Table of Contents - Actuarial Outpost

Transcription

Table of Contents
Canadian Tort Law in a Nutshell (Kerr et al.)................................................................................................................. 1
Function of Tort Law ................................................................................................................................................ 1
Negligence Theory ................................................................................................................................................... 1
Occupier’s Liability ................................................................................................................................................... 2
Product Liability ....................................................................................................................................................... 2
Professional Liability ................................................................................................................................................ 3
Crown Liability ......................................................................................................................................................... 3
Strict Liability ........................................................................................................................................................... 3
Vicarious Liability ..................................................................................................................................................... 3
Damages in Tort....................................................................................................................................................... 3
Compensatory Damages ...................................................................................................................................... 4
Exemplary or Punitive Damages ........................................................................................................................... 4
Aggravated Damages ........................................................................................................................................... 4
Damages in Intentional Tort ................................................................................................................................. 4
Damages in Negligence ........................................................................................................................................ 4
Mitigation ............................................................................................................................................................ 4
Pecuniary Losses & Non-Pecuniary Losses ............................................................................................................ 4
Structured Settlement.......................................................................................................................................... 4
Survival of actions ................................................................................................................................................ 5
Rylands v. Fletcher ................................................................................................................................................... 5
McAlister (Donoghue) v. Stevenson ......................................................................................................................... 5
Hedley Byrne and Company v. Heller and Partners Ltd. ............................................................................................ 5
Cases on the Canadian Law of Insurance (Baer and Rendall) ........................................................................................ 6
Subrogation ............................................................................................................................................................. 6
Solutions to double recovery problem.................................................................................................................. 6
Insurance Industry in Canada ................................................................................................................................... 6
Reasons for Regulating the Insurance Industry ..................................................................................................... 6
Types of Insurance Carriers .................................................................................................................................. 6
Nature of Competition ......................................................................................................................................... 7
Insurance Industry Organizations ......................................................................................................................... 7
Nature of Insurance Regulation................................................................................................................................ 7
Types of Insurance ............................................................................................................................................... 8
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Created by Darkness Falls
Regal Films Corporation Ltd. V Glens Falls Insurance Company ................................................................................ 9
Fletcher V. Manitoba Public Insurance Corporation ................................................................................................. 9
Broadhurst & Ball v. American Home Insurance Co. ............................................................................................... 10
Dillon v. Guardian Insurance Co. ............................................................................................................................ 11
Introduction to Canadian Insurance Law (Brown)....................................................................................................... 12
Nature of Insurance Law ........................................................................................................................................ 12
Utmost Good Faith............................................................................................................................................. 12
Fortuity .............................................................................................................................................................. 12
Indemnity .......................................................................................................................................................... 12
Consumer Protection ......................................................................................................................................... 12
Compensation.................................................................................................................................................... 13
Determination of an Insurer’s Obligation to Pay..................................................................................................... 13
Non-Disclosure and Misrepresentation .................................................................................................................. 13
The Need to Have Interest in the Subject Matter ................................................................................................... 14
Interpreting Insurance Policies Intent..................................................................................................................... 15
Excusing Defects in Claims and Other Defaults ....................................................................................................... 16
Relief from Forfeiture......................................................................................................................................... 16
Waiver and Estoppel .......................................................................................................................................... 16
Settling Claims and Resolving Disputes................................................................................................................... 17
Current Issues in Asbestos Litigation (AAA) ................................................................................................................ 19
Civil Liability Review, Consultation Paper (BC Civil Liability) ........................................................................................ 20
Limitation Act ........................................................................................................................................................ 20
Joint and Several Liability ....................................................................................................................................... 20
Class Proceedings Act ............................................................................................................................................ 21
Vicarious Liability for Intentional Torts ................................................................................................................... 21
Non-delegable Duty ............................................................................................................................................... 21
Structured Damage Awards ................................................................................................................................... 21
Alberta Auto Cap Decision Hard to Swallow (Harris)................................................................................................... 22
Medical Malpractice: Impact of the Crisis and Effect of State Tort Reforms (Mello).................................................... 23
2007 Update on U.S. Tort Cost Trends (Towers Perrin)............................................................................................... 25
Methodology and Approach Components of Tort Costs .......................................................................................... 26
Commercial Practices in the Quebec Damage Insurance Brokerage Sector (AMF) ...................................................... 27
Distribution of Financial Products and Services Section (AMF) ................................................................................... 28
Life Insurance Laws of Canada (McDonald) ................................................................................................................ 29
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British North America Act ...................................................................................................................................... 29
Privy Council Decisions........................................................................................................................................... 29
Regulation of Insurance Federal Regulation of Insurance ....................................................................................... 30
Office of the Superintendent of Financial Institutions ............................................................................................ 30
Insurance Companies Act ....................................................................................................................................... 31
Protecting the Pledge (Noonan) ................................................................................................................................. 32
Private Passenger Automobile Filing Guidelines (FSCO).............................................................................................. 33
Definitions ............................................................................................................................................................. 34
Guidelines.............................................................................................................................................................. 35
Effects of Rate Regulation on the Volatility of Auto Insurance Prices: Evidence from Canada (IBC) ............................. 38
Effect of Rate Regulation ....................................................................................................................................... 38
Premium Volatility and Rate Regulation ................................................................................................................. 38
Volatility and Rate Regulation: Illinois and South Carolina ...................................................................................... 39
Summary ............................................................................................................................................................... 40
Canada’s Agricultural Business Risk Management Programs (AAA) ............................................................................ 41
Production Insurance............................................................................................................................................. 41
Roles and Responsibilities ...................................................................................................................................... 42
Alberta Insurance Act, Premium Regulation ............................................................................................................... 43
Government Insurers Study Note Reasons for Government Participation in Insurance ...................................... 44
Crop Insurance....................................................................................................................................................... 44
Workers Compensation Insurance ......................................................................................................................... 45
Unemployment Insurance...................................................................................................................................... 45
Catastrophe Funds ................................................................................................................................................. 46
Pension Benefit Guaranty Corporation ................................................................................................................... 46
Terrorism Insurance Act of 2002 & Extensions ....................................................................................................... 46
Landmark Legal Insurance Cases in Canada ................................................................................................................ 47
Whiten v. Pilot Insurance Co. ................................................................................................................................. 47
Submission by CIA on Future of Health Care in Canada .............................................................................................. 48
Medicare as a Plan of Insurance ............................................................................................................................. 48
Challenges to Fiscal Sustainability .......................................................................................................................... 49
Flood Insurance and Hurricane Katrina (CPCU)........................................................................................................... 50
Facility Association (Dutil) .......................................................................................................................................... 55
Risk Sharing Pools .................................................................................................................................................. 55
Risk Sharing Plan - Procedures Manual ...................................................................................................................... 57
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Residential Insurance Availability (IBC)....................................................................................................................... 60
Supporting Evidence on ICBC’s Proposed Increase of Basic Insurance Rates ............................................................... 61
Motorvehicle Insurance in British Columbia – At the Crossroads (KPMG) ................................................................... 62
Motor Vehicle Injury Compensation Systems ......................................................................................................... 63
Product Variable – Coverages and Benefits ............................................................................................................ 64
Other Product Variables......................................................................................................................................... 65
Product and Service Evaluation Framework ........................................................................................................... 66
Morneau Sobeco Handbook of Canadian Pension and Benefit Plans .......................................................................... 67
Old Age Security .................................................................................................................................................... 67
Canada and Quebec Pension Plans......................................................................................................................... 68
Provincial Hospital and Medical Insurance Plans .................................................................................................... 71
Worker’s Compensation ........................................................................................................................................ 72
Employment Insurance .......................................................................................................................................... 73
Extended Health Care and Drug Plans .................................................................................................................... 75
Managing Rising Extended Health Care Costs ......................................................................................................... 76
Select Committee on Private Passenger Insurance (New Brunswick) .......................................................................... 77
Public Hearings ...................................................................................................................................................... 77
Response to Select Committee .............................................................................................................................. 78
Earthquake Exposure Sound Practice Guidelines (OSFI).............................................................................................. 79
Earthquake Reserve Required by OSFI.................................................................................................................... 80
Default Loss Estimates ........................................................................................................................................... 81
Options to Ensure another 15 Successful Years of Service (PACICC)............................................................................ 82
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Canadian Tort Law in a Nutshell (Kerr et al.)
