhancing stability in the marketplace. It is important to emphasize that reducing the size of the Grid Risk Sharing Pool by limiting it to mandatory coverages only should not be interpreted as a substitute for other measures aimed at reducing the number of risks eligible for grid protection and hence eligible for the Grid Risk Sharing Pool. If adopted, it should be done as a complementary measure to reducing the overall number of grid risks in the province.

Facility Association Submission AIRB 2006 Annual Adjustment Review 8 May 31, 2006

250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 Given the Plan of Operation requirement that “...the results of the Alberta Pool in connection with such [Non Grid] risks shall be maintained and reported separately from risks for which the premium has been established by the statutory premium grid,” limiting the ceded coverages on grid risks to those capped by the premium grid will more clearly illustrate the financial impact of the premium grid. By extension, the amount of the subsidy (to the extent that one exists) grid risks are receiving will be more clearly illustrated as well. We stress that the option of limiting the Grid Risk Sharing Pool to mandatory coverages

• nly is very much in the exploratory stage, and that the change would require approval of

the Superintendent, the Facility Association Board of Directors, and Alberta automobile

• insurers. From preliminary discussion with the Superintendent on this issue, we understand

there may be the opportunity to explore this option further in the context of the premium regulation review to take place in 2007. CONCLUSION 265 266 267 268 269 270 271 272 273 We appreciate the opportunity to offer these comments. Recognizing change is unlikely to

• ccur overnight, we believe reducing the size of the Risk Sharing Pools (particularly the

Grid Risk Sharing Pool), and ensuring grid rates are adequate, are in the best interests of Alberta consumers in the longer term by promoting stability in the marketplace. Facility Association management and our consulting actuaries would be pleased to meet with the Rate Board and its representatives to discuss these and related matters in more detail at any time.

Facility Association Submission AIRB 2006 Annual Adjustment Review 9 May 31, 2006

Appendix A

Page 1 of 2

Alberta Rate Profile Comparisons Mandatory Coverage Residual Market vs. Grid Rates

Profiles 1 & 2 – October 2004

Profile 1

CLAIMS CONVICTIONS RM PREMIUM GRID PREMIUM 1 Criminal Code in 3 years $4,275 $3,420 1 At-fault 6/2004 1 Criminal Code in 3 years $5,781 $3,420 2 Speeding in 3 years $1,868 $1,069 4 Speeding in 3 years $2,296 $1,283 6 Speeding in 3 years $2,809 $1,710 1 At-fault 5/2003 1 At-fault 6/2004 $2,968 $1,283 40 years old male licensed since 16 driving to and from work 10 km 2001 Ford Taurus $500,000 Liability Calgary (Territory 1) 1 At-fault 4/2002 1 At-fault 8/2002 1 At-fault 5/2003 1 At-fault 6/2004 $4,234 $2,138

Profile 2

CLAIMS CONVICTIONS RM PREMIUM GRID PREMIUM 1 Criminal Code in 3 years $11,659 $7,524 1 At-fault 5/2003 1 At-fault 5/2004 $8,007 $1,442 2 Speeding in 3 years $5,907 $1,999 4 Speeding in 3 years $7,345 $2,399 19 years old single male licensed since 16 driving to and from work 10 km 2001 Ford Taurus $500,000 Liability Edmonton (Territory 4) 6 Speeding in 3 years $9,071 $3,198

Appendix A

Page 2 of 2

Alberta Rate Profile Comparisons Mandatory Coverage Residual Market vs. Grid Rates

Profiles 3 to 5 – May 2006

Profile 3

CLAIMS CONVICTIONS RM PREMIUM GRID PREMIUM 26 years old

2 impaired 1 careless driving 1 driving while suspended

$7,359 $6,255

Profile 4

CLAIMS CONVICTIONS RM PREMIUM GRID PREMIUM 20 years old Now has interlock in vehicle 1 impaired

