expense allocation methodology manitoba public insurance ... · expense allocation methodology...

Expense allocation methodology Manitoba Public Insurance Corporation

June 30, 2009

June 15, 2012 2013 RATE APPLICATION Cost Allocation - AI.16 - Attachment F

© Deloitte & Touche LLP and affiliated entities. Expense allocation methodology i

Table of contents

1 Introduction ............................................................................................................................................. 1 1.1 Historical context and background ................................................................................................ 1 1.2 Scope and purpose of the report ................................................................................................... 2 1.3 Report overview ............................................................................................................................ 2

2 MPI operations and costs ....................................................................................................................... 4 2.1 Overview ....................................................................................................................................... 4 2.1 Business operations ...................................................................................................................... 4 2.2 Significant cost types .................................................................................................................... 6 2.3 Transfer of driver licensing and vehicle regulation to MPI ............................................................ 9 2.4 Cost or expense organization ..................................................................................................... 12

3 Research and practices ........................................................................................................................ 14 3.1 Introduction .................................................................................................................................. 14 3.2 Research methodology and process .......................................................................................... 14 3.3 Primary comparators ................................................................................................................... 14 3.4 Secondary comparators .............................................................................................................. 22 3.5 Conclusion ................................................................................................................................... 23

4 Guiding principles and approach .......................................................................................................... 25 4.1 Overview ..................................................................................................................................... 25 4.2 Guiding principles ........................................................................................................................ 25 4.3 Conceptual approach .................................................................................................................. 26 4.4 Costing principles ........................................................................................................................ 28 4.5 Allocator development ................................................................................................................. 28

5 Proposed expense allocation methodology .......................................................................................... 29 5.1 Overview ..................................................................................................................................... 29 5.2 Methodology and approach ......................................................................................................... 29 5.3 Cost category classification ......................................................................................................... 32 5.4 Costs subject to allocation .......................................................................................................... 34 5.5 Business process review projects ............................................................................................... 39

6 Specific areas of interest ...................................................................................................................... 40 6.1 Driver licence service delivery model .......................................................................................... 40 6.2 Service centres project ................................................................................................................ 40 6.3 Main frame decommissioning ..................................................................................................... 41 6.4 Cost allocation based on management judgment ....................................................................... 42 6.5 Business process review costs ................................................................................................... 42 6.6 Post BPR allocation of DVL costs ............................................................................................... 43 6.7 Activity based costing .................................................................................................................. 43 6.8 Jurisdictional comparators .......................................................................................................... 44

7 Appendices ........................................................................................................................................... 45 Appendix A – Physical Properties ........................................................................................................ 46 Appendix B – Complete Listing of Normal Accounting Units ............................................................... 48


© Deloitte & Touche LLP and affiliated entities. Expense allocation methodology ii

Appendix C – Cost Category Description ............................................................................................. 50 Appendix D – Application of the Cost Allocation Methodology ............................................................ 55


© Deloitte & Touche LLP and affiliated entities. Expense allocation methodology 1

1 Introduction

For many years, Manitoba Public Insurance (“MPI”) has allocated its operating expenses among three insurance lines of business to ensure it established rates for coverage and service that were fair and equitable. Basic compulsory automobile insurance rates must be reviewed and approved by the Public Utilities Board of Manitoba (PUB). The PUB has always concerned itself with MPI’s allocation policies as these policies influence the total cost base upon which Basic compulsory automobile insurance rates are determined.

After the merger of driver and vehicle licensing functions into MPI in 2004, the PUB established an expectation that MPI would review its allocation policies to ensure that Basic rate payers continue to bear a fair share of operating expenses. In a letter dated January 30, 2008, the PUB provided MPI with a preliminary indication of the eight primary areas of interest to the PUB related to cost allocation.

As a consequence, MPI has concluded that it must update its cost allocation methodology. MPI has also recognized the need for independent professional assistance in the development of a new cost allocation methodology. MPI issued a Request for Proposal (“RFP”) for that assistance in January 2009. Deloitte responded to that RFP and was retained to assist MPI in March 2009.

1.1 Historical context and background In its RFP, MPI summarized the historical context for a new cost allocation study and the related areas of focus by the PUB. Excerpts from that summary are set out below to provide background for this assignment.

MPI was created in 1971 and from the beginning, Basic insurance was charged to both drivers and vehicle owners, in an integrated manner along with vehicle registration and driver licensing. Said another way, registration and insurance have been inextricably linked on both driver’s licences and vehicle registration since 1971.

From 1971, until the merger in 2004, work effort and responsibility were shared in the following manner:

• MPI administered vehicle registration and insurance processing, including the vehicle information database and Autopac On-Line (“AOL”), the vehicle registration and insurance on-line and real-time transaction processing system used by more than 300 insurance brokers across the Province. ‒ In 2003/04, Manitobans paid a total of $75.765 million in vehicle registration fees and $627.229

million in Basic and Extension insurance premiums and fees. • Manitoba government Division of Driver and Vehicle Licensing (“DVL”) administered driver’s

licensing and insurance, including the driver records database and driver’s licence transaction processing system, an older mainframe system used by internal DVL staff, with paper-based services provided by approximately 100 insurance brokers across the Province. ‒ In 2003/04, Manitobans paid a total of $14.460 million in driver licensing fees and $33.938

million in Basic driver insurance premiums and fees. • In total, from the two systems, the government of Manitoba received $90.225 million and MPI

received $661.167 million, respectively.



In 2004, the government merged the operations of the former DVL (which was a division of the Department of Transportation) into MPI. One outcome of the merger was that MPI began receiving $21 million in annual funding from the Province of Manitoba (“Manitoba”). These funds were to offset the cost of administering the functions that were merged into MPI and represent the Department of Transportation’s budgeted costs for these functions in 2003.

The Corporation became responsible for the administration of the Driver’s and Vehicles Act (“DVA”). The government’s stated objectives for the 2004 merger were:

• Improve customer service; • Save costs and become more efficient by reducing overlap and duplication; and • Create a new model for meeting the licensing, registration and insurance needs of Manitobans. To that end, MPI has indicated they have closed redundant facilities, decommissioned old single-purpose computer systems in favour of integrated systems and databases and provided seamless cohesive services to Manitobans. MPI has represented that the result of these efforts has been a complete integration of the four components of driver’s licensing and vehicle registration (driver licensing, vehicle registration, driver insurance and vehicle insurance).

1.2 Scope and purpose of the report The objective of our mandate is the development of a new or revised cost allocation methodology that will apply now and continue to be suitable for application once planned operational and service delivery integration is complete. The process is focussed on what MPI considers its normal operations. Normal operations are to reflect the routine annual operations of MPI and exclude significant one time projects and initiatives which, once complete, will not continue. In particular, MPI requested that we:

• Review the current cost allocation methodology; • Conduct a review of costing practices among other industry participants; • Define each major expense category; • Identify and define appropriate allocators; • Specifically address the eight topic areas of interest of the PUB; and • Prepare a report on our findings and recommendations. This report contains our findings and recommendations.

Attached as Appendix D is the expected impact of the recommended allocation methodology on the financial results for each line of insurance business, based on the 2009/10 normal operations budgeted costs.

1.3 Report overview The report has been laid out to address each of the requirements of MPI, as outlined above. Our report is structured under the following sections.

2.0 MPI operations and costs This section provides an overview of the past, current and anticipated operations of MPI to assist the reader in understanding the operations and cost structure of MPI as well as the progress it has made with respect to integration and the anticipated final state of operations.



3.0 Research and practices This section provides insight into the operations and practices of the Saskatchewan Auto Fund (“SAF”), which is administered by Saskatchewan Government Insurance Corporation (“SGI”), and the Insurance Company of British Columbia (“ICBC”). It will also examine other authoritative information on industry practices and policies which are relevant to either the insurance industry or regulatory environment.

4.0 Guiding principles and approach This section outlines the guiding principles and approach adopted in the development of a new cost allocation methodology.

5.0 Proposed expense allocation methodology This section outlines the proposed expense allocation methodology which has been developed.

6.0 Specific areas of interest This section addresses the eight specific areas of interest identified in the RFP.

Appendices Appendices include a listing of all MPI’s physical properties, normal accounting units, a description of the cost categories utilized in the methodology and referred to in the report and the results of the application of the proposed methodology utilizing 2009/10 normal budgeted amounts.



2 MPI operations and costs

2.1 Overview MPI is a Manitoba Crown Corporation which was established and began selling automobile insurance in 1971 under the terms of The Manitoba Public Insurance Corporation Act. MPI was established as the exclusive provider of Basic universal compulsory automobile insurance in Manitoba. MPI provides products and services across Manitoba through approximately 1,800 employees and 325 authorized MPI agents or brokers. MPI also provides other types of auto related insurance in the competitive market space in Manitoba.

Prior to 2004 MPI provided insurance products only and responsibility for the licensing of drivers and regulation of motor vehicles resided with DVL. In 2004, MPI and Manitoba entered into an agreement to transfer certain responsibilities of DVL to MPI and Manitoba agreed to compensate MPI annually to administer the driver licensing and vehicle regulation programs formerly undertaken by DVL. Prior to DVL merging with MPI, MPI and DVL had a long history of cooperating in the collection of each other’s fees or premiums and the sharing of information.

At the time of the merger, MPI had approximately 1,500 employees located in Winnipeg and claim centres across Manitoba and DVL had approximately 300 employees located in Winnipeg and service centres across the Manitoba. Since the merger MPI has actively pursued the integration of the two organizations to:

• Enhance customer service; • Realize on efficiencies by reducing overlap and duplication; and • Create a new service delivery model to provide licensing, registration and insurance services to

Manitobans.

2.1 Business operations

2.1.1 Services provided Currently MPI provides the following services to Manitobans:

• Basic universal compulsory automobile insurance product which includes Personal Injury Protection Plan (“PIPP”) and all perils coverage. This coverage is mandatory for all Manitoba vehicles and drivers.

• Extension automobile insurance products which include enhancements to Basic coverage as well as other insurance products for specialty types of vehicles such as snowmobiles and all-terrain vehicles. These products are optional and can be purchased from competitors in the marketplace.

• Special Risk Extension (“SRE”) insurance products which provide insurance coverage for specialized risks such as large commercial truck fleets and garages. These products can also be purchased from competitors in the marketplace.

• Driver licensing services which include the testing, record keeping and renewal of driver licences for Manitobans.

• Vehicle regulation services which includes the registration and administration of vehicles in Manitoba and the mandatory vehicle safety program.



• Identification card issuing services which ensures that the identity of customers is properly verified and established according to national standards. There are two classes of identity card products, regular identity and enhanced identity. Enhanced identity products include both an enhanced identity card and the enhanced driver licence document which both meet the requirements established by the Western Hemisphere Travel Initiative (“WHTI”) a United States law which sets standards for identity documents acceptable for entry into the United States effective June 1, 2009.

For purposes of this report we have categorized the MPI services provided into two (2) categories of business (“COB”); Insurance and Non-insurance. Within each category of business we have further identified 3 lines of business (“LOB”).

The Insurance COB includes the following LOBs:

• Basic coverage; • Extension coverage; and • SRE coverage. The Non-insurance COB includes the following LOBs:

• Driver licensing; • Vehicle regulation; and • Identification services. We note that while three non-insurance LOBs have been identified, development of a methodology for the assignment or allocation of Non-insurance COB costs among the Non-insurance LOBs has not been undertaken as it is beyond the scope of this report. Required driver licensing and vehicle regulation functions are determined by the Highway Traffic Act and the DVA. The responsibilities of MPI in this regard are referenced in the DVA and in their agreement with Manitoba.

2.1.2 Significant business processes The business activities of MPI include the following significant business processes which include the key steps and functions noted.

Business process Key steps Functions involved

Insurance operations

Insurance underwriting Develop coverage options Develop rates Support sales channel Gather insured identity information Prepare and issue policy Collect premiums/registration fees/licensing fees

Product development Pricing Brokers Call Centre Service Centres Accounting

Claims processing Document claims Confirm coverage Adjust claims Manage claims Pay claims

Call Centre Claims Centres Service Centres Personal injury claims management Accounting



Business process Key steps Functions involved

Asset/liability management Establish reserves Invest reserves Account and report on reserves

Pricing Investments Accounting

Non-insurance operations

Driver licence issuance Gather driver identity information Test drivers Issue and renew licence/proof of insurance Collect fees and insurance premium Monitor driving record

Driver testing Service Centres Brokers Driver records Accounting

Vehicle registration Gather vehicle owner identity information Issue registration documents/proof of insurance Issue licence plate Collect registration fee

Brokers Vehicle records Accounting

Vehicle regulation Monitor licensed inspection facilities Safety standards enforcement

Identity card issued Gather identity information Verify identity information Produce identity card Collect fee

Brokers Identify verification Accounting

While the key business processes have been categorized and described as either insurance or non-insurance, some of the key steps in both the insurance and non-insurance lines of business are undertaken by the same personnel and, in fact, are often undertaken concurrently.

2.2 Significant cost types The insurance industry is considered a service industry. In common with many other service industry organizations the operations of MPI are not particularly capital intensive but are people, information and information technology intensive. Capital investment is largely limited to technology infrastructure, furniture and fixtures and physical property required to support and house MPI’s service and service support operations.

Consequently the main types of costs include claims expense, premium taxes and cost of operations such as broker commissions, salaries and benefits, property costs and out of pocket type costs such as technology licences, forms, stationary, postage, travel, professional fees and other purchased services.

Over the past number of years MPI has undertaken a business process review (“BPR”) initiative. To date certain projects have been completed, others are currently in progress and still others are in the beginning stages. In order to maintain a baseline of costs of regular recurring operations, MPI prepares their overall annual budget in two components, a normal operations component and a special BPR component. The fiscal 2009/10 normal budget is provided below.



Cost type Normal operations %

Net claims incurred $688,000,000 70.5%

Premium taxes 27,000,000 2.8%

Commissions 69,800,000 7.1%

Internal operating 191,748,106 19.6%

Total $976,548,106 100.0%

2.2.1 Net claims incurred Net claims incurred represents all payments made by MPI directly to insureds and the cost of goods and services purchased by MPI on behalf an insured arising from a claim made under a policy issued by MPI. Net claims reflect the costs and benefits of any reinsurance programs utilized by MPI to mitigate risks. MPI’s 2009/10 budget for net claims incurred by line of insurance is as follows.

Insurance LOB Amount %

Basic coverage $596,000,000 86.6%

Extension coverage 62,000,000 9.0%

SRE coverage 30,000,000 4.4%

Total $688,000,000 100.0%

2.2.2 Premium taxes Premium taxes are taxes paid to Manitoba on premiums collected on insurance policies issued by MPI. MPI 2009/10 budget for premium taxes by line of insurance is as follows.

Insurance LOB Amount %

Basic coverage $22,000,000 81.5%

Extension coverage 4,000,000 14.8%

SRE coverage 1,000,000 3.7%

Total $27,000,000 100.0%

2.2.3 Broker commissions Broker commissions are commissions paid by MPI to approximately 325 MPI insurance broker agents located across the Province for selling MPI insurance products and processing vehicle registration and driver licensing transactions on behalf of MPI. The commission structure is defined in a schedule to the “Agent Commissions Regulation”. MPI’s 2009/10 budget for broker commissions broken down by Insurance LOBs and Non-insurance COB is presented in the following table.