Learning Objectives
A1 – Identify and describe the key components of tort law.
A4 – Distinguish between the different types if damages with respect to remedies in tort.
A5 – Discuss the measurement of damages and elements of personal injury damages.
B4 – Discuss the issues, outcome, rationale and implications of landmark decisions for the insurance industry.
Function of Tort Law
A tort is a civil wrong done by one person to another person’s body, property or reputation, which is done either
intentionally or negligently.
 Compensation to the victim for the wrong that has been done, by putting the victim in the same position he
would have been in if the wrong had not been committed in the first place.
 Act as a specific deterrence, since the defendant will probably be careful to act in such a way that he will not
be get sued again.
 Punish the defendant if it includes an award for punitive damages.
 Act as a general deterrent. Ex: When a company making a potentially dangerous product gets sued, others
may stop making the product.
 Can serve as a means to redress an infringement of civil rights by a government body or public official.
Negligence Theory
Elements of a Tort
 Wrongful conduct of defendant
 Causation of the harm
 Harm to plaintiff
Wrongful Conduct
 Duty of care
 Reasonably foreseeable risk of injury to others
 Person(s) “close” enough to suffer that injury
 Breach of duty of care
 Factors that raise or lower the standard of care
 Standard of care of the reasonable person has been set
 The defendant’s conduct vs. the standard is found wanting
Causation
 Cause-in-Fact Direct connection between the wrongful conduct of the defendant and the harm suffered
by the plaintiff.
 Cause-in-Law or Proximate Cause Harm suffered by plaintiff was reasonably foreseeable at time of
wrongful conduct.
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Harm
 Actual harm to a legally recognized interest
 Must be proved objectively
 Safety & integrity of a person’s own body, possessions, reputation and real property.
 “Thin-skinned rule” If a reasonably foreseeable negligent event causes more harm due to a preexisting condition the defendant is responsible.
Occupier’s Liability
A shifting balance between the rights of the occupiers and entrants.
Occupier
 One who has control over the premises + can be shared with others + need not be owner
 Greater the control  Greater the duty the occupier has in the law
Entrants
 Trespassers
 On premises without permission
 Occupier’s duty is only to not cause positive/intentional harm
 Trespasser accepts all risks except risk of intentional harm
 Possible problem when it comes to differentiating between burglars and children
 Licensee
 Presence is not objected but confers to benefit to occupier
 Duty to protect licensee from unusual dangers which the occupier should know of
 Invitee
 Presence is permitted and confers a benefit to occupier or both
 Occupier’s duty is to use reasonable care to prevent damage from unusual danger
 Contractual Entrant
 May fall outside occupier’s liability since it is based on breach of contract
 Implicit warranty that the premises are reasonably safe
All occupiers’ statutes allow an entrant to willingly and voluntarily assume risks that are expected to be encountered
on the premises. The occupier will therefore not be liable for these if the risk was assumed. All statues also permit
occupiers’ to limit their liability and their duty by contracting out of the statutory duty. Therefore they are not liable
to damage caused by a contractor if reasonable care was used in selecting them.
Product Liability
Product liability arises out of a negligent design, manufacture or marketing of a product, which causes harm to the
users.
 Must show defects were present when the product left the control of the manufacturer and arose from their
negligence
 May be found liable for failure to warn of risks, except when risks are obvious
 Must show that product was negligently designed by using a “risk-utility” approach
 Utility of product to plaintiff & general public
 Ability of plaintiff to avoid injury through reasonable use
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Ability of plaintiff to discover the risks prior to injury
Reasonably foreseeable harm of product
Existence of a safe design
Professional Liability
Practitioner with specialized knowledge/skills relied on by others has a duty to use their skills competently.
 Practitioner must possess skills of reasonably competent practitioner
 The law distinguishes between incompetence and “errors in judgment” where the errors are those a
reasonably competent practitioner might make
 For medical negligence, the practitioner may also be found negligent if they perform a procedure
competently, but fail to advise the patient of all the risks.
Crown Liability
Allows a citizen to sue the Crown in tort and contract as if it were an ordinary citizen.
 Permits direct action against the Crown or vicariously for actions of an employee or agent
 Duty to public may override duty to plaintiff, which may make suits difficult
 Must balance duty of care towards individuals with duty to protect public interests
 Express statutory liability is a class where specific statutory duties have been created and which simplify
bringing a lawsuit. The courts must weigh in as to if the Crown met its duties.
 If the negligence stems from a policy decision, there is no duty of care owed to the plaintiff. If the negligence
stems from implementing a policy decision then there is a duty of care with the ordinary standards.
 Can be difficult differentiating policy from operational side
Strict Liability
Tort arising when harm is caused even when the defendant has taken reasonable care to prevent harm.
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If the plaintiff benefits in part from the defendants actions strict liability does not apply.
If the plaintiff suffered damages due to her own actions then the defendant can escape liability.
Magnitude of danger leads to required magnitude of care
If the defendant acts according to requirements of a stature then there is no strict liability.
 Activity must be expressly authorized by statute or necessarily incidental
 Statute does not permit careless execution of statutory duties
Vicarious Liability
Vicarious liability arises where one person is held liable for the wrongdoing of another over whom they hold a legal
relationship.
 Employer is responsible for action of an employee if they are where told how to do the action which caused
the liability.
 May be imposed by statute, such as when a vehicle owner is liable for the actions of a non-owner driver.\
Damages in Tort
The primary purpose of an award of damages is to put the plaintiff back into the position he was in prior to the
defendant doing the harm complained of.  Restitutio in integrum
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Compensatory Damages
 Special Damages: Damages where the actual amount of the loss in known precisely before the trial
 General Damages: Damages for subjective losses such as “pain & suffering” also for when amounts of special
damages must be estimated
Exemplary or Punitive Damages
Punitive damages are awarded to explicitly punish or deter a defendant when their conduct was particularly
outrageous. Also serves to further compensate plaintiff.
Aggravated Damages
Damages awarded in situations where the defendant’s actions were so outrageous that the harm done is worse than
it otherwise would have been.
Damages in Intentional Tort
 Trespass to persons: Compensatory damages awarded for physical injury, pain & suffering and pecuniary
losses. If the action is for battery there is no limit on the damage. Losses for psychological damage (fear,
humiliation, etc.) may also lead to aggravated damages.
 Trespass to chattels: Required to pay plaintiff market value of the chattel at time of conversion and for
incidental losses.
 Trespass to land: Damages are awarded to repair the physical harm done as well as for consequential losses.