1 speeding

$3,903 $1,420

Profile 5

CLAIMS CONVICTIONS RM PREMIUM GRID PREMIUM 29 years old 7 speeding $5,961 $2,852

Facility Association Alberta Grid Risk Sharing Pool As at 28 February 2006 Notes Regarding the Estimated Operating Results by Coverage Starting Expected Loss Ratio An expected loss ratio of 87% was selected for the Alberta Grid Risk Sharing Pool (“RSP”) for the purposes of the October 2005 Operational Report. This estimate is documented in our report on the Valuation of the Policy Liabilities of Facility Association Alberta Grid Risk Sharing Pool (“Valuation Report”), a copy of which was sent to the Superintendent of Insurance for the Province of Alberta on 3 May 2005. Please refer to the Valuation Report for a discussion of the discounting assumptions underlying the financial statements of the Alberta Grid RSP, and the extent to which they differ from those underlying the October 2005 Operational Report. As noted in Section 1.6 of the Valuation Report, future loss emergence may deviate from

• ur estimate of the policy liabilities by amounts greater than the standard of materiality of

$1,260,000 used for the valuation. The potential for such deviation arises from many sources including, but not limited to:

• Uncertainty in the estimated loss costs for the industry in accident year 2005 (i.e.

the estimates derived in the 31 May 2005 report of Mercer Oliver Wyman),

• Uncertainty arising from the use of industry experience as the basis for deriving

an estimate for the Alberta Grid RSP,

• The estimated effect of the grid system on the premiums for risks ceded to the

RSP, and

• The volume and experience of risks in the RSP that were previously uninsured.

To date, no change has been made to the expected loss ratio of 87% for member sharing

• purposes. Accordingly, the claim liabilities reflected in the February 2006 Operational

Report are consistent with an expected loss ratio of 87%. Expected Loss Ratios by Coverage In order to estimate the operating results by coverage group (compulsory coverages and

• ptional coverages), it was necessary to derive loss ratio estimates by coverage that are

equivalent to the 87% expected loss ratio noted above. In addition to the areas of uncertainty already noted, the estimates by coverage incorporate other assumptions and approximations that may prove to be wrong. For example, we do not have available Alberta Grid RSP actual written or earned premiums by coverage at 28 February 2006. The premiums shown in columns (1) and (2) of the attached exhibit were allocated to the coverage groups based on actual premiums in calendar year 2005.

3 May 2006

1

Appendix B

Page 1 of 4

The expected loss ratios for compulsory coverages and optional coverages are estimated to be 97% and 59%, respectively. Based on the calendar year 2005 distribution by coverage, they combine to an overall loss ratio of about 85%, with differences in the underlying distribution by coverage likely explaining the difference between this estimate and the preliminary estimate of 87%. Operating Results For the purposes of the attached exhibit, the Operating Result was computed as the earned premiums, less the following amounts:

• Expense Allowance
• Administration Expenses
• Incurred Losses and Expenses (including IBNR and Development)

Accordingly, the operating result does not reflect investment income earned by member companies, nor does it reflect expenses such as premium tax incurred by those members in respect of their participation in the Alberta Grid Risk Sharing Pool. Cynthia M. Potts, FCIA, FCAS Eckler Partners Ltd.

3 May 2006

2

Appendix B

Page 2 of 4

[1] Premiums Written (Transferred) [2] Expense Allowance (a) [3] Earned Premium [4] Administration Expenses (b) [5] Expected Loss Ratio (Discounted) [6] Incurred Losses & Expenses (Including IBNR) [7] Operating Result = [3] - {[2] + [4] + [5]} [8] Operating Result as a % of Earned Premium Notes: FACILITY ASSOCIATION ALBERTA GRID RISK SHARING POOL 28 FEBRUARY 2006 ESTIMATED OPERATING RESULT BY COVERAGE (Amounts in $000's) Amounts Estimated by Coverage:

• Feb. 2006
• Oct. 2005

Compulsory Optional Sum of Operational Operational Coverages Coverages Coverages Report Report (1) (2) (3) (4) (5) 346,218 147,885 494,103 494,104 372,047 104,887 44,802 149,689 149,688 113,454 257,160 108,139 365,299 365,336 245,393 672 282 954 954 736 96.6% 58.5% 85.3% (c) 87.0% (c) 87.1% 248,417 63,261 311,678 317,735 213,736

• 96,816
• 206
• 97,022
• 103,041
• 82,533
• 37.6%
• 0.2%
• 26.6%
• 28.2%
• 33.6%

(a) The expense allowance is recorded on a written basis (i.e. based on written amounts, without any deferral on the basis of unearned premiums). Amounts were allocated by coverage on the basis of written premiums. (b) Administration expenses were allocated by coverage on the basis of earned premiums. (c) The difference between these two loss ratios is due to the assumed distributions of earned premiums by coverage. In all other significant respects, the assumptions underlying the loss ratio of 85.3% are consistent with the assumptions underlying the loss ratio of 87.0%, which is reflected in the October 2005 and February 2006 Operational Reports.

S:\PNC\Clients\FA\RESERVES\POOL\Alberta\F2006\ ALB RSP.GRID.Results By Coverage.Feb06.xls - OP RESULT 03/05/2006 - 5:26 PM

Appendix B

Page 3 of 4

FACILITY ASSOCIATION F A C I L I T Y A S S O C I A T I O N PAGE 1 151 YONGE STREET 18 FLOOR A L B E R T A R I S K S H A R I N G P O O L TORONTO, ONTARIO M5C 2W7 O P E R A T I O N A L R E P O R T - GRID

• CO. NO. MO. YR.

000 03 2006 FISCAL TOTAL -------------------------------------------- A C C I D E N T Y E A R S --------------------------------------- PROVINCE OF ALBERTA 2006 ALL YEARS 2007 2006 2005 2004 P O O L T O T A L * PRIVATE PASSENGER *

• THIS MONTH
• + PREMIUMS TRANSFERRED

27,327,578 4,510,870 22,894,112 77,763- 359

• EXPENSE ALLOWANCE

7,755,025 1,285,482 6,493,153 23,716- 106 = NET 19,572,553 3,225,388 16,400,959 54,047- 253 LOSS PAYMENTS TRANSFERRED 11,467,577 4,901,067 6,061,702 504,808 EXPENSE PAYMENTS TRANSFERRED 133,691 18,273 99,094 16,324 ADMINISTRATION 70,559 11,614 58,945 YEARS TO DATE

• + PREMIUMS TRANSFERRED

117,017,550 521,431,190 7,150,152 197,579,013 269,304,086 47,397,939

• EXPENSE ALLOWANCE

34,117,583 157,443,205 2,037,580 58,831,814 82,116,978 14,456,833 = NET 82,899,967 363,987,985 5,112,572 138,747,199 187,187,108 32,941,106 LOSS PAYMENTS TRANSFERRED 43,563,258 89,107,349 6,956,451 69,443,368 12,707,530 EXPENSE PAYMENTS TRANSFERRED 417,817 734,647 28,526 570,835 135,286 ADMINISTRATION 279,852 1,024,124 17,953 412,503 533,305 60,363 PREMIUMS EARNED 120,782,888 389,840,745 73,138,720 269,304,086 47,397,939 + PAID LOSSES AND EXPENSES 43,981,075 89,841,996 6,984,977 70,014,203 12,842,816 + OUTSTANDING LOSSES 107,650,049 107,650,049 29,701,090 70,442,274 7,506,685 + IBNR PROVISION 141,352,000 141,352,000 26,425,000 94,026,000 20,901,000 O/S LOSSES INCL. IBNR 249,002,049 249,002,049 56,126,090 164,468,274 28,407,685

• O/S LOSS INCL IBNR @ 31/10/2005

189,814,751 189,814,751 158,010,354 31,804,397 = INCURRED LOSSES AND EXPENSES 103,168,373 338,844,045 63,111,067 234,482,477 41,250,501 PREMIUM DEFICIENCY/(DPAC) 16,908,000- 16,908,000- 16,908,000-