LOB or COB Amount %

Basic insurance $41,200,000 58.9%

Extension insurance 23,000,000 33.0%

SRE insurance 5,000,000 7.2%

Non-insurance 600,000 0.9%

Total $69,800,000 100.0%

2.2.4 Internal operating costs Internal operating costs are costs incurred by MPI to conduct its business activities, excluding amounts paid to brokers for their services as noted above. MPI’s 2009/10 budget for internal operating costs by major type of cost is as follows.

Type of cost Amount %

Salaries and benefits 123,035,097 64.2%

Physical properties 16,813,411 8.8%

Other costs 51,899,598 27.1%

Total 191,748,106 100.0%

Salaries and benefits Salary and benefit costs are the compensation costs for all employees of MPI. Benefits include all benefits paid to or incurred on behalf of employees such as CPP, EI, pension costs, medical benefits, retirement allowances, etc. MPI’s 2009/10 budget for normal salaries and benefits totals $123,035,097 or 64.2% of internal operating costs.

Physical properties Physical property costs refer to the cost of operating the physical properties located throughout the Province which house the business operations of MPI. Head office and support functions are located in Winnipeg with customer service facilities located in across Winnipeg and the Province. MPI’s 2009/10 budget for normal physical property costs is $16,813,411 or 8.8% of internal operating costs.

MPI operates from 33 distinct locations in Manitoba, with one location, Plessis Road in Winnipeg, divided into 3 locations for accounting purposes. A listing of these properties, their location, size and primary use are contained in Appendix A. The operating cost of each property is captured in a separate accounting unit or cost centre in the general ledger of MPI. Nine properties, whose primary use is listed as driver testing, are operating locations of the former DVL branch which existed when DVL merged into MPI.

Other costs Other costs include:

• General office supplies and services such as stationary postage, telephone, travel, etc.; • Consulting and professional fees such as actuarial fees, audit fees, research, management

consultants; • Software and hardware licences and service contracts; • Software and systems amortization; and • Special supplies such as forms and licence plates.



2.2.5 Future intentions for operating expenses Since 2004, MPI has actively pursued the strategy of integrating, to the greatest extent possible, its historical vehicle registration and insurance operations with the driver licensing, insurance and regulatory functions assumed from the former DVL. Given that all these responsibilities relate to Manitoba drivers and the vehicles they own, MPI has indicated that the opportunities for integration and operational synergy are very significant. The integration initiatives in MPI’s plans intend to eliminate costs incurred by the former DVL by utilizing existing or enhanced MPI processes.

To date, integration activities have included MPI integrating all management functions (e.g. finance, administration, human resources, etc.), eliminating duplicate customer record keeping databases and systems, aligning drivers licence/insurance and vehicle registration/insurance renewal processes, combining all direct customer contact into a single call centre and eliminating separate driver licensing functions by integrating this work into procedures undertaken by the insurance broker network.

Integration activities that are still in process include the closure of dedicated DVL facilities in favour of new “service centres” which will host both insurance and driver licensing operations and the development of a new driver records system that will serve both insurance risk rating and driver licensing purposes. This latter activity will allow for the decommissioning of DVL’s former mainframe system.

MPI’s costs for undertaking these initiatives are recorded as part of the cost of its BPR projects.

2.2.6 Business process review projects In its 2009/10 budget, MPI has budgeted specific amounts for the cost of undertaking BPR projects. These costs are part of a multiyear program. Once these projects are completed in 2011/12 MPI anticipates that while it may have future BPR or other special project costs, they will not be of the scale and magnitude that they have been as part of this program.

These BPR costs are not considered a part of MPI’s normal operations. Therefore, the cost allocation methodology model will address these costs independently from normal operating costs.

The majority of the BPR costs in 2009/10 relate to the following significant projects:

• Enhanced identity card program • Service centre establishment • Driver safety rating program • Personal Injury Protection Plan claims management system • Enhanced driver licence program • One piece driver licence program • Mainframe decommissioning • Streamlined renewal process • Enterprise data warehouse

2.3 Transfer of driver licensing and vehicle regulation to MPI In 2004, under terms of a master agreement with Manitoba dated October 1, 2004, the operations and certain authorities, powers and duties of the DVL branch were transferred to MPI. In exchange for operating the driver licensing and vehicle regulation program Manitoba agreed to provide MPI with an annual payment of $21.0M in perpetuity.

Not all responsibilities of DVL were transferred to MPI. The master agreement outlines the following responsibilities for both parties.



MPI will assume responsibility for:

• Driver licensing; • Vehicle registration; • Driver improvement and control; • Alcohol and drug program; • Vehicle dealers, salespersons and recyclers; • Driver training schools and instructors; • Vehicle standards and inspection programs; • Provincial photo identification card program; • Medical records; • Driver testing; • Driver records and suspension; • Research and information services; • Maintaining registries; and • Record keeping, reporting and information management relating to the services described above. Manitoba will retain responsibility for:

• Driver licensing standards and policy development, including establishment of driver medical standards and guidelines, driver examination and testing criteria;

• Vehicle registration standards and policy development, including establishment of vehicle classes; • Standards of vehicles and inspections and policy development, including equipment requirements

and safety standards, vehicle weights and dimensions on highways; • Establishment and waiver of any charges, taxes or other amounts for driver licensing and vehicle

registration services; • Rules respecting control of traffic, including seatbelt and child restraint requirements and physically

disabled person’s parking permits; establishing standards of conduct for all users of Manitoba’s highways, including drivers, pedestrians, cyclists and operators of horse-drawn vehicles;

• Social policy initiatives to enhance sustainable transportation, including measures to implement Manitoba’s climate change objectives related to reducing the on-road emissions from vehicles;

• Social policy countermeasure initiatives, including impaired and disqualified driving, prostitution-related offences, domestic and family related offences, stalking legislation, etc.;

• Statutory bodies, including the Licence Suspension Appeal Board, the Medical Review Committee, the Taxicab Board, the Highway Traffic Board and the Motor Transport Board;

• Motor carrier fitness, including regulation of public service, commercial and other vehicles; and, • Establishment of driver licence and vehicle registration rates. MPI collects these fees from the

customer and forwards those funds to Manitoba. During the course of the 12 months ended March 31, 2009, MPI collected and remitted just over $140.0M.

2.3.1 Arrangements prior to transfer Prior to the transfer of DVL functions to MPI, MPI and DVL already worked closely with each other in a number of areas. The principal areas of cooperation and information exchange were:



• Collection of insurance premiums and surcharges with driver licence fees – In Manitoba all driver licences carry with them an insurance component. Consequently the annual amount paid for a drivers licence in Manitoba includes at least two components, a driver licence fee and the Basic insurance premium. The current licence document is both a driver licence and MPI insurance certificate. In addition, certain drivers, based on their history of driving infractions and vehicle accidents also pay an insurance surcharge when renewing their driver licence. Both the Basic premium and insurance surcharge were determined by MPI. DVL collected the premiums at time of renewal on behalf of MPI and forwarded those premiums to MPI. MPI did not reimburse DVL for this service.

• Registration and collection of registration fees with vehicle insurance sales – In Manitoba all motor vehicles must be registered and insured in order to operate them on a public roadway. As virtually all Manitobans with a vehicle must register their vehicle with Manitoba and also purchase Basic insurance from MPI and the customer was the same individual or entity, these two activities could logically be accomplished at the same time so the act of vehicle registration and insurance procurement were both provided by MPI. Vehicle registration classes and registration rates were established by DVL; however MPI completed the registration documentation, issued the licence plate, collected the registration fee on behalf of DVL, and forwarded registration information and the funds collected to DVL. DVL did not reimburse MPI for this service.

• Reliance on driver records maintained by DVL – The driver records maintained by DVL provided both the court system and the Province with relevant driver information upon which to base decisions regarding the suspension or reinstatement of driver licences. This same information which was compiled and maintained by DVL was also a key input into the driver merit program utilized extensively by MPI to determine registrants eligibility for vehicle insurance discounts and the need for, and extent of, insurance surcharges attached to driver licences. MPI did not reimburse DVL for this service.

Key attributes shared by both MPI and DVL were extensive record keeping requirements and the commonality of their customer base. Each entity maintained their own customer records despite significant overlap in customers and common required customer information such as legal name, address, date of birth, etc. In virtually every case DVL vehicle registrants were also MPI insureds and the vast majority of vehicle registrants and insureds were also vehicle operators who required a driver’s licence and insurance. As such this represented an area of significant potential to realize efficiencies through the synchronization, integration and maintenance of a single customer database of core customer information.

2.3.2 Post transfer activities Subsequent to the transfer of DVL to MPI, MPI began to execute a plan to integrate the functions and operations of DVL into MPI. Significant changes to date include:

• Integration of the former DVL support functions such as finance, administration, information technology and research and planning into the MPI operating environment. This integration has resulted in the reduction of FTE positions from the former DVL organization.

• Integration and synchronization of the driver licensing and insurance core information database records with existing MPI vehicle insurance and registration database records. This was a significant undertaking and required significant efforts as the combination of the previous entity databases produced many duplicate records with variations of names or addresses, etc.

• Aligning the timing of driver licence and insurance renewal with vehicle registration and insurance renewal for all drivers.

• Transition of driver licensing functions such as renewal processing, new licence applications, photo taking, etc. to the broker network.

Significant integration steps initiated but not yet concluded include:

• Development of a centralized driver testing appointment computer application which will allow driver testing appointment booking by MPI broker network.



• Transition of current claims centres into full service centres which will provide certain driver testing services to customers such as driver road tests, online access to driver written exam and general customer service.

• The closing of virtually all current DVL driver testing locations and shifting of driver road test personnel into service centres.

• Completion of a new driver records system and final decommissioning of the former DVL driver records system still resident on the existing DVL mainframe system. MPI continues to maintain the existing DVL mainframe system for driver records and will continue to so until such time as a new system can be developed with appropriate interfaces for the legal system and police.

The ultimate objective is to shift all routine driver application and renewal processes to the broker network with the MPI service centres providing access to on-line driver testing as well as road testing services. The alignment of timing of driver and vehicle renewals will facilitate all annual renewals at the same time for individual customers.

To support the transition of certain driver licensing transactions to the broker network, MPI has built upon its existing AOL capabilities and network currently utilized by the broker network for the insurance business, developing additional functionality to accommodate the requirements of the driver licensing program.

Back office type functions such as the maintenance of driver medical records, driving records and driver control will continue to be performed by MPI personnel. Vehicle registration functions such as registration record keeping and maintenance of the vehicle safety program will continue to be performed by MPI personnel.

The integration steps currently under development are treated by MPI as special projects and termed BPR projects. The costs of these projects are not included in the normal operating budget of MPI and those costs not allocated to the Basic insurance LOB are being funded by MPI competitive lines of business retained earnings.

2.4 Cost or expense organization MPI has identified a series of cost centres or accounting units (“AU”) and captures its costs of claims, taxes and operations in these various AUs. The AUs have been established to capture costs in a manner consistent with how MPI organizes and manages their business. AUs or cost centres can represent a:

• Functional department such as human resources; • Business operation located in a specific location such as the Dauphin claims centre operations; • Physical property such as the property located in Dauphin which houses the Dauphin claims centre;

or, • Specific type of cost or expense such as corporate employee benefits. Accounting units are assigned numbers and names, with the name being MPI’s best description of the costs, property or operation captured in the accounting unit. For the 2009/10 fiscal year MPI has organized and will account for their normal costs in 129 AUs. A listing of the 129 AUs with numbers and their current names is provided in Appendix B.

During the course of our work we reviewed each AU to determine the nature of the costs included as well as the nature of the activities undertaken which are reflected by the costs. From this review we developed the cost categories shown in the table below for use in the cost assignment and allocation process. Each cost category contains one or more AUs.



Key Cost category AUs included

A Injury claims management 018, 019, 020, 024, 028, 042, 044

B Insurance support operations 003, 011, 040

C Loss prevention programs 008, 010, 056, 079

D Driver licensing and control 101, 105, 106, 107

E Driver records 104

F Vehicle registration 102

G Vehicle standards and inspection 103

H Claims centres 013, 014, 015, 016, 017, 021, 023, 025, 027, 029, 031, 032, 033, 034, 035, 037, 039

I Service centres 041

J Physical damage centre 022, 053, 077

K Central administration 005

L Physical properties 072, 110, 112, 113, 114, 115, 116, 117, 118, 119, 129, 121, 122, 125, 127, 129, 131, 132, 133, 134, 135, 137, 139, 141, 144, 160, 161, 162, 177, 178, 179, 180, 181, 182,

185, 186, 187, 188, 189

M Corporate information technology 081, 092, 093, 094

N Human resources and training 071, 080

O Advertising, communications, and research

061, 066, 070, 073, 074

P Fair practices 043

Q Accounting and finance 001, 002, 004, 006, 045

R Investments 064

S Pricing and economics 095

T Employee benefits 007

U Legal 059

V ID verification and data integrity 069

W Customer service and support 076, 078, 086

X Basic policy 096

Y Extension 085

Z Special risk extension 084

AA Enterprise systems support 068, 075, 083, 087, 088, 091

BB Internal audit 055

CC Regulatory/appeal 062

DD Management committee 063

EE Broker commissions 605, 615, 630, 650

FF Premium taxes 607, 617, 631

GG Claims incurred 610, 620, 632

A description of the principal activities and type of costs for each cost category are provided in Appendix C.



3 Research and practices

3.1 Introduction In response to the requirements of MPI and to assist in the development of a new cost allocation methodology we conducted research looking for existing acceptable practices already developed and adopted in other similar organizations or jurisdictions. This section reviews the research conducted by Deloitte in examining industry practices and regulatory guidance in the insurance and related industries and assessing their potential applicability to MPI.

3.2 Research methodology and process In conducting research, Deloitte utilized a number of sources at its disposal including internally prepared reports, external research including websites, publicly available information from regulators and other institutions, textbooks and other scholarly publications on the subject matter. Deloitte also contacted certain organizations by telephone.

Research efforts on cost allocation practices were separated into two categories:

1. Primary comparators: Research in this category focussed on identifying accepted practices in the automobile insurance industry and regulatory findings from regulators of insurance. Already identified were the Saskatchewan Auto Fund (“SAF”) and the Insurance Corporation of British Columbia (“ICBC”) as they are entities which are regulated automobile insurers. Analysis and findings for each of these organizations will be reviewed in greater detail below.

2. Secondary comparators: This category involved research into the cost allocation methodologies employed in other industries and regulatory findings from their regulators.

Our research examined information from insurance industry associations, review panels and companies subject to review panels. While the research in relation to these organizations has not been produced in detail in this report, the information obtained from this research has assisted in forming the recommendations made and will be referred to as necessary and appropriate in subsequent sections.

