DECISION 2020 NSUARB 14 M09513 M09514

NOVA SCOTIA UTILITY AND REVIEW BOARD

IN THE MATTER OF THE INSURANCE ACT

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IN THE MATTER OF APPLICATIONS by AVIVA INSURANCE COMPANY OF CANADA and TRADERS GENERAL INSURANCE COMPANY for approval to change their rates and risk-classification systems for private passenger vehicles

BEFORE: Stephen T. McGrath, LL.B., Member

APPLICANTS: AVIVA INSURANCE COMPANY OF CANADATRADERS GENERAL INSURANCE COMPANY

FINAL SUBMISSIONS: January 20, 2020

DECISION DATE: February 10, 2020

DECISION: Applications are approved.

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I INTRODUCTION

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[1] Aviva Insurance Company of Canada and Traders General Insurance

Company are related companies, and both applied to the Nova Scotia Utility and Review

Board to change their rates and risk-classification systems for private passenger vehicles.

The companies propose changes to base rates and differentials, and to their risk-

classification systems, that result in an overall increase of 10.5% for Aviva and 14.4% for

Traders.

[2] In addition to changes to base rates, the companies also ask the Board to

approve the following:

• changes to their territorial base rates;• the adoption of the 2019 Canadian Loss Experience Automobile Rating

(CLEAR) Table;• the removal of certain discounts;• the adoption of a new rating variable;• the introduction of a new non-standard endorsement;• the replacement of an existing non-standard endorsement with a standard

form endorsement;• changes to their rating algorithms;• changes to certain rating or underwriting rules; and• the continuation of an existing cap on premium increases and decreases at

renewal.

[3] The Board must consider whether the proposed rates and risk-classification

systems are just and reasonable and in compliance with the Insurance Act (Act) and its

Regulations. The Board is satisfied that the applications meet these requirements and

approves the proposed rates and risk-classification systems for Aviva and Traders.

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II ANALYSIS

[4] Aviva and Traders applied under the Board’s Rate Filing Requirements for

Automobile Insurance - Section 155G Prior Approval (Rate Filing Requirements). Since

the filing of these applications, Aviva and Traders received and responded to Information

Requests (IRs) from Board staff. Board staff prepared a report to the Board with

recommendations on the applications (Staff Report). Before providing the Staff Report to

the Board, Board staff shared it with Aviva and Traders. The companies reviewed the

report and provided Board staff with brief comments clarifying their intentions for the

requested new rating variable and about the timing of the release of the Board’s decision

in this matter. Aside from these matters, they had no further comments on the Staff

Report.

[5] Board staff examined all aspects of the ratemaking procedure to make the

recommendations in the Staff Report and suggested that the Board further review certain

issues. Board staff consider that Aviva and Traders satisfactorily addressed all other

aspects of the ratemaking procedure in its application and IR responses.

[6] The Board will examine the following issues in this decision:

• Loss Trends• Profit Provision (Target Return on Equity)• Comparison of Proposed Rates to Indicated Rates• Territorial Differentials and Rates• 2019 CLEAR Table• Discounts• Endorsements• Proposed Rating Variable: Responsibility Factor• Rating Algorithm• Rating or Underwriting Rules• Premium Dislocation Capping

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Loss Trends

[7] The Board periodically publishes loss trend selection reports prepared by

its consulting actuary, Oliver Wyman Limited, based upon industry-wide Nova Scotia

data. The most recently published report is based on General Insurance Statistical

Agency industry claims experience data through December 2018. The loss trends in the

most recently published report may be used by insurers to develop rates for Board

approval. The Board views these loss trends as benchmarks, but their use by insurers

is not mandatory. An insurer may choose to use different selections, in which case, they

are expected to provide the supporting information for their chosen selections as well as

comments on why their selections are more appropriate in the circumstances.

