Vol I DG PreFiledTestimony PPT [Read-Only] · Vi P id t HVice President, Human Resources & Chief...

PRE-FILED TESTIMONY

TESTIMONY OF DAN GUIMOND,

PRESIDENT ANDPRESIDENT AND CHIEF EXECUTIVE

OFFICEROFFICER

June 16, 2014 Pre-Filed Testimony

1

Corporate PrioritiesCorporate Priorities

• PUB and MPI working together towards financial g gviability & stability of Basic Insurance for all Manitobans.– Manitobans deserve auto insurance rates that are

affordable and predictable• Address physical damage claims cost

– Work with Manitoba Repair Trades to manage cost– Work with Manitoba Repair Trades to manage cost growth

– Offer customers service delivery options at lower operational costsoperational costs

• Prepare the organization for the digital economy; adapt to meet new operating realities

2


We are positioning MPI to be successful in a different operating environmentin a different operating environment

2014 2015 2016 2017 2018 2019 2020 2025 2030

Collaborative Estimating

High School

New 5 Year Product &

Service PlanPDR Complete

Autonomous Vehicles

Collision Avoidance TechnologyHigh School

Driver Education

(over 5 years)Distributed Estimating

Digitized Economy

3


Organization ChartPresident & Chief Executive Officer

Vi P id t HVice President, Human Resources & Chief Human Resources Officer (currently on hold)

Vice President, Finance & Chief Financial Officer

Vice President, Customer Service & Chief Operating Officer

Vice President, Business Development, Communications & Chi f P d t Offi

G l C l & C t

& Chief Operating OfficerChief Product Officer

Vice President, Business T f i I f iGeneral Counsel & Corporate

SecretaryTransformation, Information Technology & Chief Information Officer

4

Executive Assistant To The President Manager, Internal Audit


4

Our Relationship - Common GroundOur Relationship - Common Ground

All players in the regulatory process have a role to play, but p y g y p p y,also have common objectives:• Provide Basic ratepayers with rate predictability and

stabilitystability• Set rates that are just and reasonable• Offer amongst the lowest rates in Canada

f f• Ensure the sustainability and financial soundness of the universal compulsory automobile insurance program

• Achieve an actuarial opinion of being in a satisfactory p g yfuture financial condition

• Provide the ratepayers value for their money• Have a clearly defined public rate setting process

5

• Have a clearly defined public rate setting process


Success factors for PUB and MPI delivery to Basic ratepayers:delivery to Basic ratepayers:

• Leadership will be critical to moving forward

MPI d t d t t t th PUB th t it h li t d• MPI needs to demonstrate to the PUB that it has listened to their concerns and, more importantly, is doing something about themg

• MPI and PUB need to agree on the various economic assumptions used for the forecasting process, such as i hi h d i ll l h B iinterest rates which can dramatically alter the Basic financial results

• The PUB and MPI must finalize agreement on the• The PUB and MPI must finalize agreement on the methodology to calculate the minimum amount for the Basic RSR

6• The PUB and MPI must agree on how we move forward

on road safety



BASIC INSURANCE

TESTIMONY OF DAN GUIMOND,PRESIDENT AND CHIEF EXECUTIVE OFFICER

BASIC INSURANCE FINANCIAL SITUATION

7


Unprecedented Financial LossesUnprecedented Financial Losses• Basic has sustained net losses of approximately

$70 illi i h f th t t$70 million in each of the past two years • This is unprecedented since the PUB commenced

tti B i tsetting Basic rates • The reasons for this are varied and will be the

subject of evidence in this proceedingsubject of evidence in this proceeding • I would like to highlight that the severe winter

driving conditions along with greater severity ofdriving conditions, along with greater severity of claims resulting in significantly higher claims costs were a primary driver for the losses; not an

8

p y ;increase in operating expenses


RSR: Rate Stabilization ReserveRSR: Rate Stabilization Reserve • Lowest level in over 10 years

• By Feb 2015, at $62 million, it will be lower than current PUB target of 10-20% of written premiumscurrent PUB target of 10 20% of written premiums

• Ability to use the RSR to stabilize Basic rates in f t i t i kfuture years is at risk