3.3 Primary comparators Other than SAF and ICBC, in the course of our research we did not identify any other organizations or situations similar to MPI. That is we did not identify any other rate regulated mandatory automobile insurance provided in a legislated monopoly environment. A significant number of Canadian and US jurisdictions were identified where automobile insurance rate regulation took place, however these were all jurisdictions where automobile insurance was provided in a competitive environment and the regulator appeared to review the competitor’s rates for reasonableness. For these jurisdictions, we were unable to determine the level of due diligence conducted by these regulators in their review process and there was no published information on any specific findings.

While we did not identify any public automobile insurance companies that are directly comparable in all aspects to MPI, both SAF and ICBC possess similar business and operational characteristics. The following sections will provide an overview of the MPI, SAF and ICBC product offerings and operating environments to understand the similarities and differences between them before examining cost allocation approaches adopted.



3.3.1 Manitoba Public Insurance In Manitoba, all motor vehicle owners are required to purchase Basic insurance. MPI’s Basic insurance is composed of three general types of coverage:

1. Personal injury coverage: Provided through the PIPP, this includes protection against personal bodily injury, loss of life and loss of income. All Manitoba residents injured in automobile accidents in Canada or the United States are protected under PIPP.

2. “All Perils” collision coverage: This includes protection against damage that occurs to an insured’s vehicle as a result of an insured peril. This category is termed “All Perils” as it provides comprehensive coverage of possible accidents such as collisions, upsets, hail, fire and vandalism. Basic insurance provides protection of the actual cash value of the vehicle (fair market value) at the time of the accident (up to a maximum vehicle value of $50,000).

3. Third party liability coverage: This pertains to protection from claims brought against an insured for injuries or death caused to another person or damage to another’s vehicle or property through the use of the insured’s vehicle. Basic insurance includes third party liability coverage for claims up to a maximum of $200,000.

Purchasers of MPI’s Basic insurance for passenger vehicles are covered with a deductible of $500. However, Basic insurance does provide for reduced deductible levels for certain types of claims. For example, if an insured’s vehicle is stolen despite having used an approved anti-theft device, the required deductible is reduced by 50% (due to the use of the anti-theft measure).

Extended insurance coverage options are also offered by MPI subject to the competitive marketplace and pricing pressures inherent therein. These options can be divided into two lines of business or divisions:

1. Extension insurance: This division offers products that are largely comprised of additional coverage or modifications to the Basic insurance product. This can include:

a. Reducing deductible levels

b. Extending third party liability coverage

c. Extending the maximum vehicle value protected in excess of the $50,000 level covered by Basic insurance

d. Loss of use protection enabling the rental of a replacement vehicle during the period in which the insured’s vehicle cannot be or is unsafe to be driven

e. New and leased vehicle coverage which provides protection during the first 12 to 24 months of owning or leasing a new or nearly new vehicle to ensure that loss on the investment are minimized in the case of a write-off

f. Lay-up coverage which (unlike the above options) actually reduces the protection offered by the Basic insurance to address the reduced risk profile for vehicles that will be stored for a prolonged period of time

Rental car insurance is another Extension insurance product but is not a modification of an existing Basic insurance contract. Instead, this insurance option provides the same types of protection options available as discussed above. This MPI product is offered in competition with insurance offered through rental car companies themselves.

2. Special Risk Extension (SRE): This division offers products for vehicles which are either not eligible for All Perils insurance or Extension insurance products discussed above. Such vehicles may include large commercial trucks, public service vehicles, semi-trailers, and fire department vehicles. This category also captures the more custom-designed insurance plans offered by MPI in direct competition with private insurers. This can include the more unusual optional extensions desired for owners of passenger vehicles such as income replacement coverage (for individuals earning more than $76,000 per year), and sound equipment coverage (for aftermarket sound and communication equipment permanently installed in the insured’s vehicle).



3.3.2 Saskatchewan Auto Fund

Company overview SAF is a fund managed and administered by Saskatchewan General Insurance Company (“SGI”). SGI also manages SGI Canada Insurance Services, Coachman Insurance Company and the Insurance Company of Prince Edward Island. The ultimate parent of SGI is the Crown Investments Corporation of Saskatchewan. SGI is a fully competitive insurance company selling a broad range of property and casualty insurance products that vastly exceed those available through MPI. SGI’s products include home, farm, and business insurance and extended automobile coverage. SGI Canada currently operates in Saskatchewan, Alberta, Manitoba, Ontario, Prince Edward Island, Nova Scotia and New Brunswick.

SAF is a fund of the Province of Saskatchewan and as such its financial results are not reported in the consolidated financial statements of SGI. It should be noted that while it is a fund of the Province, it does not receive any money from or pay any dividends to the Province.

Products and services Similar to MPI’s position in Manitoba, SAF is the sole provider of compulsory universal vehicle insurance required of all Saskatchewan automobile owners. SAF’s mandate for this is provided by the Automobile Accident Insurance Act. Consistent with the Manitoba experience, due to its monopoly position in this product line, SAF is regulated by the Saskatchewan Rate Review Panel with respect to the rates that it can charge for this basic level of insurance.

SAF’s compulsory insurance product is referred to as Licence Plate Insurance (“LPI”) and is very similar to the Basic insurance offered by MPI. LPI provides an insured with the following:

1. Personal injury coverage: This covers injuries sustained by the insured as a result of a vehicle crash. LPI differs from MPI’s Basic insurance in this coverage area in that Saskatchewan purchasers have the ability to elect between “No Fault Coverage” and “Tort Coverage”. The former is consistent with the MPI personal injury insurance coverage (i.e. comprehensive benefits are received by an insured who is injured as a result of a collision regardless of fault) while the latter provides a basic level of benefits and then allows the injured party to sue for additional expenses as well as pain and suffering.

2. Core collision coverage: This protects the insured against damage to his or her vehicle, subject to the required deductible (LPI carries a deductible of $700).

3. Third party liability insurance: This protects the insured against claims made by those who have been injured or whose vehicle or property may have been damaged through the use of the insured’s automobile. The maximum claim insured by LPI for a single accident is $200,000.

SAF’s operations also extend beyond insurance products. SAF is responsible for driver licensing and vehicle registration, and also administers safety initiatives aimed at “keeping customers safe”. SAF is not permitted to compete in the market of optional or supplemental insurance products. Such extended coverage is offered by SGI.

Summary of financial allocation process As all operations of the SAF are focussed on the provision of their basic rate regulated insurance offering and driver licensing and vehicle registration costs are funded by basic insurance rates, there is no requirement for cost allocation within SAF. Allocation of costs takes place however from SGI to SAF as SGI provides certain claims and administrative services to the SAF.

The SAF’s 2009 proposal for rate adjustment defines Administrative expenses as “salaries, infrastructure costs, system support costs and traffic safety program costs.” There is no publicly available information regarding the detailed allocation process of these expenses between SGI and SAF nor is there publicly available information regarding the provision of services of employees under each entity.



SAF’s 2008 annual report states, “the Auto Fund is expected to manage its allocated administrative expense budget such that the Auto Fund remains within its administrative expense ratio” and “the Auto Fund ratio was slightly higher than planned at 7.2% compared to its target of 6.9%.” SAF has set a target of 7.0% for 2009. The note disclosure in the annual report goes on to state, “Administrative and claim adjustment expenses incurred by SGI are allocated to the Auto Fund directly or on the basis of specific distributions.” In 2008 amounts charged by SGI to the SAF were $104,699,000.

As any allocation of costs appears to take place at SGI, we approached SGI and requested access to its allocation policy. SGI indicated that it was not a public document.

There was no relevant information available from the Saskatchewan regulator regarding allocations of costs.

3.3.3 Insurance Company of British Columbia

Business overview ICBC is a provincial crown corporation established in 1973 in accordance with the Insurance Corporation Act. While ICBC originally served as the sole provider of all automobile insurance in British Columbia, subsequent changes in legislation facilitated competition in the market for optional insurance products beyond the legislative minimum requirements. Accordingly the monopoly-competitive balance faced by ICBC is similar to that faced by MPI in Manitoba.

ICBC is the one of the largest corporations in the Province of BC and one of the largest property and casualty insurers in the country. It operates exclusively in BC through a vast network of independent brokers (~900) and claim centres (~39) in addition to having an online presence and call centre.

Products and services The universal automobile insurance offered by ICBC is the minimum level of insurance which vehicle owners in the Province of BC are required to carry. The rates charged by ICBC for this mandatory coverage are reviewed by the British Columbia Utilities Corporation (“BCUC”). While these characteristics of the BC insurance scheme appear consistent with the practices in Manitoba and Saskatchewan, it must be noted that there is a significant difference between the contents of mandatory minimum insurance coverage provided by ICBC compared to that provided by SAF and MPI.

Basic insurance in BC includes the following coverage components:

• Third Party Legal Liability: This coverage is similar to that provided by SAF and MPI. When an insured’s vehicle has been involved in an accident, this component of basic insurance provides protection against claims brought by the other motorist for injuries and property damages sustained. Basic insurance provides coverage up to a maximum claim amount of $200,000.

• Accident Benefits: This component provides coverage for the costs of medical care and rehabilitation, replacement of lost income (up to $300 per week), and funeral expenses and death benefits for surviving spouse and/or dependants. This coverage is extended to the vehicle owner, his or her household members, passengers in licensed and insured vehicles, as well as any pedestrians or cyclists who may have been involved in the accident. This protection is available regardless of the person who is found to be at fault. This component of basic insurance is similar in coverage to that provided by SAF’s Person Injury Tort Coverage Package but with lower levels of financial support. ICBC’s approach to accident benefits is based on a full tort system in which the injured party is permitted to sue the party at-fault for the full amount of the damage sustained. As acknowledged by ICBC in its annual report, this approach is different from the insurance schemes in all other provinces in Canada which are based on either a no-fault or mixed no-fault/tort program,



and “[t]hese differences make inter-provincial comparisons difficult since the products, services and cost structures of each are unique”.1

• Underinsured Motorist Protection: This covers the insured who is involved in an accident from the risk that the party at-fault does not have adequate insurance to satisfy the insured’s claims. Basic insurance provides protection for the first $1 million in excess of the at-fault party’s coverage.

• Protection against Hit-and-Run and Uninsured Motorists: This component protects every resident of BC regardless of whether he or she owns or insures a vehicle. Residents are entitled to a maximum claim of $200,000 for damage (excluding vehicle damage), injury, or death as a result of a hit-and-run or accident caused by an uninsured motorist.

• Inverse Liability Coverage: This aspect of ICBC’s basic package enables an insured to collect for damages and injuries sustained as a result of an accident in another jurisdiction where that jurisdiction does not permit legal claims to be made against the party at fault. Coverage is limited to the proportion of the claim for which the insured was not at-fault.

While some of the above components of ICBC’s basic insurance product provide coverage for vehicle damage as a result of a collision (e.g. Inverse Liability Coverage), the most significant difference between MPI’s Basic insurance and that provided by ICBC is that comprehensive collision coverage is not part of ICBC’s mandatory basic coverage, but is optional insurance coverage offered by ICBC in BC.

ICBC offers optional collision coverage, in addition to the same types of optional vehicle insurance products offered by MPI as discussed earlier. Similar to the situation in Manitoba, ICBC’s optional product offerings compete against those available through private insurance companies and are not subject the public rate review.

ICBC is also engaged in non-insurance activities including driver licensing, vehicle licensing and registration, and fines collection as well as road safety and loss management programs to reduce automobile accidents, crime, and fraud. Unlike MPI, ICBC’s driver licensing operations are physically separated from the remainder of the business operations and the operating costs are funded by basic insurance premiums.

Summary of financial allocation process Significant information on ICBC’s allocation methodology is available in the public domain and ICBC personnel were available for a discussion on their approach. ICBC filed its first revenue requirement application with the BCUC in August 2003. As part of that application, ICBC filed a report pertaining to its financial allocation methodology. The BCUC’s November 2003 Decision on that filing included direction that in 2004, ICBC address a number of items including the allocation of costs between ICBC’s basic insurance and its optional insurance.

ICBC’s approach to cost allocation as outlined in their August 2003 financial allocation methodology document is as follows:

• Identification of business segments for purposes of the financial allocation • Identification of cost elements to be allocated to the business segments • Directly allocating to the relevant business segment those cost elements that are caused solely by

one business segment • Determining the allocators that best reflect causality for each cost element that cannot be directly

allocated • Using the allocators to allocate the remaining costs to the business segments

1 ICBC 2007 Annual Report on Page 12



Similar to MPI, a significant proportion of the total costs are directly attributable to a specific line of business. These costs are:

• Claims payments • Broker commissions • Premium taxes The remaining costs are operating expenses and are categorized under:

• Operations division ‒ Loss management ‒ Driver licensing ‒ Call centers ‒ Regional claims operations ‒ Specialized claims ‒ Business support

• Insurance, Marketing, and Underwriting division • Finance division • Human Resources and Corporate Law • Information Services division • Corporate Costs These remaining costs represent approximately 14% of ICBC’s total expenses and are allocated on the basis of causation. Causation is determined by one of 4 methods:

1. Work effort: primarily measured by estimated hours multiplied by compensation costs

2. Premiums written: applicable to activities such as underwriting

3. Claims incurred: primarily the value of the claims of each type of insurance handled

4. Shared services: allocated based on the overall allocation results for the primary operating areas

Discussions with ICBC indicated that “shared services” was commonly used. This concept works on the premise that costs requiring allocation should be allocated in similar ratio to the direct costs already assigned to specific lines of business. As an example, if direct costs in a given year are split between two lines of business 90%/10%, then the costs requiring allocation will also be split to these lines of business 90%/10%.

In order to allocate costs under the 4 methods described above, ICBC utilized more than 30 allocators that fall within the following classifications:

• Work effort • Averages • Premiums • Claims • Shared services • Others



More recent developments In response to BCUC’s November 2003 Decision, ICBC retained consulting firm Elenchus Research Associates to assist in conducting a complete review of its financial allocation methodology. A resulting financial allocation methodology report was filed with BCUC on July 5, 2004.

BCUC released a Decision on the 2004 financial allocation methodology report in January 2005 which requested further detail on seven specific allocators (to be included in ICBC’s next revenue requirement filing).

ICBC provided this detail in a separate filing. BCUC’s July 2006 Decision on this filing accepted the detail as filed but further indicated:

• BCUC was taking the view that for one cost centre that is common to both the basic and optional segments, it should be split 50/50 after directly costing the Non-insurance segment; and

• BCUC ordering ICBC to allocate ‘auto crime prevention costs’ between basic and optional based on the percentage of comprehensive insurance market share held by ICBC.

The January 2005 Decision also requested an analysis on seven other allocators and allocation percentages which were included in the financial allocation methodology filing. ICBC filed for a workshop for these seven allocators within 60 days of the decision. The purpose of the workshop was to further clarify the calculations of these allocators.

ICBC presented its due diligence on this second set of seven selected allocation functions used in its financial allocation methodology in a Filing made March 10, 2005 which was presented at the ICBC Financial Cost Allocation Workshop on March 16, 2005. Following the Workshop, ICBC, BCUC staff, and interveners commenced a Negotiated Settlement Process.