[8] In this application, Aviva and Traders, in selecting their loss trend

assumptions, reviewed data for their own combined experience in Nova Scotia through

December 2018. They also considered the most recent Oliver Wyman report published

by the Board for private passenger vehicles. They argue that their experience has been

different from the industry, supporting the use of their own data, in whole or in part, for

the development of loss trends. Given that their combined market share is about 10%,

they say that this experience is credible enough to use to discern trends. However, due

to the significance of the differences, the companies continue to consider both company

trends and industry trends by giving equal weighting to both.

[9] Board staff produced tables comparing each company’s loss trend

selections to those in the most recent Oliver Wyman report. Board staff observed some

differences but noted that the differences between the companies and Oliver Wyman are

not as large as those observed in their past filings.

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[10] The companies also provided an analysis of required rates using the Oliver

Wyman loss trends. Board staff compared these to the indicated rates using the loss

trends selected by the companies. Board staff advised that, while there are some

differences by coverage, the overall indications are close. The indicated rate increases

for the companies are less than two percentage points higher using their own selections

compared to the Oliver Wyman loss trends. Board staff concluded that the companies

supplied enough evidence to support the use of their loss trend selections, which give

equal weight to company and industry trends. Board staff recommend that the Board

accept these loss trend selections in developing indicated rates in these applications.

The Board accepts this recommendation.

Profit Provision (Target Return on Equity)

[11] The Rate Filing Requirements note that, in general, the Board finds a return

on equity between 10% and 12% to be reasonable, assuming a premium-to-surplus ratio

of 2:1. The Board also allows a return on premium approach to reflect profit and generally

views a range of 5.5%-7% as reasonable.

[12] Aviva and Traders use a profit provision that reflects a 12% target for return

on equity and a 2:1 premium-to-surplus ratio. This combination produces profit provisions

that are a little higher than the range in the Rate Filing Requirements but are consistent

with what the companies included in their last filings for the approval of rates for private

passenger vehicles. In those filings, the Board required the companies to move to a 10%

return on equity resulting in a profit provision at the low end of the Rate Filing

Requirements range.

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[13] Board staff do not believe that the companies’ circumstances call for a

different treatment of Aviva or Traders than the Board has recently employed for other

insurance carriers in Nova Scotia and has imposed on the companies in past applications.

While the impacts are not large, Board staff recommend the Board require Aviva and

Traders to use a 10% return on equity in its indications and the Board agrees. The Board

will compare the rates proposed by the companies to the rates indicated using a target

return on equity set at 10% instead of the selected 12% with all other assumptions used

by the companies unchanged.

Comparison of Proposed Rates to Indicated Rates

[14] Aviva’s proposed rate changes produce lower rates than indicated for all

coverages. Aviva estimated that the proposed rates would produce a return on equity of

8.11%.

[15] Traders’ proposed rates are set at a specific percentage of Aviva’s

proposed rates for all coverages except SEF #44 (which both companies propose to leave

unchanged). In previous applications, the companies explained that the choice of setting

Traders’ rates as a percentage of Aviva’s rates maintains a clear relationship between

the rates for the two companies. This relationship also makes it easier to communicate

with brokers and manage their expectations on the rate differences between the two

companies.

[16] Traders’ proposed rates produce lower rates overall than indicated, but the

difference by coverage is mixed. The proposed rates are higher than the indicated rates

for Bodily Injury, Accident Benefits, Uninsured Automobile, and Specified Perils. The

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proposed rates are lower for the remaining coverages. The proposed increases for Bodily

Injury and Accident Benefits are much larger than the indicated increases. However,

these increases are partially offset by a much lower increase for Property Damage-Tort

& DCPD than indicated. All of these coverages are mandatory coverages, and the

proposal results in all risks receiving close to the indicated change for mandatory

coverages. The difference in the overall change is driven by the optional coverages,

where the proposed rates are lower than the indicated rates. Traders estimates that the

proposed rates would produce a return on equity of 9.09%.

[17] Board staff recommend that the Board approve the rates proposed by the

companies.