• Rebuilding the RSR is critical

• Predictable and clear criteria for RSR rebuilding & rebating is needed

9

rebating is needed


Balanced Overall Rate IncreasesBalanced Overall Rate Increases

• When needed in the past, a RSR rebuilding fee of 2.0% was applied for and approved

• This year, a 2.4% Basic rate increase is y , %needed to deal with the current deficit in earned premiums p

• MPI determined a more moderate approach to RSR would be takento RSR would be taken– Requesting only a 1.0 % RSR rebuilding fee for a

total overall increase of 3 4% to 2015/16 rates10

total overall increase of 3.4% to 2015/16 rates


DCAT: Dynamic Capital Adequacy TestDCAT: Dynamic Capital Adequacy Test

• The DCAT method under development with the PUB pand MPI over the last few years is recommended for setting the RSR target

• The use of DCAT has been proposed since 2010• Positive reports from Heather Reichert, Luke Johnston p ,

and Kathy Kalinowsky regarding the practicality of the DCAT technical conferences resulting in the two Areas of Agreement documents

• MPI asks that the PUB approve its implementation

11


Overall Premium/Incomes & Claims Costs

+10%10%

range

-10%

12


RSR Fund Profile

13


Rebuild RSRRebuild RSR

• The Corporation, as it has done in the past when faced with significantly adverse financial results– Is willing to rebuild the Basic RSR with a

transfer of excess retained earnings from its competitive lines of business

O th RSR i d b th PUB• Once the RSR range is approved by the PUB, the amount and rate of transfer will be determined by MPIdetermined by MPI

14


MPI is seeking approval of the PUB of:

• A Minimum RSR of $194 million• A Minimum RSR of $194 million– Which is the largest reduction in retained earnings

identified from all the plausible adverse scenarios p• That the Corporation hold a minimum total equity

of $213 million – Which is based on the largest reductions in total equity

from all plausible adverse scenariosA b th i i RSR t t ith• A range above the minimum RSR target with an upper range based on a 100% MCT value

15


Interest Rate Volatility & Risk ToleranceTolerance

• Current plan is based on an average rate forecast by the five major banks and Global Insight

• If the current forecast does not materialize, and a lower interest rate growth occurs, the premiums will be deficient by 1.9% which would translate into a $16 million reduction in retained earnings

• To protect rate stability and long term viability a lower interest rate growth forecast is more prudent

16


Income Interest Rates Have been Volatile; Rate Growth Forecasted in 2008 thru 2013 has Not

Materialized

The spread between the MPI lower interestthe MPI lower interest rate growth forecast and the current forecast will generate a shortfall in premiums of 1.9%,p ,which translates directly to a $16 million reduction in

Actual Interest Rates million reduction in

retained earningsInterest Rates

17


Acceptable Risk ?Acceptable Risk ?• The interest rate forecast, and in particular the perspective of

the economists preparing the forecast is a good example of thethe economists preparing the forecast, is a good example of the risk tolerance the PUB has to consider in setting Basic rates.

– There is significant risk in the interest rate not increasing as forecast by the average of the five major banks and Global Insight.

• If MPI had applied its risk tolerance to the interest rate forecastIf MPI had applied its risk tolerance to the interest rate forecast, it would have used the lower interest rate growth forecast;

– The rate increase requested would have been for 4.3%

• In keeping with the PUB direction last year, our interest rate forecasting methodology does not include the insertion of our

18

forecasting methodology does not include the insertion of our judgment.



MOVING FORWARD


MOVING FORWARD

19


Value to ManitobansValue to ManitobansSimply stated:

M it b l t th t th C di f• Manitobans pay lower rates than most other Canadians for often significantly more benefits

• MPI customers receive exemplary service when and where they want it – While a private insurer would likely not provide a guarantee of a claims

service centre within a one hour drive for 90% of customers, MPI does• Unlike other automobile insurers across the country MPI

customers have comprehensive protection against the cost of collisionscollisions– Including the Personal Injury Protection Plan – With a basic deductible of only $500

• As a public insurer, MPI does not turn anyone away

20

As a public insurer, MPI does not turn anyone away – No driver is discriminated against on the basis of age, gender or

marital status


A Culture of Cost Containment and Continuous ImprovementContinuous Improvement

• The Corporation takes seriously itsThe Corporation takes seriously its responsibility to provide excellent service to our customers while controllingto our customers, while controlling operating costs