A Negotiated Settlement Agreement regarding the methodology and these seven allocators was reached which contained a clause for an updated work effort study of the Regional Claim Centres.

This updated work effort study was completed in October 2007. The study discusses how regional claim centre costs are allocated between basic and optional insurance lines based on 5 job categories and 10 claims transaction types.

BCUC’s 2008 Decision on the Regional Claim Centres Application (RCCA) agreed with the information provided for all allocations but one. The Decision indicated that ICBC re-examined the allocation of costs within the Marketing and Broker Support Services department instead of considering alternative means to allocate these costs. ICBC has been asked again to comply with the request.

The 2008 Decision also included a direction for ICBC to prepare and file an application for approval of a Proposal Plan for the identification and selection of an independent third party to review, report on, and make recommendations with respect to ICBC’s financial allocation methodology. ICBC filed the application in October 2008. ICBC also filed an application with revised terms in February 2009. BCUC accepted the February 2009 application which indicated that “the scope of the review will consist primarily of an examination of the RCCA work effort study, but will also include a limited review of the allocators used for specified allocation functions.”

Since the submission of its August 2003 allocation methodology, ICBC has been directed to undertake considerable additional detailed work to revisit specific allocators. The specific allocators that were to be revisited related to the allocation of costs between the basic and optional insurance lines. Discussions with ICBC personnel confirmed that ICBC has invested significant amounts of time and resources in this process during this period. This work has resulted in significant expansion in the complexity of the allocation methodology.



3.3.4 Summary comparison table The following table illustrates the insurance offerings, non-insurance activities, and other characteristics of primary comparators and MPI:

Category Saskatchewan Auto Fund

Insurance Corporation of British Columbia

Manitoba Public Insurance

Insurance offerings

Personal Injury Included in required basic insurance coverage – No fault or tort options

Included in required basic insurance coverage – full tort add on

Included in required Basic insurance coverage – No fault

Third Party Liability Included in required basic insurance coverage

Included in required basic insurance coverage

Included in required Basic insurance coverage

Core Collision Included in required basic insurance coverage

Not included in required basic insurance coverage. Options available through competitive lines of business

Included in required Basic insurance coverage

Extended Coverage Options Offered

No; offered by SAF administrator, SGI

Yes; available through competitive lines of business

Yes; available through competitive lines of business

Other insurance products offered

SAF: None SGI: Wide range of property and casualty insurance products

None. None

Non-insurance activities

Responsibility for driver and vehicle licensing and registration

Administers driver licensing and vehicle registration



Funding for DVL Operations

Provided by basic insurance rate revenue

Provided by basic insurance rate revenue

Manitoba provides annual funding of $21.0M. Costs in excess of this amount are funded by the Extension LOB.

Other significant activities Driver and road safety programs

Road safety and loss management programs

Driver and road safety programs

Other characteristics

Geographic area serviced SAF: Saskatchewan. SGI: SK, AB, MB, ON, PEI, NS, and NB

British Columbia Manitoba

Regulatory Oversight Saskatchewan Rate Review Panel

British Columbia Utilities Commission

Manitoba Public Utilities Board

Legal Structure Fund of the Province of Saskatchewan

Provincial Crown Corporation Provincial Crown Corporation

Integration of Operations Separate locations for claims centres and driver examination offices. Degree of system integration unknown

Driver licensing operations are physically separate from the remainder of the business (separate locations, systems, and staffing)

Integrating all lines of business including physical locations, employee tasks, information system applications, data warehousing, etc.



As noted from the analysis above, while SAF and ICBC are both publicly owned entities providing basic mandatory vehicle insurance in a monopolistic environment there are significant differences which limit the value of these entities and jurisdictions as comparators. The key differences are:

• SAF and ICBC both provide driver licensing and vehicle registration services on behalf of their provincial governments, however these services are funded by their basic insurance premiums.

• ICBC offers basic and optional competitive lines of insurance, however the nature of its basic insurance is significantly different in that it does not include collision coverage so claims process requirements for basic insurance are significantly different than MPI’s, whose Basic coverage includes collision.

• ICBC basic and optional competitive lines of business generate comparable amounts of premiums so one line of insurance business does not dwarf the other lines of insurance.

3.4 Secondary comparators A search was conducted for publicly available information on cost allocation methodologies from industry groups, other regulators and rate regulated entities.

3.4.1 Industry associations Industry associations considered included:

• Insurance Bureau of Canada (“IBC”) • National Association of Insurance Commissioners (US) (“NAIC”)

IBC indicated to us that they do not provide any guidance on cost allocation to the industry.

NAIC provided some high level guidance with respect to the allocation of expenses, however the guidance is largely geared toward allocation of expenses between functions within an insurer such as claims adjustment, underwriting and investment expenses. Some allocators were suggested in the guidance, although the guidance also indicated that other allocators or bases of allocation are acceptable if they provide more precise results.

3.4.2 Review panels Our research considered information available on the websites of the following provincial review panels:

• Manitoba Public Utilities Board • Alberta Utilities Commission • Alberta Rate Review Board • Saskatchewan Rate Review Panel • Financial Services Commission of Ontario • Ontario Energy Board • Island Regulatory and Appeals Commission (PEI) • Yukon Utilities Board

A review of information available from review panels did not uncover or reference any standard or universal cost allocation methodology. Rather the review panels’ rulings would evaluate submissions for consistency with previously approved filings for the same entity.



3.4.3 Companies subject to review panels A search and review of information that was publicly available from various companies, primarily energy companies, that are subject to review panels was conducted. Much of the information uncovered dealt with the allocation of corporate or administrative costs in a cost of service context for the purposes of supporting the rates to be charged to different classes of customers which share the same infrastructure. For this reason, the information discovered provided limited guidance in the allocation of costs relevant to MPI.

These findings are consistent with ICBC’s findings in its July 5, 2004 filing with the BCUC, which indicate significant differences between the cost structure of an automobile insurer and more traditional regulated utilities such as energy companies. The three differences identified by ICBC were:

1. Insurance companies have much less capital invested in fixed assets than most public utilities.

2. The costs of traditional utilities are primarily common costs, such as infrastructure, whereas insurance costs are mostly direct costs, such as claims.

3. Utilities’ costs in capital assets are recovered over the life of the assets, whereas insurance companies’ claim costs related to future payments to customers.

Due to these differences in cost structure the information found in this branch of our research was of limited value in developing an allocation methodology for MPI.

3.5 Conclusion Based on our research and analysis of publicly available information related to primary and secondary comparators we note the following:

3.5.1 Primary comparators As primary comparators both SAF and ICBC are similar in that they offer mandatory insurance to the citizens of their respective provinces. However, there are significant differences in the basic mandatory insurance offered by these comparators and the manner that driver and vehicle licensing is incorporated in their structures. Particularly, driver and vehicle licensing is funded through their basic rates; therefore, their methodologies for allocating costs provide no guidance for MPI in this area.

There was no publicly available information detailing an allocation methodology applicable to SAF; therefore, we were unable consider SAF’s methodology in our research.

Significant information related to ICBC’s financial allocation methodology was available through its filings with BCUC. ICBC has spent a significant amount of time, effort and resources to implement, support and modify its financial allocation methodology since its initial filing in 2003 and this process continues at the time of writing of this report. The oversight of the BCUC and its interveners has led to effort being spent to further document and re-examine the allocators developed by ICBC.

The ongoing discussions with respect to the allocation methodology have provided a significant amount of information which has served to highlight the differences between ICBC and MPI’s structures and service offerings. Although this information has provided some insight into potential allocators and methodologies we considered in developing a cost allocation for MPI, ICBC’s methodology has not been universally accepted by the BCUC and its interveners and continues to evolve under their supervision. Additionally, the differences in ICBC and MPI’s structures and service offerings does not allow for ICBC’s methodology to be mechanically applied to MPI’s operations.



3.5.2 Secondary comparators We investigated the existence of industry standard methodologies or allocators through the research of industry associations and the publicly available information related to regulated industries. Industry associations provided some general guidance with respect to the allocation of expenses; however, no specific industry standard was found.

Expense allocation information from other regulated industries was of limited usefulness. Significant differences in the nature and structure of operations results in limited comparability in the allocation of expenses. Other regulated industries tend to be capital asset intensive with costs recovered over the life of assets. Additionally, the majority of the assets of these entities are common assets used to provide services the different rate classes of these entities. As such the cost of these common assets must be allocated amongst the different rate classes. An insurance-based company, such as MPI, requires much less investment in fixed assets, has more costs that are directly attributable to specific customers, and the majority of its costs relate to current and future payments to customers.

3.5.3 Summary In summary, we considered the information gathered in our research of primary and secondary comparators throughout the development of the MPI costing methodology. The allocation approach selected for MPI is consistent with the approach most commonly used. Similarly, the costing principles suggested for MPI in this report are consistent with those articulated for ICBC.

However, as a result of differences in MPI’s operating environment and mandatory service offerings compared to those of ICBC and SAF, and due to the limitations of publicly available information regarding cost allocation approaches relating to SAF, the details of the methodology developed for MPI may differ from those of ICBC and SAF. The information obtained related to other regulated industries was of limited usefulness due to the significant differences in the nature of operations of these industries compared to MPI.



4 Guiding principles and approach

4.1 Overview Prior to the detailed development of a cost allocation methodology certain guiding principles were identified and established to guide the development of the methodology. These guiding principles were developed based on our costing experience, established regulatory guidance and application of common costing principles. An overall approach was also developed to guide the development of the methodology. This section sets out the guiding principles and approach adopted in the development of the cost allocation method.

4.2 Guiding principles While our research indicated that there is no universally accepted standard allocation methodology, research did indicate that most policies and methodologies were based on certain guiding principles. In developing this cost allocation methodology we adopted the following overall guiding principles and attributes:

• Fair and reasonable • Practical and efficient • Flexible and adaptable for future • Acceptable in a regulatory context • Consistent with any industry standards

4.2.1 Fair and reasonable Fair and reasonable is a key objective of the methodology in that the final result produced by adoption of the methodology will produce a result which fairly reflects the cost of a providing a specific service and that the result is reasonable. The allocation of a cost to a service should reasonably reflect a casual relationship and should be relatively transparent. While it is recognized that the concepts of fair and reasonable may be somewhat vague and in that what is fair or reasonable may be subject to opinion, this principle was none the less a key guiding principle in the development of a methodology.

4.2.2 Practical and efficient Practical and efficient were also key guiding principles. Practical means that the methodology is suited to the business environment for which it is being developed, can be applied with relative ease and can be readily understood by those examining it. The principle of efficiency focuses on striking a balance between complexity and accuracy. The principle of efficiency suggested that the methodology should be as simple as possible to adopt, implement and maintain without sacrificing a sufficient level of complexity that may be required to arrive at an accurate reflection of costs.



4.2.3 Flexible and adaptable The methodology should be flexible and adaptable to changing conditions and operations. Many changes have taken place at MPI in recent years and changes will continue to occur as evidenced by the BPR activity taking place. The methodology developed should be flexible and be able to adapt to the ongoing changes in operations, business processes and models. The methodology should be developed at a sufficiently conceptual level so that business and process changes can be incorporated without creating a need to develop a new methodology.

4.2.4 Acceptable in a regulatory context The methodology should be acceptable in a regulatory context. Cost allocation methodologies are developed and implemented within many organizations. In many situations the requirements for a cost allocation methodology is driven by the requirement to assess financial performance of a business segment or management performance within an organization. In these situations the degree of precision for the methodology is often less rigorous. Cost allocation in a regulatory context generally requires a greater level of rigour in both development and design as the results of the methodology have a potential effect on a much larger group of people and those people generally include the average consumer.

4.2.5 Consistent with industry standards The methodology should be consistent with any published or generally accepted industry standards or practices. Section 3 of this report outlines any industry guidance and common practices identified.

4.3 Conceptual approach Key to development of an allocation methodology is understanding the nature of the operations, costs of operations, cost drivers and operational and organizational changes that have occurred over time. Based on our initial discussions with management regarding their operations, recent changes and future plans, we considered options as to the conceptual approach to an allocation methodology. Two options considered were an incremental approach and the pro-rata full cost approach.

4.3.1 Incremental approach The incremental approach advocates that the cost of adding a new service offering to existing service offerings should be confined to only those cost items which increase because of the addition of the new service and that no cost which existed prior to the addition should be attributable to the new business segment but should remain with the existing service offering. In the case of an incremental approach any efficiencies gained from combining two business segments are realized by the new segment being added.

A simple example might be the cost of a building utilized in the provision of a service. The addition of a new service provided out of that same building will not have any effect on the cost of the original building so there would be no incremental cost of the building which would attribute to the new service. On the other hand the cost of operating the building may increase due to the additional use of utilities by the new service. In this case only the additional or incremental cost between the pre and post new service date utility costs would be considered a cost of the new service. The entire pre new service cost of utilities would continue to remain a cost of the existing service.

The incremental approach can be particularly appropriate in situations where relatively small new business segments are added to a large already established business segment and the two businesses share many of the same attributes. What gave rise to consideration of this approach is that the transfer of certain DVL responsibilities to MPI was a situation which mirrored in many respects an incremental cost situation. Pre 2004 DVL and MPI operations shared many common attributes including their customer base, market area, industry and their transactions, which were are already connected. The pre 2004 scope of DVL operations was relatively small in comparison to MPI’s and MPI already had a significant amount of the infrastructure already in place through which it could provide the DVL services.



Identified advantages of the incremental approach were:

• It leaves the insurance business and its costs “as it was” and recognizes that the synergies achieved through integration reduce the cost of providing DVL services

• It is consistent with management’s view of operations, which has been to minimize the incremental cost associated with providing DVL services

Identified disadvantages of the incremental approach were:

• Significant changes since the transfer of DVL responsibilities would create challenges in measuring the initial “base case” and then preserving that base case over time

• The approach may accurately reflect the current situation however, it may not stand the test of time as a result of ongoing changes in the business

• The cost allocation would not be based on the current activity of business lines • The calculations required to adopt this approach would be quite complex • There was no support for this allocation approach in the research that we undertook of the

regulatory environment

4.3.2 Pro-rata full cost approach The pro-rata full cost approach advocates that the full costs of activities that are shared between two services should be allocated between those two services on some pro-rata basis. Pro-rata means “in proportion” and the proportions are determined on some basis which is often called an allocator or allocation basis. In the case of a pro-rata approach any efficiencies gained from combining two business segments are shared by both the new and existing business segment. The full cost pro-rata approach is widely used in allocation methodologies.

Identified advantages of the pro-rata approach were:

• It reflects MPI’s “go forward” integrated business. • The allocation of costs would be based on activity/causation. • This approach would be adaptable into the future to respond to changes in MPI’s business. • This approach is widely accepted in the regulatory environment. Identified disadvantages of the pro-rata approach were:

• The costs allocated to Insurance operations would be reduced as a result of certain shared costs now being allocated to DVL while the quantum of insurance provided to Manitobans has not changed.