Territorial Differentials and Rates

[18] The companies conducted an analysis of territorial indications. They did

not set territorial differentials directly from their actuarial analysis, but instead, after

considering their competitive position and other regional concerns, proposed changes to

their territorial base rates that deviated from the indicated changes. The companies

supplied more information in IR responses and noted that they used information from their

brokers to compare their rates to anonymous competitor quotes.

[19] Board staff concluded that the companies supported their proposed

territorial base rates and recommend that the Board approve them.

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2019 CLEAR Table

[20] The companies currently use the 2018 CLEAR (AB Alberta & Atlantic)

Combined (Coll & DCPD) - Extended Vehicle Code (21 Years) version of the CLEAR

tables published by the Insurance Bureau of Canada to assign rate groups for physical

damage coverages and for Accident Benefits. They propose to adopt the 2019 version

of this table and have included the impact of the changes when determining the off-

balancing calculations for all the proposed risk-classification changes.

[21] On January 15, 2020, the Board approved the 2020 version of this table.

The companies filed their applications more than a month before the Board approved the

2020 table. Aviva and Traders advised, in an IR response, that if the 2020 table was

approved before a decision on their applications was issued they would still prefer to use

the 2019 table due to time constraints on their intended implementation of new rates.

Board staff recommend that the Board approve the adoption of the 2019 table.

Discounts

Anti-Theft Discount

[22] The companies currently offer a 5% discount when a vehicle is equipped

with an after-market anti-theft device, but propose to remove this discount because they

believe that most cars already have a factory installed anti-theft device so there is no

need for the after-market version. The companies also noted that a loss ratio analysis did

not show that the inclusion of an after-market anti-theft device is predictive of risk. The

removal of this discount has only a small impact and was included in an overall off-

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balancing for rates. Board staff recommend that the Board approve the removal of the

Anti-Theft Discount.

Loyalty Discount

[23] The companies currently offer a 5% discount if a policy has been in force

for at least three years with any company within the Aviva group, but propose to remove

this discount. In support of this request, the companies supplied the Board with a loss

ratio analysis showing that the gap between the loss ratios for those with the discount

and those without narrowed between 2014 and 2018, demonstrating that loyalty was

becoming less predictive of risk. The companies expect this trend will continue. The

companies estimate that the removal of this discount results in an almost 4% overall

increase and included this impact when doing an overall off-balancing for rates. Board

staff recommend that the Board approve the removal of the Loyalty Discount.

Car and Home Discount

[24] The companies offer a 10% discount when an insured has both an

Automobile policy and a Homeowner, Tenant or Condominium policy with one of the

Aviva group of companies. They propose to remove the discount for occasional drivers

licensed less than nine years in Canada or the United States. The companies said that

this change will align Nova Scotia with what they do in other jurisdictions. They also said

that the proposed change has only a very slight impact on overall rates which they

addressed when doing an overall off-balancing for rates. Board staff recommend that the

Board approve the proposed change to the Car and Home Discount.

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Endorsements

New Non-Standard Endorsement VSH - Permissions to Participate in a Vehicle Sharing

System

[25] To prepare for the vehicle sharing economy, the companies propose the

introduction of a new non-standard endorsement, VSH - Permission to Participate in a

Vehicle Sharing System. This endorsement removes an exclusion under the policy to

allow a described vehicle to be used as a “Vehicle Share Automobile”. The endorsement

will be available to private passenger vehicles and motorhomes.

[26] The removal of this exclusion allows for short-term rentals of the vehicle.

The companies modelled the endorsement after one they offer for the same purposes in

Ontario. The Nova Scotia Superintendent of Insurance approved the wording of this non­

standard endorsement on November 22, 2019.

[27] The companies propose the same $30 premium for the endorsement that

they charge in Ontario. They do not believe there are any material differences in the

short-term rental markets in Ontario and Nova Scotia that would require a different

premium. They also said that the $30 premium charged in Ontario was based on their

judgment, as they lacked claims experience in this area. As they gain claims experience

in Nova Scotia, the companies will consider premium changes.