• Initiatives taken by the Corporation have• Initiatives taken by the Corporation have resulted in cost savings or cost avoidance of almost $60 million per yearof almost $60 million per year

21


Cost ContainmentCost Containment• Despite the increase in the number of claims this year, total

corporate claims & operating expenses are lower than last yearcorporate claims & operating expenses are lower than last year. • Responding to a second year of a significant financial loss MPI

has taken the following serious management actions:– A hiring freeze has been implemented– All out-of-province travel & conference participation is restricted

All f ti tt d d l l b i t l t ff– All expenses for meetings attended solely by internal staff are restricted

– A committee of senior managers has been formed to:A committee of senior managers has been formed to:• identify, investigate and implement operating cost reduction

initiatives, and further cut discretionary spending in areas

22

such as travel, conferences, meetings, sponsorships, consulting, etc.


Program InitiativesProgram Initiatives• Physical Damage Re-engineering project

Innovative approach to managing physical damage claims– Innovative approach to managing physical damage claims – Once completely implemented in 2019, will contribute to more than

$13 million reduction in costs I l di l t $10 illi di tl l t d t d i l i t– Including almost $10 million directly related to reducing claims costs

• High School Driver’s Education programg g– Commits to reducing frequency and severity for a particular

customer segment – Pilot certain technologies like after-market collision avoidancePilot certain technologies like after market collision avoidance

systems, text-blocking software, and vehicle telematics that driving instructors and parents/guardians can use to monitor student progress in acquiring safe driving habits and skills

23– Long term; reduction in accident frequency & severity for this group


Cost Reduction Tactics that are NOT viable options for MPI to considerviable options for MPI to consider

• Outsource its contact centre to offshore providersOutsource its contact centre to offshore providers• Offshore its IT staff• Implement a “no-frill” lesser Basic insurance policyImplement a no frill lesser Basic insurance policy

or arbitrarily increase the Basic deductible to avoid claims

• Implement a direct selling model by eliminating brokers

• Direct customers to selected collision repair shops to achieve economies of scale and lower repair costs to MPI

24

costs to MPI


ConsistencyConsistency

• Socio-economic responsibilities need to balance Basic insurance mandate to establish a proper operational cost basis

• Basic RSR amount due to the monopoly situation and the operational cost benchmarking targets need to account for expected services, access, fairness and stability objectives

• No one aspect can dominate; the guiding principles for one area need to be consistent with th i i l ithi th th

25

the principles within the other areas


BenchmarkingBenchmarking• We have heard what the

Board ordered in 151/13 onOperational Efficiency M

IT Service Delivery

Capability

Board ordered in 151/13 on benchmarking and we think what we have provided goes

l t f lfilli thiMeasuresCorporation's use

of resources

Capability Measures

Maturity level of the Corporation

a long way to fulfilling this

• Volume I Benchmarking

Serving Manitobans

Community Impact

gprovides the Board with a benchmarking framework that the Corporation intends

MeasuresQuality of service

delivered to Manitobans

pMeasures

The effect programs and services have on the community

that the Corporation intends to use to monitor operations and the attainment of the corporate goals as we move

26

Manitobans on the community corporate goals as we move forward


Road Safety Through the Lens of Loss PreventionThrough the Lens of Loss Prevention

• From a loss prevention standpoint; p p– Frequency & severity of claims and

strategies to reduce specific areas arestrategies to reduce specific areas are legitimate opportunities for MPI & PUB to collaborate oncollaborate on

• If the PUB agrees, MPI will submit a comprehensive loss prevention plan for thecomprehensive loss prevention plan for the Basic line of business in next year’s GRA

27


Changes in the Automotive Industry; Emerging BehaviourEmerging Behaviour

• Auto manufacturers are facing extreme pressure to meet fuel emission legislation throughout North Americafuel emission legislation throughout North America

• New makes & models with significantly higher fuel efficiency have been entering the market in the last few years; more are coming

• These vehicles come with a larger proportion of complex materials and technologies that in turn require new toolingmaterials and technologies that in turn, require new tooling, equipment, methods and facilities to properly repair– When they get damaged, they cost more to repair and

they take longer to repair• The Manitoba repair industry needs to tool up; this will be

expensive and disruptive

28

expensive and disruptive


Example is the 2015 Ford F-150Example is the 2015 Ford F-150• Introduced this spring, 2014