• This methodology has the potential to become overly complicated.

4.3.3 Approach adopted Upon consideration of both approaches, and weighing the advantages and disadvantages of each, the full cost pro-rata approach was adopted in the development of the allocation methodology.

The incremental approach was abandoned in large part due to the difficulties in developing a baseline and in sustaining an incremental approach over the years. In addition, it would likely not be supported in the regulatory environment. In doing so, we recognized that while, conceptually, the incremental approach is highly aligned with management’s strategy for the integration of its historical insurance operations and the DVL operations it assumed in 2004, it would not be practical for the reasons identified.

In selecting the full cost pro-rata approach, we have selected the approach that is most commonly used for cost allocation and which is used by ICBC, as described in Section 3.0.



4.4 Costing principles In developing the cost allocation methodology we adopted the following costing principles:

Cost causality – To the extent possible, costs should be allocated on the basis of causality; i.e. costs should be allocated to the LOB or COB that cause the costs to be incurred, at least to the extent that a direct causal relationship can be established. Causality also implies that the selected allocators need to be closely associated with the activity or factors that drive the level of consumption of that cost.

Cost benefit – If, in the allocation of costs, causality is difficult to establish, then costs may be allocated on the basis of the relative benefit received by that LOB or COB.

4.4.1 Assigned vs. allocated costs As we followed these costing principles, it was beneficial to consider costs as being one of two possible types. Costs can be viewed as either directly assignable or requiring allocation.

A directly assignable cost is one incurred to provide one specific service. For example, the cost of an employee working full time in providing a specific service represents a direct cost of that service which can be assigned to that service or LOB. The cost can be assigned directly to that service and no allocation is required.

A cost requiring allocation is a cost incurred to provide two or more services. For example, the cost of an employee who contributes to the provision of two or more services is a cost of each of those services. In this case the cost of the employee must be allocated to those two or more services on the basis of an appropriate allocator.

4.5 Allocator development Based on our research many different cost allocators and types of allocators are in use in the many organizations which rely on cost allocation as part of the reporting process. In developing allocators there are many different possible approaches as well. Some common approaches include:

Ratios – ratios can be developed with operating statistics, cost pools or groupings of costs, FTEs, salary costs, etc. These are commonly used allocators as they are generally easy to develop, calculate and apply on an ongoing basis. They often rely on existing operating or financial data.

Percentages – similar to ratios these can be developed utilizing operating statistics, costs, cost groupings, FTE’s, salaries, customer statistics, etc. These are commonly used allocators as they are generally easy to develop, calculate and apply on an ongoing basis. They often rely on existing operating or financial data.

$ Per a unit of measure – This approach utilizes a fixed amount per some measure such as area. A common example would be per square foot amounts for real estate or land. This is a commonly used allocator for specific costs such as property or maintenance costs. They are generally easy to develop, calculate and apply on an ongoing basis. They often rely on existing operating or financial data.

Work effort – Work effort is based on the either estimated amounts of effort, or actual measured amounts of effort based on studies, required to complete certain activities. Estimated work effort is a commonly used allocator as it can be relatively easy to develop, revisit and update periodically. Actual work effort requiring studies may be considered as providing a greater level of accuracy, however they only capture a measure of activity at a point in time and can be extremely time intensive and costly to develop and maintain.



5 Proposed expense allocation methodology

5.1 Overview In developing an overall approach to an expense allocation methodology we first considered the nature of MPI’s core business. Even though MPI has in recent years become a provider of other services, MPI is at its core a provider of insurance products to Manitobans. Other services provided are complimentary in that they leverage existing MPI customer records and customer points of contact. As an insurance company, the nature of MPI’s business is that it is information and people intensive. Information is a cornerstone of an insurance operation as the collection and maintenance of information is a key component in development of product offerings, policy rates, processing of claims and management of claims. Equally important are the people who design the products, underwrite the policies, adjudicate the claims, manage the settlements and case manage injury rehabilitation.

This is in stark contrast to most rate regulated service providers which are utilities. While utilities also invest in information and people, the provision of their services is highly dependent and driven by investment in capital infrastructure such as power generation stations, transmission lines, telecommunication infrastructure, etc.

Consequently, when examining the cost structure of MPI and developing a cost allocation methodology we continued to revisit the relationship between the cost of a service and the quantum and qualifications of the human activity and technology resources required to deliver that service. As people are the key drivers of business activities at MPI we consistently looked for allocators which might reflect levels of activity or work efforts.

5.2 Methodology and approach In developing the cost allocation methodology we developed and followed the approach and decision making process noted in the diagram below. The objective of the process was to maximize the number of cost categories, and the AUs each cost category contained, which could be assigned either directly to a line of business or assigned to a category of business. This would, in turn, minimize the extent of allocation that would need to be done between insurance and non-insurance COB. A second key objective was to seek out operating information or measures of activity which could reasonably be utilized as the basis of allocation for cost categories requiring allocation. In establishing the most appropriate basis of allocation, we endeavoured to strike a balance between the precision and suitability of a particular allocator, on one hand, and the effort and extent of analysis required to develop and quantify the allocator on an ongoing basis, on the other hand.

5.2.1 Overview of the methodology The process was designed so that as we work through the decision making process at each level, certain cost categories might be assigned directly to lines or categories of business thereby reducing the amount of cost categories ultimately requiring allocation. The process includes four key decision points as noted in the diagram. Levels A and B involve decision points as to the assignment of cost categories whereas Levels C and D involve the allocation of cost categories.



Recap of “Levels” Level A – this decision point is designed to identify all cost categories that are comprised exclusively of costs that relate entirely and discreetly to one of Basic insurance, Extension insurance, SRE insurance or the Non-insurance COB. If a cost category meets this criterion, the entire cost category is assigned directly to the appropriate LOB or COB.

Level B – this decision point is designed to identify all cost categories that are comprised exclusively of costs that relate entirely to either the Insurance COB or the Non-insurance COB. This differs from Level A in that an insurance cost that cannot be discreetly allocated between Basic, Extension and SRE at Level A, may, in fact, be exclusively a cost of the Insurance COB (such as the cost of a claims adjustor). Such costs are assigned to either the Insurance COB or the Non-insurance COB. Costs which do not meet this “assignable to a COB” criterion are designated as “subject to allocation” and handled at Level C.

Level C – this level handles all costs that must be allocated between the Insurance and the Non-insurance COBs. These are costs that could not be directly assigned to these COBs. The allocation between the COBs at Level C is done based on certain allocators.

Level D – this level handles all costs that have been determined to be Insurance COB costs through either Level B assignment or Level C allocation. In other words, these are the costs of Insurance operations that must be allocated between Basic, Extension and SRE. This allocation will be done based on certain allocators.



Linking the Methodology to Accounting In Section 2.4 of this report, we identified all of the categories of costs that we have concluded exist within MPI. As reported in that section, each cost category is comprised of one or more AUs. To implement the methodology described immediately above, each cost category must be assessed to determine how it should be handled.

5.2.2 Purifying accounting units In our analysis of the AUs contained in the cost categories, we identified AUs that, as currently structured, would need to be assigned to Level C for allocation. For some of these AUs, though, we noted that they contained predominantly costs of one COB, with a small minority of costs related to the other COB.

A key principle of the suggested methodology is that opportunities to assign direct, causal costs to a specific LOB or COB should be maximized. Therefore, we investigated the AUs that have a predominant type of cost to determine whether a change in accounting for certain costs might “purify” the AU so that it might be directly assigned rather than allocated.

For example, if a hypothetical AU contained 50 employees, 45 of which exclusively supported insurance operations and 5 of which worked exclusively in non-insurance operations, the costs of this AU would need to be allocated through an allocation methodology. If on the other hand, the 5 employees could be moved to a new or different AU, they could be included in a non-insurance cost category, leaving the original AU with only the 45 dedicated insurance employees. In this case, the revised 45 employee AU could be assigned directly to insurance operations.

Our analysis identified the following recommendations for adjustments that should be contemplated by MPI. By making these adjustments, revisions and/or recategorizations, more AUs, and cost categories, would be “purified”, enabling more direct assignment of dedicated cost categories.

AU # AU Name Suggested recategorization Recategorize to

001 Treasury and Disbursements

• Recategorization of 7 FTE positions and out of pocket costs related to accounting for investments and accounts receivable as all investment and accounts receivable activities arise as a result of insurance activities

• A cost category which will be assigned to the insurance COB

006 Financial Applications

• Recategorization of 1 FTE position providing accounting services for MPI’s re-insurance program


008 Driver Education and Training

• Recategorization of a small component of fees paid to contract driver training instructors to administer the written driver licence test at the end of the training program

• Driver licensing and control cost category

041 Winkler Service Centre

• In each service centre, recategorize all FTEs, physical space and out-of-pocket costs which are devoted to providing either insurance and non-insurance services

• Insurance FTEs, space and out-of-pocket costs to a cost category which will be assigned to the insurance COB

• Non-insurance FTEs, space and out-of-pocket costs to driver licensing and control cost category

045 Corporate Controller

• Recategorization of annual actuarial fees which arise in determining insurance rates and reserves


062 Regulatory and Appeal

• Recategorization of the Crown Corporation Council Levy which will result in this AU being exclusively related to the provision of Basic insurance

• An appropriate cost category subject to allocation



AU # AU Name Suggested recategorization Recategorize to

066 Advertising • Recategorization of out of pocket advertising amounts designated to support specific initiatives such as road safety, etc.


066 Advertising • Recategorization of out of pocket advertising amounts designated to support driver licensing program

• Driver licensing and control cost category

073 Strategic Research

• Recategorization of out of pocket research amounts designated to support specific initiatives such as road safety, etc.


075 Enterprise Systems Support

• Recategorization of 6 FTE positions devoted to analysis of insurance operations

• FTE positions to a cost category which will be assigned to the insurance COB

075 Enterprise Systems Support

• Recategorization of specific out of pocket costs arising from the production of driver licences

• Out of pocket costs to driver licensing and control cost category

081 Business Services • Recategorization of specific software licence and support out of pocket costs arising from software devoted to either insurance or non-insurance products

• Cost categories which will be assigned to either insurance or non-insurance COB

087 Custom Applications

• Recategorization of 12 FTE positions dedicated to maintaining the driver records system on the legacy DVL mainframe system

• 12 FTE positions to driver records cost category

087 Custom Applications

• Recategorization of 4 FTE positions dedicated to the Claims Adjustment and Reporting System (“CARS”)

• 4 FTE positions to a cost category which will be assigned to the insurance COB

088 Business Development

• Recategorization of 3 FTE positions dedicated to CARS • A cost category which will be assigned to the insurance COB

091 Delivery Support • Recategorization of 6 FTE positions dedicated to CARS • A cost category which will be assigned to the insurance COB

092 Project Management Office

• Recategorization of external consulting fees to maintain and support CARS


094 Application Services

• Recategorization of 6 FTE positions dedicated to supporting CARS

• Recategorization of specific information technology hardware costs dedicated to CARS

• 6 FTE positions and CARS costs to a cost category which will be assigned to the insurance COB

094 Application Services

• Recategorization of specific information technology hardware costs dedicated to the legacy DVL mainframe system

• Hardware costs related to DVL legacy system to driver records cost category

5.3 Cost category classification Based on the assumption that the re-categorization of costs identified above has been undertaken, the following section:

• Provides the outcome of the Level A and B cost assignment process, • Describes the Level C allocation process between insurance and non-insurance COB, and • Describes the Level D allocation of insurance COB costs between the 3 insurance LOBs.



5.3.1 Initial cost classification and assignment The table below reflects the results of the Level A and B assignment of cost categories.

• Cost categories assigned at Level A go directly to an insurance LOB or the non-insurance COB.

• Cost categories assigned at Level B go either: ‒ Directly to the insurance COB and are subject to subsequent allocation between the insurance

LOBs at Level D. ‒ To the Allocation category and are subject to subsequent allocation between the insurance

COB and non-insurance COB at Level C. ‒ Directly to the non-insurance COB.

Key Level A – Line of business Basic Ext. SRE Non-Ins.

Level B – Category of business Insurance Non-Ins. Allocation

A Injury claims management X

B Insurance support operations X

C Loss prevention programs X

D Driver licensing and control X

E Driver records X

F Vehicle registration X

G Vehicle standards and inspection X

H Claims centres X

I Service centres X

J Physical damage centre X

K Central administration X

L Physical properties X

M Corporate information technology X

N Human resources and training X


X

P Fair practices X

Q Accounting and finance X

R Investments X

S Pricing and economics X

T Employee benefits X

U Legal X

V ID verification and data integrity X

W Customer service and support X

X Basic policy X



Key Level A – Line of business Basic Ext. SRE Non-Ins.

Level B – Category of business Insurance Non-Ins. Allocation

Y Extension X

Z Special risk extension X

AA Enterprise systems support X

BB Internal audit X

CC Regulatory/appeal X

DD Management committee X

EE Broker commissions2 X X X X

FF Premium taxes3 X X X

GG Claims incurred4 X X X

5.4 Costs subject to allocation Based on the assignment of cost categories in the previous section the following two sections outline the allocation of cost categories identified as subject to allocation.

5.4.1 Allocation between categories of business (Level C) This section describes the Level C allocation of cost categories identified as requiring allocation between the insurance and non-insurance COBs. The recommended allocation approach for each of these cost categories is identified and described below.

Key Cost category Basis of allocation Rationale for allocator

E Driver records Estimated work effort Personnel in driver records collect driver record information and maintain that information for use by the law enforcement, the judiciary and MPI.

F Vehicle registration Estimated work effort Certain personnel in vehicle registration provide insurance services to owners of certain classes of commercial vehciles not serviced by the broker network. These personnel register vehicles and sell Basic insurance products to these customers.

I Service centres COB salary ratio Shared costs in service centres are allocated on the basis of the ratio of salaries assigned specifically to insurance and non-insurance COBs. Salaries is utilized as they reflect the relative complexities of the two COBs.

2 Broker commissions can be assigned directly to specific LOBs or COB as the cost category contains 4 AUs, each of which directly captures costs directly assignable to one of the 3 Insurance LOBs or the Non-insurance COB. See Section 2.2.3 for details.

3 Premium taxes can be assigned directly to specific Insurance LOBs as the cost category contains 3 AUs, each of which directly captures costs directly assignable to one of the 3 Insurance LOBs. See Section 2.2.2 for details.

4 Claims incurred can be assigned directly to specific Insurance LOBs as the cost category contains 3 AUs, each of which directly captures costs directly assignable to one of the 3 Insurance LOBs. See Section 2.2.1 for details.




L Physical properties Enterprise wide per square foot basis

All property maintenance costs as well as the cost of the internal premises management group (AU 072) are combined and allocated on a organization wide per square foot basis to all cost categories based on square footage utilized. Common space not directly attributable to a cost category is assigned to premises department prior to allocation of premises department costs.

T Employee benefits % of base salary costs Corporate employee benefit costs are directly corelated to salaries earned.

V ID verification and data integrity

Estimated work effort Personnel verify new and existing customer data utilized by both the insurance and non-insurance COB.