[28] Board staff recommend that the Board approve the introduction of the new

non-standard endorsement and its $30 premium.

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Replacement of Non-Standard Six* Protector (PRO) and Extension Endorsements with

Standard Endorsement Form #39 - Accident Rating Waiver Endorsement

[29] The companies currently offer accident forgiveness under their non­

standard Six* Protector endorsement but propose to remove this endorsement in favor of

a standard endorsement, SEF #39 - Accident Rating Waiver. The benefits are essentially

the same under the non-standard endorsement and SEF #39. The companies propose

to charge the same $30 premium for SEF #39 as they do for the Six* Protector

endorsement now but would make two changes to how the premiums are determined.

[30] The first of the two changes the companies propose with their move to SEF

#39 is to not provide it to occasional drivers. They said that while occasional drivers can

currently buy a version of the Six* Protector endorsement, interest in this has been very

low so they chose to retire it under the new offering.

[31] The second change applies when a single primary operator has multiple

vehicles, or there are more vehicles than operators. Under the current non-standard

endorsement, the companies charge a premium only once per operator. Any unassigned

(or extra) vehicles would receive the benefit of the Six* Protector endorsement at no

additional charge. Under the current proposal, the companies will require a separate $30

SEF #39 premium for each vehicle under the policy to extend the endorsement coverage

to all vehicles.

[32] The companies explained that for vehicles that are insured for operation on

the road, they charge a driver with multiple vehicles a premium for each vehicle. Under

the proposal, they would apply the same approach to the SEF #39. The companies also

said that the change aligns the rating approach with the intention of the endorsement

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wording that the protection is only for the automobile to which the endorsement applies.

They believe the change provides the appropriate premium for the risk, without requiring

a subsidy from other policyholders to cover the vehicles that currently would have no

premium assigned.

[33] Board staff recommend that the Board approve the retirement of the Six*

Protector endorsement and its replacement with the SEF #39, along with the retirement

of the protection for occasional drivers.

Proposed Rating Variable: Responsibility Factor

[34] The companies use certain characteristics of the vehicle and driver, or

rating variables, to determine the premium to charge a client. The premium is determined

by applying factors, referred to as differentials, to each segment within a variable.

[35] In this application, the companies propose to introduce a new rating variable

based on a customer’s credit information. The Board is aware that in Newfoundland and

Labrador and Ontario legislation explicitly prohibits the use of credit information for

automobile insurance rating or underwriting. The companies have supplied evidence that

such use is allowed elsewhere in Canada. Given the different treatment of credit

information in different jurisdictions in Canada, the Board considered whether this factor

could be used to determine automobile insurance rates in this province.

[36] In Nova Scotia, the Matters Considered in Automobile Insurance Rates and

Risk-Classification Systems Regulations, N.S. Reg. 183/2003, prohibits the use of certain

factors in a risk-classification system but does not explicitly mention credit information:

Prohibited risk factors

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2 An insurer is not permitted to include in a risk-classification system for automobile insurance any risk-classification factor that, in the opinion of the Board

(a) is subjective;

(b) is arbitrary;

(c) bears little or no relationship to the potential risk to be assumed by the insurer; or

(d) is contrary to public policy.

3(1) An insurer is not permitted to include any of the following factors as risk- classification factors in a risk-classification system for automobile insurance:

(a) any claim resulting from an incident for which the insured was not at fault;

(b) any claim that was made more than 6 years before the year for which the contract is to be issued;

(c) a lapse in coverage under a contract of automobile insurance for a period of less than 24 months, except as provided in Section 4;

(d) age;

(e) marital status;

(f) whether or not a person who would be an insured is covered by

(i) a medical, surgical, dental or hospitalization plan, or

(ii) an income continuation plan, a sick leave plan

or any other arrangement or plan providing coverage for benefits that, in the absence of the arrangement or plan, the insurer would be required to pay for under Schedule 2 of the Automobile Insurance Contract Mandatory Conditions Regulations;

(g) membership in an organized group, except as provided in Section 5;

(h) any of the following that do not result in a claim for payment or indemnification under a contract by an insured:

(i) an inquiry made by an insured about coverage under a contract, or

(ii) a notification made by an insured of an incident that involves the insured.