 Nuisance: Losses are awarded differently based on if it was a one-time occurrence or repetitive. If losses are
repetitive a court may order an injunction to restrain the defendant. Abatement is also possible where the
plaintiff remedies the situation himself by ending the nuisance.
Damages in Negligence
 Compensation of victim is in part for financial losses and for general losses such as “pain & suffering”
 When the plaintiff was employed or employable, losses to future income are awarded
 Estimated earning if no accident occurred so that plaintiff can maintain position in life
 In cases where the plaintiff gets additional compensation the courts are reluctant to reduce damages
 Out-of-pocket pre-trial expenses are recoverable, usually as special losses
 If the defendant requires future care the required sum will be paid to maintain position in life
 When property is damaged from negligence the defendant must pay to repair it or to account for the
reduction in the value of the land
Mitigation
In cases where the plaintiff’s own actions did not employ reasonable diligence the defendant may argue that he
aggravated his injury and that he is thus not entitled to receive the full amount for the loss.
Pecuniary Losses & Non-Pecuniary Losses
 Pecuniary losses are paid out to account for economic losses which can be explicitly stated in terms of a
dollar amount
 Non-pecuniary losses are paid when damages are not readily tangible, such as: pain & suffering, los of
amenities and loss of expectation of life
Structured Settlement
 Instead of the usual lump sum payment the court orders the defendant to make periodic payments
 Can be adjusted for interest rate, inflation and the state of the plaintiff’s health
 Helps the plaintiff to budget and prevents the waste of a large capital sum
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Survival of actions
 If the plaintiff is killed or dies during the trial, their family/executor may commence a legal action or continue
an ongoing one. The losses are therefore then paid out towards the plaintiff’s estate
 In certain cases a family member may sue separately for their loss due to the death of the victim as a result of
negligence
Rylands v. Fletcher
Strict Liability Case
 The defendant reasonably constructed a reservoir, but which flooded the plaintiff’s mine
 In court liability was based on the fact that the defendant’s action was hazardous in nature, and was carried
out solely for his profit and benefit. Later in the House of Lords the case centered on the “unnatural” use of
the land.
 Case often applied mechanically even when parties are not adjacent landowners.
Application
 Dangerous objects, must relate to their use and not to their inherent nature
 2 Viewpoints for Non-Natural use
 Broad approach: Introduction of a danger which may cause harm, focus on risk
 Narrow approach: Focus on unusual use of land. This approach can lead to rejection of then
enterprise theory of liability where those that take risks should bear the costs.
 If release of substance is intentional it should be treated under law of negligence. The Rylands doctrine is
meant to catch innocent but harmful acts.
 In Read v. J. Lyons & Co. damages should be limited to proprietary interest; however other courts
decisions have awarded losses for personal injuries.
McAlister (Donoghue) v. Stevenson
 First court case to recognize negligence as a tort
 The court stated that every person owes a duty to take reasonable care for the safety of anyone who might
be harmed by the person’s actions.
Hedley Byrne and Company v. Heller and Partners Ltd.
 Plaintiff bank contacted defendant bank on a third parties finances. The information received was inaccurate,
however the defendant bank escaped liability based n their disclaimer.
 Courts rules that liability could arise from a negligent misrepresentation even in the absence of a contractual
relationship. This negligence could lead to an award for pure economic losses even without personal injury or
damage to property.
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Cases on the Canadian Law of Insurance (Baer and Rendall)
Learning Objectives
A1 – Identify and describe the key components of tort law.
A3 – Discuss major elements of insurance contract law.
B1 – Describe the reasons and the objectives of insurance regulation.
B2 – Describe both the historical development and the current state of insurance regulation.
B5 – Describe the structure of the insurance industry in Canada.
Subrogation
 The doctrine of subrogation states that an insured should not profit from a loss and should only be
indemnified.
 Problems often arise when there are multiple recovery sources for a loss, due to complex compensation
system.
Solutions to double recovery problem
 Election: Victim can choose their compensation source.
 Cumulation: Victim can collect from more than one source.
 Reimbursement: The tortfeasor pays the full amount of the damage and any excess (after insured is made
whole) is returned to the collateral source.
 Relieving the tortfeasor: The tortfeasor’s overall liability is reduced by the amount of the collateral benefit
received by the injured person.
All the above methods except cumulation prevent double recovery. Conversely, relieving the tortfeasor and
possible election reduce or remove the tortfeasor’s liability. The question of which policy is primary and which is
secondary is also brought up by reimbursement and by relieving the tortfeasor. However, in modern tort law the
focus is on compensating the victim, so subrogation does not always put the burden on the wrongdoer. Finally,
the introduction of limited accident benefits (“no-fault”) has introduced the question of what effect the payment
of benefits should have on the insured’s tort claim. Recent claims seem to hold that the insurer is not entitled to
any subrogation and the amount of the claim should be reduced by the benefits received.
Insurance Industry in Canada
Reasons for Regulating the Insurance Industry
 Economic Impact: Large concentration of financial power
 Undesirable business practises: High pressure tactics by agents + Deliberate delays & technical defences
 Insurer insolvencies: Complex business which requires large capitalization
Types of Insurance Carriers
 Individual Underwriters: Example Lloyds of London
 Underwriting members accept “risks” under their own account
 Non-underwriting members have all privileges except for insuring
Subscribers: Act as brokers on behalf of public and place risks with the underwriting
members
Associates: Lawyers, claims adjusters, actuaries, etc. Who perform services for members
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 Joint stock companies: Organization for profit composed of stockholders and controlled by its officers and a
board of directors.
 Mutual insurance carriers: Corporate insurer owned by the customers.
 Reciprocal or inter-insurance exchanges: Organization of individuals who have joined together for the
exchange of insurance.
 Does not issue policies
 Members individually liable
Nature of Competition
 Uncontrolled price competition in the short term is not in the public’s long term interest
 Industry is encouraged to cooperate in the determination of adequate premiums, through rating bureaus.
 Rating bureaus are authorized by statute to fix the terms or conditions of insurance contracts. The resulting
standardization implies that insurers do not compete on the basis of policy terms.
 In some provinces, part or all of the auto insurance policies are prescribed by legislation or regulation.
Insurance Industry Organizations
Insurance Bureau of Canada (IBC)
 Discussion of general insurance
 Collect, collate and analyze actuarial and statistical information
 Study legislation and legislative proposals
 Engage in research and pilot programs
 Promote a better public understanding of insurance
Nature of Insurance Regulation
 Guarantee the financial solvency of insurers
 Controlling the creation of domestic insurers + licensing of foreign insurers
 Limiting investment types
 Periodic filing of financial information
 Government authority to ensure compliance
 Creation of rating bureaus and provincial administrative boards
 Most important purpose of government regulation is to prevent insolvency
Loss of public confidence following bankruptcy
Short-term price competition not in public interest
Fiduciary managing of funds collected in advance
 Promote Canadian ownership of insurers
 Foreign companies must maintain sufficient assets in Canada to meet their Canadian obligations.
 Creation of tax revenues
 Regulating insurance contract
 Terms not fully set out in the policy are void and not misstatement in any application form can void
the contract unless such statement is material.
 The courts have denied the Federal government from regulating insurance leaving it to the provinces.