U Legal Estimated work effort The majority of the legal department efforts are directed toward the provision of insurance services, however members of the department do also provide non-insurance and general corporate services.

W Customer service and support

Weighted customer call centre contact ratio

As a service business MPI is focussed on their customers. Their main conduit of direct interaction with their customers is their call centre. All customer calls to MPI are directed to the customer call centre. The customer call centre tracks the volumes of calls by COB as well as the duration of each call. On average non-insurance calls are shorter in duration as the non-insurance business is much less complex. Adoption of the a weighed call centre ratio which reflects the volume and duration of customer interaction provides a reasonable basis upon which to allocate the costs of providing customer service and support.

K, M N, O P, Q AA BB DD

Central administration Corporate information technology Human resources Advertising, communications, and research Fair practices Accounting and finance Enterprise systems support Internal audit Management committee

Weighted customer call centre contact ratio

As a service business MPI is focussed on their customers. Their main conduit of direct interaction with their customers is their call centre. Adoption of the a weighed call centre ratio which reflects the volume and duration of customer interaction provides a reasonable basis upon which to allocate the costs of people and systems which support the provision of customer service to customers.

The last grouping of cost categories in the table above is a large one. We are recommending that these costs be treated together because they are alike in a fundamental way. They are comprised of costs that are incurred on behalf of MPI, the corporation, rather than on behalf of the delivery of a specific LOB or COB. Further, unlike the other cost categories allocated at Level C, there is no direct work effort basis within these cost categories for making an allocation. Therefore, another allocator is required.

In selecting an appropriate and reasonable allocator for this group of cost categories, we considered a number of options:

• The ratio of FTEs assigned to the two COBs – this allocator would use the ratio FTEs assigned to each of the COB’s through the Level A and B assignments.

• The ratio of salary and benefit expense related to FTEs assigned to the two COBs – this allocator would use the relative salary dollars assigned to each of the COBs through the Level A and B assignments.



• The ratio of insurance revenues versus permit and licence fees collected on behalf of the Province – this allocator would essentially be a ratio of the cash handled on behalf of the two COBs.

• The weighted customer call centre contact ratio – this allocator would be the ratio of time spent by customer facing call centre employees with customers on matters related to each COB.

Assessment of allocators not chosen In our judgment, each of the first three potential allocators provided a potential comparative measure of human activity or financial transactions between the two COBs. However, none of these three potential allocators captured the:

• Comparative complexity of either the underlying transactions or the human activity involved; • The comparative complexity of the required information technology infrastructure required to

support the human activity; or • The comparative nature of MPI’s interaction with its customers, on whose behalf all of these costs

are incurred. We believe that these are significant shortcomings of these first three potential allocators.

Assessment of allocator chosen The costs included in this grouping of cost categories are incurred to support MPI’s other, more directly assignable and allocatable costs in support of MPI’s service to its customers. Therefore, in our view the nature, complexity and time involved in responding to customer inquiries is a useful reference point for assessing those factors that the other potential allocators did not.

The weighted customer call centre contact ratio, which is determined by the relative frequency and duration of customer interaction (i.e. total minutes), was therefore considered as a potential allocator. We believe it is a valid indicator because it captures the disparity in relative business complexity that exists between the COBs. All incoming customer interaction comes through MPI’s central call centre. Data currently captured for call centre activity includes the volume of calls by COB and the duration of those calls.

As an example, the corporate information technology and enterprise system support cost categories together comprise a significant portion of the costs represented in this grouping. It is not possible to analyze these costs in a way that enables direct assignment or straightforward allocation to MPI’s COB or LOB. They are incurred in support of MPI’s operations, which are ultimately directed to serving its customers.

MPI has made and continues to make a significant investment in information technology systems that support the delivery of service to customers. In fact, MPI’s two most significant applications, AOL and CARS are both focussed on the provision of services to customers. Utilizing the weighted customer call centre contact ratio allocates these costs in proportion to MPI’s own investment of aggregate time in interacting with its customers on its respective COB’s. We believe that this measure, which captures not only the frequency of customer interaction, but also the inherent complexity therein, is the most appropriate measure for allocating such costs.

Another example is the management committee cost category. It is also not possible to analyze these costs in a way that enables direct assignment or straightforward allocation to MPI’s COB or LOB. They too are incurred in support of MPI’s operations, which are ultimately directed to serving its customers.

All that the executive management team does is ultimately done in support of MPI’s services to its customers. Again, the weighted customer call centre contact ratio is an objective measure of the split of MPI’s interaction with its customers between COB’s. It is, therefore, an appropriate allocator for this cost category.



As a consequence of this analysis, we concluded that the weighted customer call centre contact ratio is the most appropriate allocator for this grouping of costs.

5.4.2 Allocation of assigned and allocated insurance category of business costs (Level D)

This section describes the Level D allocation of cost categories identified as requiring allocation between the insurance LOBs. The recommended allocation approach for each of those cost categories is identified and described.


A Injury claims management Claims under management ratio

Ratio of claims managed by insurance LOB reflects reasonable allocation of injury claim management function costs to insurance LOBs.

E Driver records Assigned to Basic LOB Efforts of personnel are to establish and maintain the driving record used for Basic driver and vehicle insurance rating purposes.

F Vehicle registration Assigned to Basic LOB Efforts of personnel include sale of Basic insurance products to certain classes of commercial vehicles.

R Investments Percentage of claims reserves and unearned premiums by insurance LOB

The cost of investment activity is relative to the magnitude of the required investment portfolio as determined by claims reserves and unearned premiums by line of insurance.

B, C, H, I, J, K, M, N, O, P, Q, S, U, V, W, AA, BB, DD

Insurance support operations Loss prevention programs Claims centres Service centres Physical damage centre Central administration Corporate information technology Human resources Advertising, communications, and research Fair practices Accounting and finance Pricing and economics Legal ID verification and data integrity Customer service and support Enterprise systems support Internal audit Management committee

Net claims incurred % Net claims incurred reflects the net insurance claims activity in a given year. The majority of MPI operating costs related to the provision of insurance services are related to claims. Net claims incurred by insurance LOB as a percentage of total net claims incurred provides a reasonable allocator to apply to shared costs of providing insurance services and the supporting functions to the the provision of insurance services.



In selecting an appropriate and reasonable allocator for the large grouping of cost categories listed last in the table above we considered a number of options including claims volumes, insurance premiums and claims incurred. Claims volumes was rejected as a potential allocator due to the “add-on” nature of much of the Extension LOB to Basic insurance and the fact that one accident often gives rise to a “claim” in more than one LOB. Premiums were rejected as Basic insurance reflects no profit component yet extension and SRE premiums are competitive lines which reflect a profit component. Net claims incurred by line of insurance was selected as a reasonable allocator as it provided the most reasonable comparator of actual business activity required to service customers under each insurance LOB.

5.4.3 Allocator definitions

Estimated work effort Estimated work effort is the estimate of work effort required by human resources to complete certain activities or tasks or alternatively the percentage of time spent doing certain activities or tasks. It is typically expressed as a percentage of time worked.

COB Salary ratio The COB salary ratio is defined as the total salaries assigned to one COB in relation to the total salaries assigned to the other COB. It can be expressed as a ratio or percentage.

Per square foot Per square foot is defined as the total cost of all property operations, including the internal department which manages those properties, divided by the total amount of operating department specific space measured in square feet.

Weighted customer call centre contact ratio The weighted customer call centre contact ratio is determined based on the volume and duration of incoming calls into the MPI call centre. This call activity is electronically tracked. The weighted ratio is obtained by comparing the total call minutes received in a year for calls regarding the insurance COB as compared to the total call minutes received in a year for calls regarding the non-insurance COB. The ratio between these two is then applied to general information calls and the ratio recalculated including the allocated general information calls.

Percentage of base salary costs The percentage of base salary is derived by determining what percentage the total of a cost category represents of total enterprise wide salaries.

Claims under management ratio Claims under management ratio is the ratio of personal injury claims under management originating from a particular insurance LOB divided by total personal injury claims under management.

Percentage of reserves and unearned premiums by line of business The percentage of reserves and unearned premiums by insurance LOB is based on the reserves and unearned premiums balance for each insurance LOB as a percentage of total insurance reserves and unearned premiums as at the previous year end.



Net claims incurred percentage Net claims incurred percentage is the net claims incurred by each insurance LOB as a percentage of the total net insurance claims incurred.

5.5 Business process review projects As described in Section 2.2.6, MPI is in the midst of a multiyear program of BPR projects, with the expectation that this major program will be completed by 2011/12. In those years in which there are such projects, their costs will need to be assigned or allocated to individual LOBs. MPI’s accounting systems accumulate costs related to specific projects in individual AUs for each project. The methodology proposed for the assignment or allocation of BPR or other special project costs to LOB’s is developed on the principle that each project should be separately and individually considered.

To that end, we recommend that these costs be handled in the following manner.

1. Each individual project should be reviewed to determine whether it relates exclusively to a single LOB.

a. The costs associated with any such project should be assigned to that LOB.

b. Projects that cannot be assigned to a LOB in this way are assessed at the next step – step 2 immediately below.

2. Each remaining individual project should be reviewed to determine whether it relates exclusively to a single COB.

a. The costs associated with any such project should be assigned to that COB. Projects assigned in this manner to the Insurance LOB should then have their aggregate project cost for the year allocated between the three lines of insurance based on “net claims incurred %”. This will be consistent with the allocation method for the largest portion of normal insurance LOB costs.

b. Projects that cannot be assigned to a COB in this way are assessed at the third step – step 3 immediately below.

3. Each individual remaining project relates to both of MPI’s COBs.

a. Accordingly, for each project, an allocation must be made of its costs between the MPI’s insurance and non-insurance COBs. We recommend that each project be separately considered to determine the most appropriate basis for allocating its costs.

b. Because each project is undertaken with a unique and ambitious business purpose, we do not believe that a specific allocator should be prescribed. In the year in which this methodology is first adopted, each project to be allocated should be reviewed and a basis of allocation determined by management.

c. The basis of allocation for each project should be consistent with the costing principles outlined in this report. That means that where possible, the selected allocator for an individual project should reflect the allocation of work effort on the project between COBs. If a work effort allocation is difficult to identify due to the nature of the project, the allocator should be based on the allocation of benefits of the project between COBs.

d. Those costs assigned, through the utilization of an allocator, to the insurance COB should then have their aggregate allocated project cost for the year allocated between the three insurance LOBs based on “net claims incurred %”. This will be consistent with the allocation method for the largest portion of normal insurance COB costs.



6 Specific areas of interest

In its RFP, MPI identified eight specific areas of interest that the PUB had identified. Therefore, MPI requested that each one specifically be addressed. The following sections discuss and respond to each of those eight areas of interest.

6.1 Driver licence service delivery model

Issue The Service Delivery Model adopted in 2007 closely aligns the driver licence and automobile insurance renewals. The Board is interested in assuring that the cost allocation methodology, especially as related to broker costs for service provision, are appropriately allocated between driver licensing, basic insurance, Extension and SRE.

Response There are two components to broker costs for service provision. These are broker commissions and broker network support costs.

As described in Section 2.2.3, broker commissions are commissions paid by MPI to approximately 325 MPI brokers located across the Province to sell MPI insurance products and process vehicle registration and driver licensing transactions on behalf of MPI. The commission structure is defined in a schedule to the “Agent Commissions Regulation. These commission rates represent compensation for particular types of transactions, as negotiated by MPI with independent, third party brokers.

As commissions are paid, they are allocated to AUs based on the underlying nature of the transaction on which the commission is paid. Accordingly, there are four broker commission AUs in normal operations – one for each of driver licensing, basic insurance, Extension and SRE. Each of these AUs is treated as a separate cost category that is assigned as part of the Level A assignment to the corresponding LOB. This results in the assignment of commission costs to the LOBs in which the underlying commission-creating transaction belongs.

Broker network support costs are captured in AU 076, which is included for purposes of the cost allocation study, in the “Customer service and support” cost category. This cost category is allocated, in its entirety, between Insurance and Non-insurance COB as a Level C allocation on the basis of the weighted customer call centre contact ratio. We believe that this is the appropriate basis of allocation for the reasons outlined in Section 5.4.1 of this report.

6.2 Service centres project

Issue With the move to multi-use facilities, cost recovery of the claim centre buildings and support operations will need to be allocated in such a manner as to ensure an appropriate portion of these costs being allocated to the respective divisions, most notably DVL.



Response The service centre concept is a key component of the strategy to integrate the former insurance and non-insurance operations. The roll out of the service centre concept will largely result in the changing of current insurance claims locations into service centre locations and the elimination of most current dedicated non-insurance locations. These service centre locations will offer all services provided by MPI to customers.

As the majority of the planned service centres are currently claims centres, they will be renovated to accommodate the staff and functions required for the provision of non-insurance lines of business. The provision of non-insurance services from a service centre involves the introduction of a limited number of personnel directly providing non-insurance services and perhaps the addition of general clerical and customer service personnel who will then support the delivery of both insurance and non-insurance services. The scope of required physical renovations will include refurbishment of the general customer service area and development of work space for devoted non-insurance personnel.

Despite the fact that these integrated service centres will provide both insurance and non-insurance services, the responsibilities of individual employees within a service centre are, for the most part dedicated to either insurance or non-insurance COB. For instance, the work of the claims adjusters resident in each service centre relates exclusively to the insurance COB, while the work of driver examiners resident in each service centre relates exclusively to non-insurance COB. There will also be a limited number of customer service personnel, such as those attending to the front desk, whose responsibilities will support both COBs.

MPI currently envisions recording all staff and supporting costs of a service centre in an AU. In that type of accounting structure, the cost of the entire AU (i.e. all of the costs of the service centre) would be subject to allocation, since the efforts of the employees in the AU support both of MPI’s COBs.

Consequently our recommendations to “purify” AUs, as set out in Section 5.2.2 of this report, address this situation. Currently, there is only one integrated service centre – the one located in Winkler. Its costs are accumulated in AU 041. Our recategorization suggestions would have MPI analyze the efforts of individual employees, physical space utilized and out of pocket costs incurred in AU 041, so that all employee salaries, space and out of pocket cost dedicated to insurance COB would be accumulated in second AU and all employee salaries, space and out of pocket costs dedicated to non-insurance COB would be accumulated in a third AU. In this way, only the first AUs costs would be subject to allocation between the COBs. The costs in the second and third AUs would be assigned directly to one of the two COBs.

While there is currently only one service centre that has been opened, each service centre that becomes operational would be analyzed in the same way so that costs incurred at service centre locations that can be assigned directly to a COB are maximized.

6.3 Main frame decommissioning

Issue With the intended decommissioning of the main frame computer system used by DVL and the integration of this function with AOL and MPI’s information technology platform for all of its business functions, the Board will be interested in ensuring that the computing costs are allocated on a reasonable basis.

Response The records containing information regarding driver’s identification and status in Manitoba have already been integrated into the overall customer records of MPI through the development of an earlier application and the integration of customer information and records. MPI continues however to operate the existing DVL mainframe system as it is still required to maintain driver’s driving history records.