(2) For greater certainty, the inclusion of risk-classification factors that reflect driving experience does not contravene clause (1)(d).

(3) A claim recorded in respect of an incident for which an insured who is at fault made a voluntary payment to the insurer of the person who is not at fault is deemed to be an incident for which the insured was not at fault for the purposes of this Section, as referred to in clause (1)(a).

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[37] The companies currently use credit information to rate property policies in

some jurisdictions, including Nova Scotia. In those policies, this information appears to

be predictive of risk. The companies believe this predictive nature will carry over to

automobile insurance and in response to IRs, supplied the Board with additional

confidential information that supported this belief. Based on the information provided in

this application, the Board finds that the proposed use of credit information as a rating

variable is not subjective or arbitrary and is reasonably related to the risk assumed by the

companies.

[38] In considering whether the proposed rating variable would be contrary to

public policy, the Board has reflected upon the fact that it is permitted elsewhere in

Canada. In Ontario and Newfoundland and Labrador where the use of credit information

is prohibited, this is explicitly addressed in legislation. The Board has also considered

the prohibited factors in s.3 of the Matters Considered in Automobile Insurance Rates and

Risk-Classification Systems Regulations, and notes that none of them have anything to

do with the financial circumstances of the insured except s. 3(1 )(f) which deals with the

potential existence of other insurance that may affect the benefits that an automobile

insurer may be required to pay such as income replacement or medical benefits.

[39] Board staff advise that during staffs review of the application, the

Superintendent of Insurance was also contacted to confirm the Superintendent’s view that

credit information is not prohibited for rating in Nova Scotia. The Board has also taken

into account the fact that under the companies’ proposals, a customer will not be required

to provide credit information to obtain insurance, A customer may be able to obtain a

better rate if this information is provided, but wont be denied insurance if they do not.

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Considering all of this, and in the absence of specific evidence providing a justification for

doing otherwise, the Board finds that approving the proposed rating variable would not

be contrary to public policy.

[40] Board staff submit that the companies supported the introduction of the

proposed rating variable and recommend that the Board approve its introduction. Board

staff also recommend that the Board should require the companies to provide, in their

next mandatory filing for rates for private passenger vehicles, an update to see if the

experience emerged as expected and to determine whether changes to the off-balancing

calculations are required.

Rating Algorithm

[41] The companies propose changes to their rating algorithms to reflect the

changes noted above. They also request changes to remove multiple rounding steps.

Rather than rounding to the nearest dollar at each step, the full result of the calculation

carries forward to the next step.

[42] Board staff recommend that the Board approve the proposed changes to

the rating algorithms.

Rating or Underwriting Rules

[43] In addition to several changes to clarify current practices or to correct

typographical errors or missing words, the companies proposed other changes to their

rating or underwriting rules. Some of these changes also result from proposals advanced

by the companies in this application and addressed elsewhere in this decision.

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[44] Many of the changes impact the rules the companies use to determine when

insurance will not be provided for a vehicle (usually because it is too risky). For example,

the companies will no longer accept risks with more than one distracted driving conviction.

While one such conviction could be a learning experience, a pattern of two or more would

suggest the operator is a high-risk individual. None of the proposed decline rule changes

violate the Act or its Regulations.

[45] Two changes impact a rating variable based on an insured’s driving record

and are therefore risk-classification system changes. The first adds language advising

that a “Driving Record 6” will not be available when a driver of the vehicle has had a non­

payment cancellation in the past three years. The companies explained that this merely

represents a move of information from a section on Lapse of Coverage to the driving

record section.