 Promote the competency & integrity of insurance intermediaries
 Intermediaries usually have some independence from the insurance companies
 Example: Agents + Adjusters
 Brokers: Agents who can sell insurance for more than one company
 Most of the responsibility for the selection and training of agents is to the insurer
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Self-Regulation: Associations, whose governing bodies have statutory authority to set
admission standards, promulgate rules of conduct and establish disciplinary procedures.
Superintendents of insurance: Formally in charge of licensing agents and brokers, but rely on
insurers for training.
Generally, insurance is exempt from the general provincial legislation designed to promote in the
marketing of goods and services. But there exist specific prohibitions against unfair or deceptive acts
and practices in the business of insurance.
Types of Insurance
 Social and Private Insurance
 Differences between public and social insurance
Tend to be universal in application as opposed to risk selecting.
Preoccupation in private insurance of protecting the public from the social evil of gaming is of
little significance in public insurance.
No need for elaborate rules to guarantee solvency, since the state is the carrier.
Different kind of administrative/judicial supervision for civil servants in social insurance.
 Similarities between public and social insurance
Similar rules to protect the integrity of the insurance fund and to prevent double recovery.
Common problem of defining what events are covered and whether a loss has been caused
by a covered event.
Difficulty in establishing a fair and efficient claims process
 Marine and Non-Marine Insurance
 Historically most of the common law of insurance derives from marine insurance. There are some
unique marine doctrine such as general average, constructive total loss and abandonment.
 Indemnity and Non-Indemnity Insurance
 Glynn v. Scottish Union & National Insurance Co. Ltd.
Couple injured in car accident due to negligence from another
Insured obtained a settlement for their claims from the negligent party’s insurer and then
sued his insurer for medical expenses.
Decision: Judge concluded that personal accident coverage section of the policy was a
contract of indemnity insurance to which the principle of subrogation applied by law.
 Contract of indemnity: Amount recoverable is measured by the size of the insured’s pecuniary loss.
 Not contract of indemnity: The amount recoverable is payable whenever a specific event happens.
 Sources of hazard
Hazard against insured (fire, explosion)
Antithesis of hazard against insured (credit, surety & life)
Name of the item (aircraft or boiler insurance)
Generic Name (Marine insurance)
 Principle of indemnity
Purpose is to relive the insured in whole or in part from the financial impact of some
contingent event, by shifting the risk of the insured’s possible loss to the insurer.
If an item is excluded in the contract, principle of indemnity does not apply
Insured must prove
o Happening of some event which results in liability to insured
o Loss to the insured from this event
The amount paid is the lower of the contract maximum or the size of the loss
 Valued Policy
Insurer and insured agree to specific value
Insured only needs to prove loss actually happened and not the value of the loss
Is a contract of indemnity
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 Group and Individual Insurance
 Group insurance is designed to insure classes of people rather than a specific individual
 “Master” contract between insurer and sponsor
 Insured’s only have the rights given to them by the sponsor
 Differ from subscription policies where large commercial risks are underwritten by more than one
insurer.
 Special classes of insurance
 Fidelity Insurance
Insurance against loss caused by the unfaithful performance of duties by a person in a
position of trust
Insurance to guarantee the proper fulfillment of the duties of an office
 Surety Insurance
Insurance for the due performance of a contract
Insurance for the payment of a penalty for a default (excludes mortgage/credit risk)
Regal Films Corporation Ltd. V Glens Falls Insurance Company
Case
 An insured with a policy headed as “inland marine policy” suffers a fore loss.
 The insurer resists paying the claim on the grounds that proof of loss was not given within sixty days as
stipulated in the policy.
 Court dismissed the insurer’s arguments and ordered the payment
Issues
 Though the policy is headed as “inland marine policy”, the insurance is primarily against the risk of fire and
lighting.
 Statutory provisions only require proof of loss as soon practicable
 Adjustment scheme agreed to made it impossible for proof of loss to be made within 60 days
 What fire losses are governed by the fire part of the insurance act
 Excluded insurance incidental to some other class of insurance
 Later revision states cases where section does not apply
 Does the fire part ever apply to losses from other perils
Fletcher V. Manitoba Public Insurance Corporation
Case
 Insured suffered serious injuries after an auto accident with an at-fault driver whose insurance was
inadequate to cover their damages.
 Insured did not have Underinsured motorist coverage (UMC)
 When purchasing policy insured for “Maximum available coverage”
 At renewal “not applic” was typed in for UMC, but insured believed it meant it did not apply since he already
had the maximum available coverage.
Court Findings
 Trial judge found that the insured was entitled to rely upon the company to explain to him the various forms
of coverage that were available.
 Company is found to have breached its duty to the insured when it failed to advise him on the full range of
coverage available.
 This course was reversed on appeal where one judge found no duty of care, while another concluded that
there was a duty of care but that no breach occurred.
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Issued Raised
 Did the Ontario Court of Appeal err in departing from the trial judge’s findings of fact?
 Yes, the insured relied on the insurer for advice and would have purchased UMC if it were
offered.
 Does a government owned insurer selling compulsory insurance directly to owners of motor vehicles
have a duty to advise their customers of the existence and nature of underinsured motorist coverage?
 Is there a duty if care?
Provider of information does have a duty of care to receiver of information in certain
cases when they must reasonably rely on it.
Duty of care owned when there is: reliance + reliance reasonable + reliance expected
Insurer cannot expect all their clients to be knowledgeable about the coverage and
therefore are expected to properly advise them.
 What is the scope of duty for private agents/brokers?
Provided information on the individual coverage
Provide individualized advice to meet customer needs
Review coverage + point out gaps
Seen as more than salespeople
 What is the scope of duty for public insurers?
Provided information on the individual coverage
Not required to provide individualized advice
 It was also argued at trial that MPIC was under contractual obligations to offer accurate
information, but this argument was not pursued since duty is based on tort law.
 If such an insurer has such a duty, did it fulfill it in this case?
 The MPIC failed to effectively inform the public of the coverage, compared to British Columbia
were it was advertised.
 The failure to inform the insured about UMC is below the standard of care.
 Insured was thus never in a position to make an informed decision.
 If the insurer did not fulfill its duty, is liable for the appellant’s loss?
 Yes, as the failure to purchase the UMC was due to several omissions by the insurer.
 This case thus indicates that public insurer’s are required to act reasonably and in their insured’s
interest
Broadhurst & Ball v. American Home Insurance Co.
Case
 Excess insurer’s obligation to provide a defence for an insured and the allocation of the defence costs
among primary and excess insurers.
 Case alleged conspiracy, breach of fiduciary duty and negligence brought on by a series of transactions
relating to the financing, leasing and purchase and sale of a building in Toronto.
 Both the primary (American) and excess (Guardian Insurance) insurer’s policies covered defence costs.
 The excess insurer also denied any coverage for the claims on the basis that the insured’s knew about the
case when they took on the policy.
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Judge’s view
 Claims are covered by the excess policy, subject only to the terms of the exclusionary provision.
 The excess insurer is obligated to defend the insured’s in the case.
 The excess insurer is not obligated to share in any proportion the defence costs with the primary insurer.
Issues Raised
 Coverage issue: Did the judge err in declaring that the claims are covered by the excess policy until after the
trial?
 Allegation that insured knew of claim was dismissed due to lack of evidence.
 The coverage issue was resolved prior to the trial since the judge believed that there was a remote
possibility that it would not be covered.  “Finality, expedition and economy.”
 Obligation to defend issue: Does an excess insurer have the duty to defend an insured when the primary
insurer’s policy already provides for such costs.