Maintenance of these records is required for two purposes. First, the records are required and accessed by law enforcement and the judiciary system. Second, MPI’s insurance operations require this information for maintenance of the driver merit system (soon to be replaced with the driver safety rating). This system is utilized to determine the requirement for and magnitude of insurance surcharges levied on driver licence insurance and the level of discounts applicable on vehicle insurance premiums.

Maintenance of this system is labour intensive in that all new entries and existing information updates must be entered manually. The significant data inputs into the system are driving infractions and police reports. The employees and systems maintain these dual-use records through a single process.

Currently these costs are included in AU 104 which is in the “driver records” cost category. This cost category is comprised of staffing and technology costs which are to be allocated between COBs at Level C based on estimated work effort. Since these costs support a single data record keeping process that is used for both COBs, we have determined that these costs should be shared between insurance and non-insurance on an equal, 50/50 basis.

MPI is planning to adopt new capabilities for this purpose in their current technology environment to replace the existing mainframe application. Development on these capabilities has not yet begun on a significant scale.

In addition, MPI’s BPR program includes plans for a mainframe decommissioning project. When this project begins, the costs will need to be allocated between COB’s in accordance with the recommendations set out in Section 5.5.

6.4 Cost allocation based on management judgment

Issue The Board accepts that there will be costs that will need to be allocated based on a reasonable judgment. However, the Board needs to ensure that this judgment and the related analysis has been externally evaluated and tested for reasonableness and accuracy.

Response MPI has retained Deloitte and Touche LLP to undertake an analysis of their operations and cost structure and develop a cost allocation methodology. During that process Deloitte has taken the necessary steps to understand MPI current operations, understand future planned operations and cost structure and develop a methodology which we believe is a reasonable approach to the assignment and allocation of costs.

6.5 Business process review costs

Issue The information filed with the 2008 rate application suggested that 100% of the BPR costs will be allocated to DVL except for the driver safety rating and the PIPP infrastructure project costs. The Board will be interested in ensuring that the method for capturing the respective costs is sound and the proposed allocation supportable.



Response: See Sections 2.2.6 and 5.5.

6.6 Post BPR allocation of DVL costs

Issue The stated objective of the BPR is to identify synergies, service improvements and cost reductions. However, the Board expects that any clear delineation which might currently exist between DVL operations and general operations of the Corporation will be somewhat eroded. The Board will therefore be interested in ensuring that an appropriate allocation methodology is developed that will survive a post BPR environment.

Response From the outset of the project clear direction was provided that the methodology developed must be applicable in the post BPR integrated environment. Consequently, the focus was developing a methodology which addressed the needs of the post integration and BPR project period, while still accommodating the current state which we recognized would change. The model addresses the gradual reduction of the clear delineation between historical insurance and non-insurance COB and embraces the concepts of full service centres and other changes in moving to an integrated service delivery model. Given the adoption of the full cost pro-rata allocation model, the efficiencies and synergies will be shared by both the insurance and non-insurance COBs.

6.7 Activity based costing

Issue In previous cost allocation studies, MPI indicated that it did not have the information to implement activity based costing but it would endeavour to consider it in the future. The Board will be interested in knowing the applicability of this approach in the current cost allocation study.

Response Activity based costing is typically used in a costing environment where the true cost of a product, service or customer’s business is being determined for evaluation purposes. The approach is more suited to determining the true cost of particular product or process at a point in time. Activity based costing, while not an allocator per se, could be utilized as an input in establishing an allocator.

While activity based costing can assist in arriving at an accurate measure at a point in time, two negative attributes of activity based costing measures is that they typically represent a point in time measure and require significant effort to undertake, maintain and update on a regular basis to remain relevant. Activity based costing also does not address indirect costs well which have little or no relationship to a particular product or process. Our review of allocation literature and regulatory documentation found limited reference to activity based costing and little support for its use in cost allocation.



6.8 Jurisdictional comparators

Issue The Board will request that the consultant provides a comparison between the cost allocation methodologies of SGI and ICBC and perhaps other cost allocation practices by the insurance industry in both Canada and the United States.

Response See Section 3.0.



7 Appendices



Appendix A – Physical Properties

The following table provides complete listing of all physical properties currently utilized by MPI in the course of operations.

Location Address AU # Square feet Primary use

Winnipeg City Place, 234 Donald Street 110 302,857 Head office and other central functions

Winnipeg Royal Trust, 175 Hargrave Avenue 112 8,268 Insurance operations

Winnipeg 445 King Street 113 16,918 Claims Centre

Winnipeg 125 King Edward Street 114 16,918 Claims Centre

Winnipeg 930 St. Mary's Road 115 16,918 Claims Centre

Winnipeg 420 Pembina Highway 116 23,435 Claims Centre

Winnipeg 1103 Pacific Avenue 117 24,450 Claims Centre

Brandon 731 – 1st Street 121 35,311 Claims Centre

Winnipeg 1981 Plessis Road, Building A 122 38,850 Claims Centre

Dauphin 217 Industrial Road 125 6,832 Claims Centre

Flin Flon 8 Timber Lane 127 2,280 Claims Centre

Portage 2007 Saskatchewan Avenue W 129 6,832 Claims Centre

Selkirk 630 Sophia Street 131 6,724 Claims Centre

Beausejour 848 Park Avenue 132 7,425 Claims Centre

Steinbach 91 North Front Drive 133 5,940 Claims Centre

Arborg 323 Sunset Boulevard 134 7,029 Claims Centre

Swan River 125 – 4th Avenue N 135 3,210 Claims Centre

The Pas 424 Fischer Avenue 137 3,277 Claims Centre

Thompson 53 Commercial Place 139 5,940 Claims Centre

Winkler 355 Boundary Trail 141 7,425 Service Centre

Steinbach CRRS Unit 2, 165 Park Road 144 3,910 Insurance operations

Winnipeg 240 Kennedy Street 160 9,161 Insurance operations

Winnipeg 1745 Ellice Avenue 161 27,428 Enhanced identity

Winkler Southland Mall 162 2,506 Enhanced identity

Winnipeg 1981 Plessis Road, Building C 177 23,000 Claims Centre

Winnipeg 1981 Plessis Road, Building B 178 30,000 Claims Centre

Winnipeg Nairn Avenue 179 5,500 Driver testing

Winnipeg McPhillips Street 180 4,338 Driver testing

Winnipeg Corydon Avenue 181 4,400 Driver testing

Winnipeg 1075 Portage Avenue 182 67,981 BPR

Brandon Brandon 185 4,429 Driver testing

Dauphin Dauphin 186 1,806 Driver testing



Location Address AU # Square feet Primary use

Portage la Prairie Portage la Prairie 187 1,806 Driver testing

Thompson Thompson 188 1,750 Driver testing

The Pas The Pas 189 509 Driver testing



Appendix B – Complete Listing of Normal Accounting Units

AU # Name AU # Name

001 Treasury and Disbursements 040 Quality Assurance

002 Financial Services 041 Winkler Claims Centre

003 Special Accts and Subrogation 042 Health Care Services

004 Budgeting and Planning 043 Fair Practices/Customer Relations

005 Administrative Services 044 Casualty and Rehabilitation – Regional

006 Financial Applications 045 Corporate Controller

007 Corporate Employee Benefits 053 Holding Compound

008 Driver Education and Training 055 Internal Audit

010 Road Safety 056 Auto Crime Prevention

011 Claims Business Services 059 Legal

013 Claims Centre #1 061 e-Communications

014 Claims Centre #2 062 Regulatory/Appeal

015 Claims Centre #3 063 Mgmt Committee

016 Claims Centre #4 064 Investment Department

017 Claims Centre #5 066 Advertising

018 PIPP Financial Support Services 068 COTS Applications

019 Bodily Injury 069 Identity Verification and Data Integrity

020 Casualty and Rehabilitation – Wpg 070 Int Comm and Stakeholder Rel

021 Brandon Claims Office 071 Human Resources

022 Physical Damage Centre 072 Premises

023 Commercial Claims 073 Strategic Research

024 Rehabilitative Case Mgmt 074 Corp Communications

025 Dauphin Claims Centre 075 Enterprise Systems Support

026 Temp – Catastrophe 076 Broker Operations

027 Flin Flon Claims Centre 077 Salvage

028 Medex 078 Call Management Centre

029 Portage Claims Centre 079 Special Investigation Unit

031 Selkirk Claims Centre 080 Organizational Dev/Staff Training

032 Beausejour Claims Centre 081 Business Services

033 Steinbach Claims Centre 082 Change Mgmt Office

034 Arborg Claims Centre 083 Information and Learning Serv

035 Swan River Claims Centre 084 Special Risk Extension

037 The Pas Claims Centre 085 Autopac Extension

039 Thompson Claims Centre 086 Basic Autopac Special Services



AU # Name AU # Name

087 Custom Applications 135 Swan River

088 Business Development 137 The Pas

090 Program Management – BPR 139 Thompson

091 Delivery Support 141 Winkler

092 Project Management Office 144 Steinbach CRRS

093 Information Technology Serv 160 240 Kennedy Street (PIPP)

094 Application Services 161 1745 Ellice (EDL)

095 Pricing and Economics 162 Winkler (EDL)

096 Basic Policy Dev and Support 177 Receiving and Security

101 Driver Licensing 178 Salvage

102 Vehicle Registration 179 Nairn Testing/Serv Outlet

103 Vehicle Standards and Inspect 180 McPhillips Testing/Serv Outlet

104 Driver Records 181 Corydon Service Outlet

105 Driver Testing 182 1075 Portage Service Outlet

106 Driver Improvement and Control 185 Brandon Testing/Serv Outlet

107 Medical Records 186 Dauphin Testing/Serv Outlet

110 CityPlace 187 Portage la Prairie Testing/Serv Outlet

112 Royal Trust 188 Thompson Testing/Serv Outlet

113 Claims Centre #1 189 The Pas Testing/Serv Outlet

114 Claims Centre #2 605 Basic – Commissions

115 Claims Centre #3 607 Basic – Premium Taxes

116 Claims Centre #4 610 Basic – Net Claims Incurred

117 Claims Centre #5 615 Extension – Commissions

118 Winnipeg North (Main Street) 617 Extension – Premium Taxes

119 Winnipeg North East (Gateway) 620 Extension – Net Claims Incurred

120 Winnipeg South (Bison Drive) 630 SRE – Commissions

121 Brandon 631 SRE – Premium Taxes

122 Physical Damage 632 SRE – Net Claims Incurred

125 Dauphin 650 DVL – Commissions

127 Flin Flon

129 Portage

131 Selkirk

132 Beausejour

133 Steinbach

134 Arborg



Appendix C – Cost Category Description

Key Cost category AUs included Cost category description Significant costs A Injury claims management 018, 019, 020, 024,

028, 042, 044 • Responsible for all aspects of bodily injury claims handling

including: ‒ PIPP financial support services ‒ Casualty and rehabilitation claims ‒ Rehabilitative case management ‒ Medical expenses ‒ Health care services

• Salaries, benefits and general office operating costs

• Specialized health care training

B Insurance support operations

003, 011, 040 • Collections of overdue accounts • Management, handling and collection of subrogation/recovery

claims • Budgeting, financial monitoring, reporting, and project

management • Quality assurance – documenting processes and developing

quality standards for physical damage, estimating, and bodily injury segments of MPI


• Special training costs

C Loss prevention programs 008, 010, 056, 079 • Auto crime prevention including the immobilizer program and Winnipeg Auto Theft Suppression program

• Special investigations into suspicious claims • Maintenance of fraudulent claims database • Management of driver education and training programs • Management of road safety and safety awareness programs


• External costs for auto crime prevention programs

• Contract costs for driver education programs

D Driver licensing and control 101, 105, 106, 107 • Operate existing DVL driver licensing locations • Facilitate written driver examination • Book and provide driver road tests • Driver control and improvement – monitor driver behavior, review

driver infractions, assess medical conditions and administer driver remedial actions

• Maintain driver medical records


• Postage • Amortization of deferred system

development costs

E Driver records 104 • Maintain the existing mainframe based driver records system • Provide driver information to courts, law enforcement and MPI

Basic insurance program


F Vehicle registration 102 • Maintain vehicle registration records • Compile and exchange vehicle registration with other jurisdictions • Provide registration and insurance services to certain classes of

commercial vehicles


• Vehicle licence plates

G Vehicle standards and inspection

103 • Administer vehicle inspection program including inspection of facilities, granting licences to authorized garages, administering dealer permits, etc.


• Amortization of capital assets



Key Cost category AUs included Cost category description Significant costs H Claims centres 013, 014, 015, 016,

017, 021, 023, 025, 027, 029, 031, 032, 033, 034, 035, 037, 039

• Business operations of claims centres providing: ‒ damage inspection ‒ non-bodily injury claims adjustment and management


I Service centres 041 • Business operations of a service centre providing the full range of services including: ‒ damage inspection ‒ non-bodily injury claims adjustment and management ‒ driver testing and licensing

• First prototype of service centre concept


J Physical damage centre 022, 053, 077 • A claims centre for non-drivable vehicles • Claims inspection, adjusting standards and quality group • Coordinates towing and provides storage and estimating areas for

vehicles rendered un-drivable • Handles the salvage aspect of vehicle considered irreparable

• Salaries, benefits and general office and yard operating costs

• Quality and standards research costs • Amortization of MPI fleet vehicles

K Central administration 005 • Central office services • Purchasing function • Forms inventory storage and control • Internal mail services • Internal relocation services • Furniture and fixture maintenance


• Fleet vehicle costs • Capital asset amortization • Postage

L Physical properties 072, 110, 112, 113, 114, 115, 116, 117, 118, 119, 129, 121, 122, 125, 127, 129, 131, 132, 133, 134, 135, 137, 139, 141, 144, 160, 161, 162, 177, 178, 179, 180, 181, 182, 185, 186, 187, 188, 189

• Cost of MPI premises department which manages all physical properties

• Costs of all owned buildings including claim centers, office locations, and DVL locations.


• Physical property operating costs such as cleaning services, repairs and maintenance, utilities, insurance, grants in lieu of taxes, amortization, etc.

M Corporate information technology

081, 092, 093, 094 • Acquisition/procurement process for hardware • Hardware and software maintenance, software licensing. • External consulting services and contracts for system development

and maintenance • Administration of all corporate enterprise databases including

setup, testing, maintenance, upgrading. • Enterprise wide desktop service and support


• Data processing costs • Hardware and software licences • Hardware and software support contracts • Amortization of data processing equipment



Key Cost category AUs included Cost category description Significant costs N Human resources 071, 080 • Human resource services to all departments and functions

• Staff performance improvement, team building, career counseling, productivity improvement programs


• Training and professional development funding

• Consulting fees for special employee programs and services


061, 066, 070, 073, 074

• Development and implementation of internal and external communications through web based technology

• Coordinate and manage all MPI advertising and communications • Media relations, advertising and public awareness campaigns,

graphic design, production of customer information materials, corporate sponsorship

• Strategic research including statistical analysis, management and interpretation of external polling services on various topics, and preparation of certain industry statistical reports on topics such as collision rates, etc.