[46] The other driving record change removes a driver training credit (i.e., new

licensed driver with driver training assigned driving record 3) for principal operators but

leaves it for occasional operators. The companies explained that principal operators drive

daily, and that the driver training does not offset this higher exposure in the manner it

would for an occasional driver who drives less frequently.

[47] The companies also propose to change their eligibility criteria for a SEF #43

- Limited Waiver of Depreciation endorsement. For new business, the vehicle must now

have no unrepaired damage, while for renewal business, proof of repairs from a loss must

be received prior to renewal. The endorsement will also be limited to vehicle rate groups

54 and under, to reflect the companies’ revised appetite towards high valued vehicles.

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[48] The companies propose a change to address instances where, as permitted

in Nova Scotia, an individual identifies as Gender X on a driver’s licence. In such cases,

the companies propose to charge female rates for someone making such an

identification. In all cases where rates differ by gender, the rates applicable to females

are lower than those for males. Until experience emerges under Gender X, this approach

seems reasonable and follows approaches taken by other companies.

[49] Board staff recommend that the Board approve all the underwriting and

rating rules changes, including those made for clarification or correction.

Premium Dislocation Capping

[50] The companies currently have Board-approved premium dislocation

capping mechanisms that limit premium increases to 25% at renewal and decreases to

5%. The information that the companies supplied shows that the capped increase is

lower than the uncapped increase for both companies. The negative cap meets the

Board’s criteria that income foregone by the Company from the positive cap must exceed

the extra revenue collected from the negative cap.

[51] Other information showed that the capping has a relatively small impact

because only a few risks are subject to the capping. While the impact itself may not be

large or material, the companies wish to keep the cap to offset the impact because the

caps help stabilize premiums. They indicate that, on average, the cap will be in place for

two years.

[52] Board staff recommend that the Board approve the proposed continuation

of the premium dislocation cap for both companies.

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IH SUMMARY

[53] The Board finds that the applications follow the Act and Regulations, as well

as the Rate Filing Requirements.

[54] The Board approves the proposed changes to territorial base rates.

[55] The Board approves the adoption of the 2019 CLEAR table.

[56] The Board approves the proposed changes to discounts, including the

removal of the Anti-Theft Discount and the Loyalty Discount, and the proposed changes

to the Car and Home Discount.

[57] The Board approves the proposed changes to endorsements, including the

introduction of a new non-standard VSH - Permission to Participate in a Vehicle Sharing

System endorsement and its $30 premium, and the removal of the Six* Protector

endorsement and replacement with SEF #39 (along with the retirement of the protection

for occasional drivers).

[58] The Board approves the adoption of the proposed Responsibility Factor and

directs Aviva and Traders to provide, in their next mandatory filing for rates for private

passenger vehicles, an update demonstrating whether experience has emerged as

expected and assessing whether changes to the off-balancing calculations are required.

[59] The Board approves the proposed changes to the rating algorithms.

[60] The Board approves all the underwriting and rating rules changes, including

those made for clarification or correction.

[61] The Board approves the proposed continuation of the premium dislocation

caps.

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[62] The Board finds the proposed rates are just and reasonable, and approves

the changes effective May 1,2020, for new business and renewal business.

[63] The financial information supplied by Aviva and Traders satisfies the Board,

under Section 1551(1 )(c) of the Act, that the proposed changes are unlikely to impair the

solvency of the company.

[64] The application qualifies to set a new mandatory filing date under the

Mandatory Filing of Automobile Insurance Rates Regulations. The new mandatory filing

date for Aviva and Traders for private passenger vehicles is December 1,2021.

[65] Board staff reviewed the companies’ Automobile Insurance Manuals filed

with the Board and did not find any instances where the manuals contravened the Act

and Regulations. The companies must file electronic revisions of their manuals, updated

for the changes approved in this decision within 30 days of the issuance of the order in

this matter.

[66] An order will issue accordingly.

DATED at Halifax, Nova Scotia, this 10th day of February, 2020.

Stephen T. McGratl

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