 Allocation of defence costs issue: If the excess insurer has the duty to defend, should the costs be split
between them and the primary insurer.
 Primary insurer’s obligation to defend is absolute and indivisible, but may only be enforced by the
insured. The excess insurer can also only be called on by the insured.
 Since excess insurer will have to pay if the case succeeds, they should not excuse themselves from
providing a defence. Especially since lack of involvement could delay a settlement.
 Guardian insurance should pay a proper share of the costs based on the principles of equity and good
conscience. (Not due to a contractual basis)
 Defence costs should be shared equitably and not by pro-rata since the final outcome is unknown.
Dillon v. Guardian Insurance Co.
Case
 Car accident causes brain injury to a child whose family then sues the at-fault driver.
 Insurer has the opportunity to settle the case for less than the policy limit, but does not. Trial produces a
result in excess of the policy limit and the insured sues the insurer so that they pay this amount.
 Judge finds the insurer absolutely liable for this amount.
Standard of Insurance Liability
 Absolute liability: If an insurer can settle a claim against an insured within its limits and does not do so, it is
liable to reimburse its insured for the full claim amount.
 Avoid the burden of determining if a settlement within the policy limits was reasonable.
 Eliminates the danger that an insurer faced with a settlement at or near the policy limits will
“gamble” with the insured’s money.  An insurer, which may reap the benefits of its determination
to not settle, should also suffer the detriments to its decision.
 Liability for failing to act reasonably: If an insurer does not use reasonable care in settling a claim, the want of
care is a want of good faith.
 Liability for bad faith: As above
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Introduction to Canadian Insurance Law (Brown)
Learning Objectives
A2 – Identify and describe the underlying principles of insurance law.
A3 – Discuss major elements of insurance law contracts.
B2 – Describe both the historical development and the current state of insurance regulation.
B5 – Describe the structure of the insurance industry in Canada.
Nature of Insurance Law
Utmost Good Faith
 Rule of “let the buyer beware” does not apply
 Customer is bound by duty of utmost good faith while negotiating the insurance to disclose all matters
relevant to the risk whether or not the insurer has asked about them.
 Does not always apply today for certain classes of insurance
 An insurer is not permitted to take advantage if a customer’s innocent non-disclosure if the insurer has
entered into the contract knowing of the non-disclosure.
 It is bad faith for an insurer to take advantage of a customer’s vulnerability to delay or deny a claim.
 An insurer may not decline a settlement in a liability claim without acting in good faith and taking into
account the interests of the insured person.
Fortuity
 Insurer should only cover losses that occur randomly
 Unless explicitly stated in the contract it is assumed they will not cover for losses certain to occur (wear &
tear) or for deliberate losses.
Indemnity
 A claimant should not be allowed to profit from a loss, thus the principle of indemnity states that no more
than the loss suffered should be paid.
 Moral hazard  Risk that someone will try and profit from insurance
 Rules of insurance to receive compensation
 A person who suffered a loss cannot keep both the insurance claim money and the settlement
 If there are claims against more than one insurer the total claimed cannot exceed the loss
 Insurer is subrogated to any claim against a third party
 Insured cannot claim for a total loss and keep the property for its salvage value
 Insured must prove the following
That a loss occurred
The amount of the loss
That they held an “insurable interest” in what was lost
Consumer Protection
 Rules are set up to protect the financial viability of insurers so they have the funds to pay legitimate claims.
 Courts are directed to give effect to “reasonable expectations” or to resolved ambiguities in favour of the
insured person, since the insurer are usually more sophisticated that their customers.
 Insurance contracts in Canada are regulated and have certain clauses that cannot be modified.
 Insurer may not insist on payment of premium before insurance takes effect
 Insurer may not refuse to pay out on a loss due to irrelevant misrepresentation
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Compensation
 Auto insurance
 Every province has some form of mandatory auto insurance
 A person injured in a car accident has a direct claim against the insurer of the at-fault driver
 The is compensation for a person injured by an uninsured/unknown driver
 Subrogation is only permitted when an insurer has made good the loss
 Life Insurance
 The person buying the insurance must have relationship with the person who’s life is insured
 Gambling against a person dying is prohibited in insurance
Determination of an Insurer’s Obligation to Pay
 The insurer’s main obligation is to make good a loss when a valid claim is made
 The insurer may claim to be excused from its obligations because the insured failed to meet an obligation
 Terms of a contract use to deny coverage may be inconsistent with legislation
Pre-Contractual Issues
 Did the insured hold an “insurable interest”
 Did the parties disclose all they were required to during negotiations
 What where the legal implications of the broker: Did they have authority, did they transmit true & complete
information, did the broker become liable to either party
Contractual Issues
 Was the contract in force at the time of the loss
 What did the contract provide: Loss covered or excluded, specific wordings/conditions, etc?
Claims Settlement Issues
 Obligations of the insured for providing notice and proof of the loss
 Are there grounds for excusing defects in the claim? (ex: Estopel)
 Has the insurer dealt with the claim in good faith
 If the claim has been settled, may it be reopened
 What subrogation & salvage rights does the insurer hold
 If there are multiple insurers, what is each liability?
 Does any third party have rights against the insurer?
Non-Disclosure and Misrepresentation
 Insurance are contracts of good faith and thus all parties must fully and accurately disclose all information.
 A person applying for insurance must disclose all known matters which are vital to determining the nature
and the extent of the risk.
 This obligation applies even in the absence of questions from the insurer
 There is a duty in all contracts not to misrepresent directly or by partial omission
 Test for determining if a fact is relevant (“material”)
 Objective: Prudent insurer would consider the fact when accepting the risk or setting the premium
 Subjective: Would the insurer have acted differently if it knew about it
 The information must be personal and not be publicly available
 Consequences of non-disclosure or misrepresentation
 Loss of coverage due to contract being deemed void
 Terms of contract may be modified
 Coronation Insurance Co. V. Taku Air Transport Ltd.
 Airplane crash, where the insurer refuses to pay since they allege that Taku failed to disclose its bad
accident record and misrepresented its airplane seating capacity
 The court found that the accident record was public knowledge, but denies the claim due to the
misrepresented seating capacity.
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Legislative Modification of Rules
Unspecified Classes of Insurance
 A matter may only be considered relevant as an objective fact and not decreed in the contract
 In Quebec, if the misrepresentation or non-disclosure would not have caused the insurer to deny coverage,
they must pay for the proportion of a claim equal to the proportion of premiums received.
Fire Insurance
 Except in Quebec province have created specific statutory provisions
 Insurer may not add terms to contract to deny coverage for non-material inaccuracies
 Difference between omissions and misrepresentations
 Omission must be fraudulent
Customer was aware of facts that should of been disclosed
Customer was aware those facts were relevant
 No intent necessary for misrepresentation
 When there are delinquencies the contract is considered void from the start and the insurer must reimburse
 Customers must inform insurer of changes which are material to the risk
Auto Insurance
 In Quebec, only matters that are relevant need to be disclosed and only fraudulent matters lead to denial.
 In other provinces need to disclose:
 Particulars of the automobile
 Facts requested on the application form
 Conditions for rejecting a claim based on a statement
 Application signed by the insured
 Unsigned application but proved to have been made by the customer
 Even when a customer fails to fully disclose info the insurer may have to pay claims to injured parties.