– Will be an aluminum based vehicle– Rigorous application of aluminum repair standards

requires that normal steel based repairs be inrequires that normal steel based repairs be in separate facilities due to cross contamination issues

– A bit of steel/iron dust mixed in with an aluminumA bit of steel/iron dust mixed in with an aluminum weld can lead to serious degradation of the repair

– Current rate for auto body repairs is $68.89 per hour– The national rate for structural aluminum repair is

approximately $150.00 per hour

29

– The Corporation will need to address this emerging issue in future negotiations


Forecasting Physical Damage Costs & Corresponding Premium is Now More complexCorresponding Premium is Now More complex

• Current approach relies on a proven method (CLEAR) based on the experience with the fleet as it is

• As newer vehicles age into the fleet, their repair experience will be significantly different

• We must work together to understand these trends and take necessary action to mitigate this risk in order to ensure affordable rates that are predictable and stable for Basic

30

ratepayers



MPI’S CONTRIBUTION TO


MPI S CONTRIBUTION TO MANITOBA’S ECONOMIC LANDSCAPE

31

LANDSCAPE


MPI’s Contribution to Manitoba’s Economic LandscapeEconomic Landscape

• $495.5 million (before expenses) Autopac physical damage claims; – this includes payments to body shops and auto repair facilities glassthis includes payments to body shops and auto repair facilities, glass

repair shops, tow truck companies, rental car agencies, and to customers for vehicles that were total losses

• $145.9 million on injury claims j y• $26.3 million paid to Manitoba Health• $76.2 million commissions paid to independent insurance brokers• $151 2 million salaries and benefits• $151.2 million salaries and benefits• $29.4 million in premium tax • $1.8 million was provided to municipalities as grants • $2.5 million in Health & Education tax

In combination, the above represents a direct contribution to the

32

provincial economy by Manitoba Public Insurance of close to $1 billion in 2013/14.



RATES


RATES

33


Over the Last 10 yearsRates Have Been Kept Low (decreased)Rates Have Been Kept Low (decreased)

• Collision costs continue to grow while Basic insurance rates have stayed constant or decreased

• Cumulative total for rateCumulative total for rate changes over the prior 10 years is -14.9%

• PUB has ordered reductions• PUB has ordered reductionsof 2.1%

• Cumulative impact of these d i d ti iorders is a reduction in

premium revenue of approximately $18 million

34

• This is not sustainable


34

Continuing Affordability for Manitobans

Had MPI Basic rates 140%

Passenger Vehicle Average Premium Growth

(Statistics Canada) increased at the same rate as the 5.12 % Canadian average

100%

120%

140%

Percentage Change

since 2001

2001 to present

Canadian average CPI for auto insurance since 2001

60%

80%

since 2001

Manitobans would be20%

40%

Manitobans would be paying 60.2% morethan they are actually

0%

Fiscal Year Ending

Manitoba Canada

35

y ypaying today

Manitoba CanadaSaskatchewan OntarioAlberta British Columbia


We are asking the Board to approve:We are asking the Board to approve: • The premiums charged with respect to compulsory driver

and vehicle insurance (rates for service) effective March 1and vehicle insurance (rates for service) effective March 1, 2015

• A 2.4% overall Basic insurance rate increase effective March 1, 2015

• A Rate Stabilization Reserve Rebuilding Fee of 1.0% on each Basic Autopac premium effective March 1 2015each Basic Autopac premium, effective March 1, 2015

• The use of the DCAT methodology to determine the Basic Autopac minimum RSR target of $194 million, and minimum total equity target of $213 million, based on the Chief Actuary’s final DCAT report

• A range above the recommended minimum RSR target

36

• A range above the recommended minimum RSR target (based on the minimum DCAT amount ) with the upper range based on a 100% MCT value



THANK YOU


THANK YOU

37


Vol I DG PreFiledTestimony PPT [Read-Only] · Vi P id t HVice President, Human Resources & Chief...

Documents

Transcript of Vol I DG PreFiledTestimony PPT [Read-Only] · Vi P id t HVice President, Human Resources & Chief...