Appendix B

Page 4 of 4

May 31 2006 1

Alberta Automobile Insurance Alberta Automobile Insurance Rate Board Rate Board 2006 Annual Adjustment Review 2006 Annual Adjustment Review

Facility Association Facility Association

June 15, 2006 June 15, 2006

May 31 2006 2

Presenters Presenters

David J. Simpson

President & CEO

Jill Hepburn

Vice President, Underwriting & Claims

Norman Seeney

Vice President, Finance & CFO

May 31 2006 3

Agenda Agenda

• Introduction
• Premium Grid
• Risk Sharing Pools - Overview
• Risk Sharing Pools – Size
• Risk Sharing Pools – Financial Results
• Market Impact
• Preferred Outcomes

May 31 2006 4

Facility Association in Alberta Facility Association in Alberta

Private Passenger Vehicles

• Risk Sharing Pools (Grid & Non-Grid)
• Residual Market Segment

Non-Private Passenger Vehicles

• Facility Association Residual Market

(FARM)

May 31 2006 5

Premium Grid Impact Premium Grid Impact

Residual Market Grid % Rate Rate Change 2,968 1,283

• 56.8

8,007 1,442

• 82.0

5,961 2,852

• 52.2

Reference: Appendix A

May 31 2006 6

Alberta Risk Sharing Pools Alberta Risk Sharing Pools -

• Structure

Structure

Premiums

• Companies submit 100% of Policy Premium

Claims

• Companies reimbursed for 100% of eligible

claims and expenses

May 31 2006 7

Alberta Risk Sharing Pools Alberta Risk Sharing Pools -

• Structure

Structure

Expenses

• Companies receive an allowance

Sharing of Results

Company Share of Result = Company Exposures not ceded to RSP x RSP Financial Results Industry Exposures not ceded to RSP

May 31 2006 8

Alberta Risk Sharing Pools Alberta Risk Sharing Pools -

• Size

Size

Transfer Limit

• Grid Pool

None

• Non-Grid Pool

4% of Exposures not ceded to the Grid RSP Grid Non-Grid Total Market Share Written Premium $370.6M $56.9M $427.5M 22.2% Exposure 207,381 54,650 262,031 13.9%

May 31 2006 9

Largest Residual Markets in North America Largest Residual Markets in North America

Market Share* NWT & Nunavut 30.3% North Carolina 23.2% Alberta 15.2%

*PPV exposures – AB & Territories 2005; North Carolina 2003

May 31 2006 10

Alberta Risk Sharing Pools Alberta Risk Sharing Pools -

• Financial Results

Financial Results

Loss Ratio Net Operating Result Grid 92.2% ($93.9)M Non-Grid 139.6% ($28.0)M

2005 Fiscal Year Audited Financial Statements @ www.facilityassociation.com

May 31 2006 11

Alberta Risk Sharing Pools Alberta Risk Sharing Pools -

• Financial Results

Financial Results

• Results are based on actuarial estimates
• Significant uncertainty due to:
• Start up phase
• Impact of product reforms
• Company decisions on Pool Use
• Results likely to change over time

May 31 2006 12

Market Impact Market Impact

Risk:

Large and volatile Residual Markets make the market less attractive

Result:

Less competition, choice and innovation

May 31 2006 13

Preferred Outcomes Preferred Outcomes

• Companies exposed to less volatility

from Risk Sharing Pools

• Consumers benefit from market

stability

May 31 2006 14

Achieve Outcomes By Achieve Outcomes By

• Fewer risks eligible for the Grid
• Adequate Grid rates
• Limiting coverages in the Grid Pool

May 31 2006 15

Alberta Automobile Insurance Alberta Automobile Insurance Rate Board Rate Board 2006 Annual Adjustment Review 2006 Annual Adjustment Review

Facility Association Facility Association

June 15, 2006 June 15, 2006

May 31, 2006 David J. Simpson, M.B.A. FCIP President & CEO Facility Association