 Customers must inform insurer of changes which are material to the risk
Life Insurance
 Duty of disclosure on both person buying insurance and on the person who’s life is being underwritten
 Facts must be considered relevant to the reasonable insurer
 Misstatement of age does not void contract, instead benefits amounts are modified
 Insurer can only void contract for non-disclosure in the first 2 years, unless there was fraud
 If the insurer learns about a breach of duty and does nothing it may not bring it up to deny coverage later
Marine Insurance: Customer may be bound to warrant of accuracy even if the facts are not relevant to the risk
 The consequences of failing to report a material change is that the insurance contract is void.
 Possible exception in fire insurance to protect customers from unjust actions from insurer
 Marche v. Halifax Insurance Co.
 Property was left unoccupied longer than allowed, but was reoccupied before a fire.
 Court ruled that it was unjust to deny coverage
 Underwriting factors which may be otherwise banned due to human rights legislation (age...) are often
allowed due to legislation. Essentially unless prohibited by stature insurers can discriminate.
The Need to Have Interest in the Subject Matter
 An insurance claim will fail if the person who bought the policy did not have an appropriate connection with
the subject of insurance. Possible “moral hazard” otherwise.
 Indemnity Insurance
 Principle that a person cannot recover more than their loss
 Avoiding possible danger to people or property.
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 Non-indemnity Insurance
 No need to show financial loss or to avoid being over-indemnified
 Restriction to insuring own life or someone in whom we have an insurable interest
 Avoiding “gambling” as it is an illegal contract and unenforceable
Determining Whether an Insurable Interest Exists
Indemnity Insurance
 Person who bought the product must benefit from the subject being insured or be prejudiced by its loss
 A stakeholder in a company may take insurance on its property
 A person may take insurance on property owned by another, when it has been put up as security for a debt
 There is no insurable interest in stolen property, unless the goods had been acquired innocently
 Insurable interest must exist at the time the loss occurs
Non-Indemnity Insurance
 The test for insurable interest is often laid down arbitrarily by statute
 Family, dependants, employee, person with financial interest
 Insurable interest must exist when contract is signed, not when loss occurs
Insuring Other Interests
It is possible to insure the property of others if these conditions are met
 Person taking out the insurance must have intended to insure interests other than his own
 Terms of the contract must permit it
 Person taking out the insurance must have some interest in the insurer property personally
Interpreting Insurance Policies
Intent
 Court should give effect to the intention of the parties
 If the words used are not clear enough to discern the joint intention, the courts should favour the insured
 Since the contract language was chosen by the insurer
 When policy terms are specifically negotiated:
 Terms in endorsements should be given precedence over those in the policy body
 Terms in an interim contract/application prevail over conflicting ones in the policy
 Inoperative parts of a contract do not override those in operative parts
 Handwritten terms prevail over printed ones
 Assumption that there as a meeting of minds on some level, so the policy terms cannot make the contract
worthless.
Word Meaning
 Literal meaning of words is used in interpretation, unless the intent was to give them another meaning
 When a term has both a general and technical definition the general one prevails
 Courts favour interpretations which give rise to viable insurance contracts (Ex: Only cover fortuitous loss)
 Words of a contract are to be construed more strongly against the person offering them
 Insurer is more sophisticated and has more bargaining power
 Insurer has the opportunity to modify or add to the contract language
 Reasonable expectations in Canada
 The true intent of the parties is to be gleaned from the whole contract
 Where multiple meanings are possible, the court should select the most reasonable
 Coverage provisions are interpreted broadly while exclusions are interpreted narrowly
 Ambiguities are to be construed against the insurer
 Avoid given a windfall to either the insured or insurer
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Causation
 Even when there are no ambiguities it can be difficult to decide if a loss was caused by an excluded or
covered event  Decision is based on which cause is dominant
 Chain of causations are when one occurrence leads to another
 There must be a direct connection between the occurrence of a covered peril and the loss
 If one of the direct causes is not covered the loss is excluded though
 There must also be no human interaction except in an attempt to prevent/minimize the loss
 Two factors can also coincide to cause a loss to occur or to become more severe
 Claim will be paid if one of the causes is covered as long as the other is not excluded
 Exception to above rule if the excluded cause is only a passive factor
Accidental and Deliberately Caused Losses
 Difficulty in differentiating between deliberate losses and recklessness
 Recklessness does not prevent recovery unless the person expected the adverse outcome
 Criminal acts do not bar insurance recovery, except:
 If the crime was committed to bring about the loss
 If someone was found guilty of manslaughter or murder to get life insurance money
Excusing Defects in Claims and Other Defaults
Relief from Forfeiture
 In all provinces except Quebec, a judge can rule that a claim should not be forfeited due to “imperfect
compliance” on the insured’s part after the loss.
 Mistake must be innocent and non-wilful so that it would be unfair to deny payment
 Mistake must not prejudice insurer
 This does not apply when there is complete non-compliance with a rule
 This only applies to obligations that arise after the loss occurred
 Deadlines
 Yes: Claim submission deadline to insurer (Contractual base)
 No: Filing a lawsuit against the insurer (Legal base)
Waiver and Estoppel
Estoppel: Situation where an insurer is considered to have given up its right to refuse payment due to its actions
Estoppel by Representation
 When an insurer has told an insured that they have complied with a particular obligation, the insurer cannot
later say that they did not meet it.
 Express: Statement that a phone call is sufficient notice of a claim
 Implied: Cashing a customer’s late premium cheque
 Construed from silence: Failure from insured to ask for information they needed
Promissory Estoppel
 Insurer excuses the default in advance
 Ex: An insured whose late premium cheques have been accepted may be excused from future ones
Election of Remedy
 Irises when a contract is silent about the remedies after a breach of contract
 Reliance of customer on insurer not required
 Conditions
 Insurer must have realized breach occurred and have been in a position to choose
 The choice made by the insurer must be clear
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Variation of the Contract
 Customer may overcome insurer’s allegation of breach by showing that contract has been amended
 Insured must show that there was agreement and that each party received something of value
Repudiation
 Insurer may deny a claim or cancel a contract due to a breach of conditions
 If this occurs the insurer cannot deny a claim, which it wrongly cancels (repudiates), due to an insured’s
failing to obey the terms of the contract
Preserving Insurer’s Rights
 Attempt by the insurer to preserve their rights while still taking on some claim responsibility (ex: examining
the a liability lawsuit)
 Non-Waiver Agreement
 Customer allows the insurer to deal with a third party without relinquishing their rights
 Immunity only granted for permitted actions
 Reservation of Rights Letter
 Letter sent to customer stating that the insurer will preserve most of its rights during an investigation
 Used when a customer does not accept a non-waiver agreement
Settling Claims and Resolving Disputes
Resolving Disputes
 Arises when there is a disagreement between the insurer and the insured when settling a claim
 Appraisal
 Three-person panel who decide the outcome of a dispute
 Statutory condition in fire insurance
 Mediation
 Process where a mutually acceptable third party seeks to facilitate a settlement
 Does not have authority to impose a binding judgement
 Arbitration
 Decision from a single arbitrator or a panel
 Decisions are binding, but are usually appealable
 Mediation process in Ontario
 Submit disputes to a mediation process from FSCO
 If mediation fails the customer chooses between suing the insurer or going to arbitration
 If case is brought to court it must be filed before the statutory deadline
Liability Insurance Claims
 Insurer has the exclusive right to deal with the claimant and negotiate a settlement or manage the claim
 Insurer chooses the lawyer and gets to decide which questions to ask and whether to appeal
 Insurer is obligated to provide and pay for a defence, even if the claim is groundless
 Insurer is excides from paying defence costs if the customer has breached one of their obligations
 Insurer is obligated to act with a duty of good faith towards its customer
 If a settlement offer is within the policy limits the insurer may not reject it without looking at their customer’s
interests
Insurer’s Salvage Rights
 Insurer granted salvage rights on property which has been treated as a total loss if the full indemnity has
been paid
 Insurer granted these salvage rights due to principle of indemnity
 Full indemnity not paid if there was a deductible or a policy limit
 Deductible rule does not apply in auto insurance
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Subrogation
 Situation where a customer who files a claim has an alternative source of recovery
 If the insurer has paid out under the insurance contract, it may sue the third party under the name of
the insured. The amount recovered goes to reimburse the insurer, with the rest going to the insured.