• Corporate community relations costs • Public Information and advertisements • Some program specific production and

advertising buys • Contracted production services • Contracted research and polling

assistance

P Fair practices 043 • Identifies and responds to legislation • Responds to policies or practices that are not consistent with

Corporate values • Handles Ombudsman inquiries and prepares Ministerial briefing

notes


Q Accounting and finance 001, 002, 004, 006, 045

• Corporate treasury function, banking, investments, disbursements (including payroll), A/R control

• Financial reporting, analysis, and dissemination of statistical information

• Corp. budgeting, forecasting, expense allocation, planning, managing corporate risk assessment program and corporate strategic planning process

• Monitor integrity of the financial systems and reinsurance programs


• Audit and professional fees • Bank charges • Data processing fees

R Investments 064 • Monitor, research, and analyze investments • Manage cash reserves • Make recommendations to the Investment Committee


S Pricing and economics 095 • Assist in the rate determination process by providing actuarial/financial/statistical/economic study analysis and calculations

• Some limited involvement in driver safety rating program


T Employee benefits 007 • Records all corporate employee benefits outside of direct items such as EI, CPP, etc.

• Costs of various benefits such as pensions, leaves, retirement allowance, etc.



Key Cost category AUs included Cost category description Significant costs U Legal 059 • Provides legal services to the corporation

• Corporate counsel, corporate secretary, claim adjudicators and legal staff supporting the insurance process and general corporate matters


• Professional fees

V ID verification and data integrity

069 • Research and verify identity of new and existing customers for driver licensing, insurance and identity cards


W Common service and support

076, 078, 086 • Equips and supports broker network in the delivery of all MPI services to customers – fielding calls, conducting site visits and conducting training for broker network

• Handles all incoming customer calls for all lines of business. • Initial point of contact for all insurance claims • Provides customer claim enquiries, driver licensing, vehicle

registration and identity services. • Monitors, processes and supports the immobilizer program • Provides storefront full service customer service outlet located on

the main floor in City Place


• Travel costs

X Basic policy 096 • Develops Basic insurance policy • Administers fleet rebate/surcharge program • Handles Basic insurance enquiries including insurance surcharges

on drivers licences

• Salaries benefits and general office operating costs

Y Extension 085 • Responsible for the MPI Extension LOB assisting in developing product offerings, pricing and product monitoring


Z Special risk extension 084 • Responsible for the MPI SRE LOB assisting in developing product offerings, pricing and product monitoring for products targeted for commercial vehicles


AA Enterprise systems support 068, 075, 083, 087, 088, 091

• Responsible for the enhancement, maintenance and evolution of corporate applications supporting the service delivery to customers through the provision of: ‒ business analytic services to through the Enterprise Data

Warehouse ‒ Implementing strategic corporate projects throughout their entire

life cycle ‒ Selection, acquisition and implementation of (commercial off the

shelf) applications ‒ Provide training, materials and support for users of business

operations systems and software, including brokers, call centres, claims management


• Software applications • Amortization of deferred application

development costs • Postage, printing and stationery

BB Internal audit 055 • Internal audit services to all operations • Salaries, benefits and general office operating costs



Key Cost category AUs included Cost category description Significant costs CC Regulatory/appeal 062 • Regulatory process

• Customer dispute mechanisms/programs • External costs of: ‒ AICC costs ‒ PUB Costs ‒ Claimant advisory office costs

• Crown Corporation levy

DD Management committee 063 • Senior management group • Corporate governance


• Conferences and travel

EE Broker commissions5 605, 615, 630, 650 • Commissions paid to brokers to sell products and provide services to customers

• Commission payments

FF Premium taxes6 607, 617, 631 • Taxes paid on premiums collected on insurance products • Tax remittances to Manitoba

GG Claims incurred7 610, 620, 632 • Payments made to settle claims made under terms of insurance contracts

• Payments arising from insurance claims including payments to: ‒ Claimants ‒ Suppliers providing goods and services

to MPI to resolve claims

5 Broker commissions can be assigned directly to specific LOBs or COB as the cost category contains 4 AUs, each of which directly captures costs directly assignable to one of the 3 Insurance LOBs or the Non-insurance COB. See Section 2.2.3 for details.

6 Premium taxes can be assigned directly to specific Insurance LOBs as the cost category contains 3 AUs, each of which directly captures costs directly assignable to one of the 3 Insurance LOBs. See Section 2.2.2 for details.

7 Claims incurred can be assigned directly to specific Insurance LOBs as the cost category contains 3 AUs, each of which directly captures costs directly assignable to one of the 3 Insurance LOBs. See Section 2.2.1 for details.



Appendix D – Application of the Cost Allocation Methodology

The cost methodology developed was applied to the 2009/10 normal budgeted amounts provided by MPI. The results of that application, including the purification of AUs identified in the report and the application of the multi step “Level” approach of assignment and allocation of cost categories is detailed by level in the following tables. All tables are presented in thousands of dollars ($000’s) except where noted.

Table 1 – Summary of adjustments required to calculate “Purified Normal” balances ($000’s)

Normal Adjustments “Purified Normal”

A Injury claims management $ 13,731 $ - $ 13,731

B Insurance support operations 5,497 6,340 11,837

C Loss prevention programs 10,438 1,531 11,968

D Driver licensing and control 9,999 678 10,677

E Driver records 1,483 1,576 3,060

F Vehicle registration 1,843 - 1,843

G Vehicle standards and inspection 1,760 - 1,760

H Claims centres 25,132 - 25,132

I Service centres 885 (486) 399

J Physical damage centre 7,029 - 7,029

K Central administration 2,572 - 2,572

L Physical properties 18,793 - 18,793

M Corporate information technology 29,194 (4,627) 24,567

N Human resources and training 4,569 - 4,569

O Advertising, communications, and research 7,341 (1,745) 5,597

P Fair practices 790 - 790

Q Accounting and finance 5,836 (1,238) 4,598

R Investments 413 125 538

S Pricing and economics 1,114 299 1,413

T Employee benefits 12,734 - 12,734

U Legal 2,159 - 2,159

V ID verification and data integrity 509 - 509

W Customer service and support 9,428 - 9,428

X Basic policy 782 - 782

Y Extension 197 - 197

Z Special risk extension 2,915 - 2,915

AA Enterprise systems support 7,949 (2,454) 5,495

BB Internal audit 579 - 579

CC Regulatory/appeal 3,129 (194) 2,935

DD Management committee 2,949 194 3,143

EE Broker commissions 69,800 - 69,800

FF Premium taxes 27,000 - 27,000

GG Claims incurred 688,000 - 688,000

$976,548 - $976,548



Table 2 – Level A Assignment ($000’s)

“Purified Normal”

Directly assignable costs Non-

assignable to LOB Basic

LOB Extension

LOB SRE LOB

Non-insurance

COB

A Injury claims management $13,731 $ - $ - $ - $ - $13,731

B Insurance support operations 11,837 - - - - 11,837

C Loss prevention programs 11,968 - - - - 11,968

D Driver licensing and control 10,677 - - - 10,677 -

E Driver records 3,060 - - - - 3,060

F Vehicle registration 1,843 - - - - 1,843

G Vehicle standards and nspection 1,760 - - - 1,760 -

H Claims centres 25,132 - - - - 25,132

I Service centres 399 - - - - 399

J Physical damage centre 7,029 - - - - 7,029

K Central administration 2,572 - - - - 2,572

L Physical properties 18,793 - - - - 18,793

M Corporate information technology 24,567 - - - - 24,567

N Human resources and training 4,569 - - - - 4,569


5,597 - - - - 5,597

P Fair practices 790 - - - - 790

Q Accounting and finance 4,598 - - - - 4,598

R Investments 538 - - - - 538

S Pricing and economics 1,413 - - - - 1,413

T Employee benefits 12,734 - - - - 12,734

U Legal 2,159 - - - - 2,159

V ID verification and data integrity 509 - - - - 509

W Customer service and support 9,428 - - - - 9,428

X Basic policy 782 782 - - - -

Y Extension 197 - 197 - - -

Z Special risk extension 2,915 - - 2,915 - -

AA Enterprise systems support 5,495 - - - - 5,495

BB Internal audit 579 - - - - 579

CC Regulatory/appeal 2,935 2,935 - - - -

DD Management committee 3,143 - - - - 3,143

EE Broker commissions 69,800 41,200 23,000 5,000 600 -

FF Premium taxes 27,000 22,000 4,000 1,000 - -

GG Claims incurred 688,000 596,000 62,000 30,000 - -

$976,548 $662,917 $89,197 $38,915 $13,037 $172,482



Table 3 – Level B Assignment ($000’s)

Non-assignable

to LOB Insurance

COB Subject to allocation

Non-insurance COB

A Injury claims management $13,731 $13,731 - -

B Insurance support operations 11,837 11,837 - -

C Loss prevention programs 11,968 11,968 - -

E Driver records 3,060 - 3,060 -

F Vehicle registration 1,843 - 1,843 -

H Claims centres 25,132 25,132 - -

I Service centres 399 - 399 -

J Physical damage centre 7,029 7,029 - -

K Central administration 2,572 - 2,572 -

L Physical properties 18,793 - 18,793 -

M Corporate information technology 24,567 - 24,567 -

N Human resources and training 4,569 - 4,569 -

O Advertising, communications, and research 5,597 - 5,597 -

P Fair practices 790 - 790 -

Q Accounting and finance 4,598 - 4,598 -

R Investments 538 538 - -

S Pricing and economics 1,413 1,413 - -

T Employee benefits 12,734 - 12,734 -

U Legal 2,159 - 2,159 -

V ID verification and data integrity 509 - 509 -

W Customer service and support 9,428 - 9,428 -

AA Enterprise systems support 5,495 - 5,495 -

BB Internal audit 579 - 579 -

DD Management committee 3,143 - 3,143 -

$172,482 $71,649 $100,833 -



Table 4 – Level C Allocation ($000’s)

Subject to allocation Insurance COB Non-insurance COB

E Driver records $3,060 $1,530 $1,530

F Vehicle registration 1,843 270 1,573

I Service centres 399 348 51

K Central administration 2,572 2,369 203

L Physical properties 18,793 16,114 2,679

M Corporate information technology 24,567 22,626 1,941

N Human resources and training 4,569 4,208 361

O Advertising, communications, and research 5,597 5,155 442

P Fair practices 790 728 62

Q Accounting and finance 4,598 4,235 363

T Employee benefits 12,734 11,060 1,674

U Legal 2,159 1,905 254

V ID verification and data integrity 509 254 254

W Customer service and support 9,428 8,683 745

AA Enterprise systems support 5,495 5,061 434

BB Internal audit 579 534 46

DD Management committee 3,143 2,894 248

$100,833 $87,973 $12,860



Table 5 – Level D Allocation ($000’s)

Assigned and

Allocated to Insurance COB

Basic LOB

Extension LOB

SRE LOB

A Injury claims management $13,731 $12,481 $1,249 $ -

B Insurance support operations 11,837 10,254 1,067 516

C Loss prevention programs 11,968 10,368 1,079 522

E Driver records 1,530 1,530 - -

F Vehicle registration 270 270 - -

H Claims centres 25,132 21,772 2,265 1,096

I Service centres 348 301 31 15

J Physical damage centre 7,029 6,089 633 307

K Central administration 2,369 2,052 213 103

L Physical properties 16,114 13,709 1,429 975

M Corporate information technology 22,626 19,600 2,039 987

N Human resources and training 4,208 3,645 379 183

O Advertising, communications, and research 5,155 4,465 465 225

P Fair practices 728 630 66 32

Q Accounting and finance 4,235 3,669 382 185

R Investments 538 485 29 24

S Pricing and economics 1,413 1,224 127 62

T Employee benefits 11,060 9,349 990 721

U Legal 1,905 1,650 172 83

V ID verification and data integrity 254 220 23 11

W Customer service and support 8,683 7,522 782 379

AA Enterprise systems support 5,061 4,384 456 221

BB Internal audit 534 462 48 23

DD Management committee 2,894 2,507 261 126

$159,622 $138,641 $14,186 $6,794



Table 6 – Detailed Results of Methodology Applied – 2009/10 Budget ($000’s)

“Purified Normal”

Basic LOB

Extension LOB

SRE LOB

Non-insurance

COB

A Injury claims management $13,731 $12,481 $1,249 $ - $ -

B Insurance support operations 11,837 10,254 1,067 516 -

C Loss prevention programs 11,968 10,368 1,079 522 -

D Driver licensing and control 10,677 - - - 10,677

E Driver records 3,060 1,530 - - 1,530

F Vehicle registration 1,843 270 - - 1,573

G Vehicle standards and inspection 1,760 - - - 1,760

H Claims centres 25,132 21,772 2,265 1,096 -

I Service centres 399 301 31 15 51

J Physical damage centre 7,029 6,089 633 307 -

K Central administration 2,572 2,052 213 103 203

L Physical properties 18,793 13,709 1,429 975 2,679

M Corporate information technology 24,567 19,600 2,039 987 1,941

N Human resources and training 4,569 3,645 379 183 361


5,597 4,465 465 225 442

P Fair practices 790 630 66 32 62

Q Accounting and finance 4,598 3,669 382 185 363

R Investments 538 485 29 24 -

S Pricing and economics 1,413 1,224 127 62 -

T Employee benefits 12,734 9,349 990 721 1,674

U Legal 2,159 1,650 172 83 254

V ID verification and data integrity 509 220 23 11 254

W Customer service and support 9,428 7,522 782 379 745

X Basic policy 782 782 - - -

Y Extension 197 - 197 - -

Z Special risk extension 2,915 - - 2,915 -

AA Enterprise systems support 5,495 4,384 456 221 434

BB Internal audit 579 462 48 23 46

CC Regulatory/appeal 2,935 2,935 - - -

DD Management committee 3,143 2,507 261 126 248

EE Broker commissions 69,800 41,200 23,000 5,000 600

FF Premium taxes 27,000 22,000 4,000 1,000 -

GG Claims incurred 688,000 596,000 62,000 30,000 -

$976,548 $801,558 $103,384 $45,709 $25,897



Table 7 – Summary Results of Methodology Applied – 2009/10 Budget (in millions of dollars)

Level Basic

LOB Extension

LOB SRE LOB

Non-insurance

COB Insurance

COB Subject to Allocation Total %

A $662.9 $89.2 $38.9 $13.0 $ - $ - $804.0 82.3%

B - - - - 71.6 100.9 172.5 17.7%

C - - - 12.9 88.0 (100.9) - 0.0%

D 138.6 14.2 6.8 - (159.6) - - 0.0%

$801.5 $103.4 $45.7 $25.9 $0.0 $ - $976.5

% 82.1% 10.6% 4.7% 2.6% 0.0% 0.0% 100.0%


www.deloitte.ca Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 7,700 people in 57 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu.

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms.

© Deloitte & Touche LLP and affiliated entities. TM © 2006, VANOC.


expense allocation methodology manitoba public insurance ... · expense allocation methodology...

Documents