 If the customer has obtained money from a third party, the insurer may not need to pay.
 If the customer has recovered from the third party and the insurer, the insurer needs to be paid back.
 Right of subrogation does not arise until the customer has been fully indemnified for a loss, even if an insurer
paid to the full extent of their liability
 An insurer seeking to enforce the customer’s right against a third party must first fully indemnify
them. Until then they may not recover from the third party or control litigation.
 If the customer has been compensated for a portion of the loss from a third party, the insurer must
pay for the balance of the loss and for defence expenses.
 If the customer has received payment from both the insurer and a third party totalling more than the
total loss (+ defence costs), the excess amount must be reimbursed to the insurer.
 If the customer has not been fully indemnified it has a duty to pursue the full amount from the third party
 Customer breaches this duty if they settle for a fraction of what they would get in court
 Consequence of this is to pay damages to the insurer equal to the amount that they should have got
 In fire insurance these rules have been modified by statute, so that an insurer can pursue a third party as long
as they have made any payment
 If sum recovered is not enough to pay for loss, it is shared between insurer and insured based on the
proportions in which they bore the loss
 In Quebec & Ontario auto liability claims the damages are handled on a “first party” basis. The insurer is not
allowed to seek reimbursement from the person at fault or their insurer except in rare cases.
 No fault auto system exists in all provinces which intends to prevent double recovery
 Exception when motorcycle hit by car or truck or car hit by heavy truck.
 Principles of subrogation may be modified on the insurance contract
 Commonwealth Construction Co. V. Imperial Oil Ltd.
 One subcontractor in a construction project caused a fire which destroyed property
 Contractor’s insurer tried to obtain subrogation against the subcontractor
 Supreme Court ruled that there was no case because the interests of both the contractor and the
subcontractor in the property were too closely interconnected
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Current Issues in Asbestos Litigation (AAA)
 Asbestos was widely used in for decades and at least 27.5 million people had occupational exposure
 Exposure is linked to several medical conditions, which can take 10 to 50 years to appear
 Disease it typically attributed to multiple sources of exposure, so it virtually impossible to identify a specific
source. As a result, a single claimant can file suit against 60 or more defendants.
 Number of claims filed increased sharply in the mid 1990s
 Claimants with non-malignant injuries, most of which are unimpaired, account for most of the growth
 Efforts are set up to direct scarce resources to the sickest claimants
 There was a decrease in claim filings in 2004-2005 for less severe cases
 Manville Trust was set up after the bankruptcy of the largest manufacturer of asbestos products
 Approved and began paying claims in 1988
 Projections are that 1.2-2.1 million claims will be filed
 More non-malignant claims are being reported due to litigation brought on through advertisements
and mass screenings
 Substantial claims experience in Manville data
 Manville claims are often delayed until the court cases are resolved
 As numerous companies have entered bankruptcy, there has been upward pressure on claim settlements
demanded from remaining solvent defendants
 Asbestos litigation system is considered inefficient
 30% for defence costs
 29% for plaintiff attorney fees
 41% as actual compensation
 Reasons for increasing defence costs
 More defendants are now involved and defence is no longer routinely handled on a joint basis
 Defendants have abandoned settlement strategies
 Newer defendants are incurring significant costs as they try to understand their exposure
 Coverage disputes between defendants and their insurers and between insurers and reinsurers
 Fairness in Asbestos Injury Resolution Act
 No-fault trust from which claimants meeting asbestos exposure and medical criteria would be
compensated for their injuries
 Funded with 140 billion from corporate defendants, insurers and bankruptcy trusts
 If the funding proved to be insufficient claims would return to the courts
 State reforms
 Inactive dockets: Preserve the right to sue for those who do not currently meet medical criteria
 Asbestos litigation in certain states will likely change to a more individualized process involving singleplaintiff cases by the most severely injured
 Scrutiny of potentially fraudulent cases
 Review of claimants diagnosed through mass screening programs have cast doubt on diagnoses
 Case in Texas showed that over 50% of silica claimants had asbestos which was unlikely
 Higher medical standards will likely lead to fewer mass settlements
 Conclusion due to the limited claim information it is difficult to accurately project economic costs
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Civil Liability Review, Consultation Paper (BC Civil Liability)
Limitation Act
 Concept of limitations laws is that a claim must be pursued within a reasonable period of time or be lost
 Problem if a plaintiff did not find out about the facts before the deadline
 1975 Legislation
 Postponement: Limitation period can be postponed until the facts become “discoverable”
 Ultimate limitation period: Period beyond which no action may be brought
30 years for most actions
6 years for medical negligence and malpractice (Started as 10 years)
 Limitation period postponed for minors or if the plaintiff was mentally incompetent
 Current limitation act provides for limitation periods of 2, 6 or 10 years depending on the cause
 Problem with 30 year ULP is that evidence/witness may no longer be available
 Negligence based accrual starts when damage occurs, which may cause further delay
 Potential problem for defendants is recording keeping and maintaining insurance
 Suggested in 1990 that the 30 year ULP be reduced to 10, except for fraud and concealment of facts
 Respondents favoured reducing the ULP to 10 years and measuring time from the breach of duty
 Opposition to this was due to the risk that legitimate claims would be undiscovered
 Retention in cases of fraud or where the plaintiff was a minor/disable also supported
Joint and Several Liability
 Legal problems arise when harm is caused by 2 or more people; how should damages be divided
 General sense that responsibility should be proportional to degree of fault
 If unable to establish degree of fault damages should be equally divided
 When plaintiff not found to have contributed, all defendants are jointly and severally liable
 Problem when one defendant is insolvent, the other must pay the financial shortfall
 Total financial burden can be assumed by a defendant whose fault was minor
 Law supposed to protect innocent plaintiff
 Causes “deep-pocket” defendants large liabilities + increases insurance premiums
 Solution in Canada
 Recommended implementation of a modified proportionate liability regime or economic losses
arising from errors or omissions in financial statements issues under Federal legislation
 Legislation enacted so that if a defended cannot pay their share of the claim, the other defendant
must pay an additional amount which cannot exceed 50% of the amount they had to pay
 Solution in United States
 Pure Joint and Several Liability
Certain states maintained the status quo of joint and several liability
 Pure Several Liability
Each defendant must only pay their proportion of responsibility
Plaintiff must bear the burden of an uncollectable award of damages
 Joint and Several Liability with Reallocation
Reallocation of uncollectable portion among all parties, including the plaintiff
 Hybrid based on Threshold Percentage of Comparative Responsibility
Joint and several liability if responsibility is larger than a specific % otherwise proportionate
 Hybrid Liability based on the Type of Damage
Liability dependant on type of injury
Joint and several for economic losses, while proportional for non-pecuniary losses
 Important difference between Canada and the USA is that non-pecuniary losses are smaller here
 Support for abolition of joint and several liability and adoption of some form of reallocation of liability
 Possible solution would be to have a government or industry fund
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Class Proceedings Act
 Class proceedings act allows individuals to initiate a civil action on behalf of a class or persons
 Court are allowed to order costs against the “loosing” party if case was frivolous
 The act prohibits the court from awarding costs at a certification hearing
 Goal of costs provision is to protect plaintiff from financially disastrous cost awards
 In large and complex cases, defendant must incur large costs for discovery and for advertisement of suit
 In BC the plaintiff faces liability for a cost award unless they can obtain funding through a fund for class action
 In Ontario the court has discretion to award costs similar to any other action
 In Quebec the court can also order costs, although the costs tariffs are altered to reduce the amount
 View that class proceedings legislation has not been in effect long enough to determine that there is a
problem created by the approach taken in the act.
Vicarious Liability for Intentional Torts
 Doctrine of vicarious liability imposes liability on employers for acts committed by their employees even
though there is no direct fault on the employer
 Exceptions were generally granted for criminal acts, as these did not fall under the scope of employment
 Recently employers have sometimes been found liable for these
 Ex: A non-profit was found vicariously liable for sexual abuse by an employee
 Employer found liable for arson by an employee
 Court must consider that employer material enhanced the risk of wrong doing
 These losses are often not covered by insurance, depending on the wording of the policy
 Insurance may become prohibitively expensive and exclude intentional wrongs particularly sexual ones
 View that employers should only be held responsible for the intentional criminal acts of their employees if
there is some evidence of neglect or condonation of the acts
Non-delegable Duty
 Normally a principal is not liable for the acts of a subcontractor, unless there was negligence in hiring or
supervision
 However a duty is “non-delegable” if the principal owes a duty to see that care is taken by the subcontractor
 Ex: Crown’s duty to maintain highways is “non-delegable”
 Courts are expected to look at “policy” considerations including the control exercised by the Crown, the
reasonable expectation of the public and the public’s vulnerability
 Historically applied where law would otherwise impose strict liability, now it is unclear where to draw the line
 View that there should be a clarification of what duties cannot be delegated
Structured Damage Awards
 Courts often award lump sum payments, however there are numerous shortcomings with the approach
 If claimant lives too long he will be undercompensated, while if he dies soon he will be overcompensated
 Also potential for an award for future care to be spent prematurely
 Victim becomes dependent upon others or government
 Court’s lack of power to structure damage awards requires a defendant to pay in advance damages which do
not occur until the future
 View that there should be legislative intervention and that awards should only be structured if both parties
agreed
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Alberta Auto Cap Decision Hard to Swallow (Harris)
 Alberta Minor Injury Regulation (MIR)
 “Cap” which limited economic damage awards for sprains, strains and whiplash-related disorders to
$4,399
 Alberta Judge in Morrow v. Zhang struck down MIR as discriminatory and potentially unconstitutional
 Judge held that it breached the Canadian Charter of Rights because it discriminated against car
accident victims with minor injuries
 Government appealed, but the judge rejected a stay application arguing that the ruling would not
cause irreparable harm to the public interest
 Created concern about settling costs and the impact on rate stability
 Concern that ruling could extend to other provinces with caps and limits on pain and suffering
 Insurers & adjusters are now coping with the fact that consumers must be informed of the cap’s elimination
 There was a large backlog of claims pending the outcome
 Initially they were not seeing a dramatic increase in settlement demands
 Because of large inventory of claims there will be a significant hit to prior year adverse development
 Question of “what happens to the claimant who has a claim that is worth more than the cap, but
signs a release and settles for the cap amount or less”
 Insurers are considering 3 strategies
 Continue stockpiling claims until while the appeal is in court
 Settle the claims for their value under a pure tort system
 Meet in the middle between what the claim is worth under a pure tort system and the caps
 In the long run larger claims will cause changes in the way claims are handled and investigated
 Lawyers in other provinces are hoping the ruling will help their cases against the constitutionality of caps
 Concern that there will be a domino effect which will end up to a loss for consumers
 Ontario Insurance Act states that individuals must suffer a permanent, serious impairment to an important
bodily function before they can get compensation for pain and suffering (30,000 deductible if damages are
less than 100,000)
 OTLA argues this discriminates between certain groups inside and outside the workforce
 New Brunswick has a $2,500 minor injury cap
 The legal challenges have the potential to upset the balance between rate stability and limits to damage
awards that was instituted by tort reform in the provinces
 Cap removal could lead to price fluctuates and instability in key markets
 In Alberta cap was an inherent part of being able to deliver affordable rates through the grid
 Pricing was based on an understanding of expected claims experience
 Argument that if the cap is scrapped and the previous system is restored public outcry will lead to politicians
stepping in, which likely won’t be good for anyone and may lead to a no-fault system.
 Another solution is for governments to revamp auto insurance regulations
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Medical Malpractice: Impact of the Crisis and Effect of State Tort
Reforms (Mello)
 Problems cause by the medical malpractice crisis
 Volatility in the market
 Above average increase in premiums
 Contraction in the supply of insurance
 Deterioration in the financial health of carriers
How Does a Volatile Malpractice Environment Affect Health Care Delivery
 Physicians and insurers have claimed that rising insurance costs have led to a reduction in service
 Physicians retire early
 Relocate their practice to states with lower insurance costs
 Restrict the scope of their practice to avoid high-risk procedures
 These claims have been supported more by anecdote than by hard data, especially in early years
 Studies have directly modeled the relationship without account for other differences
 Key issue in physician-supply studies is to control for various market characteristics
 3 studies showed an association between malpractice risk and physician supply, 3 showed no
significant findings, while 2 had mixed results
 The strongest studies found little or no effect of malpractice in physician supply
 Effects in certain specialties and rural areas did see a larger effect though
 Baicker and Chandra study found no significant association between premiums and supply
 Kessler study found that caps increased physician supply by 3% in 3 years
 Survey studies were done, but had some weaknesses
Low response rates
Risk of response bias: bias due to a desire to give a socially correct response
 Few studies have examined the effect on high-risk services
 Direct evidence of increased wait time for high-risk services in states with rising liability costs
 Possible that there was a decrease in service but that there were enough doctors to keep good access
 A well designed study found no significant difference in rates of certain procedures, but was limited
to Medicare only
 Possibility that doctors might avoid high-risk procedures more often for younger patients since they
are more likely to sue
 Longer-term effect on physician supply may not yet have been documented
 Students may be dissuaded from entering medical school or choosing some specialties
 A survey stated though that interest in a particular specialty is not based on malpractice risk, but
instead on income and lifestyle
 “Defensive-medicine” may become more prevalent in environments with high malpractice risk
 Certain procedures, tests and referrals are ordered primarily out of legal concern than medical
judgement (Assurance Behaviour)
May be more than one reason for ordering a test
Method is to compare tests ordered between states with different liability climates
Controlling for other factors there was a small increase
 Study of high-risk specialists in PA showed that 93% showed at least some assurance behaviour
 Physicians who were not comfortable with their liability coverage were significantly more likely to
show these behaviours
What is the Impact of State Tort Reforms on Premiums, Claims Frequency/Payouts and Physician Supply
 Objective of conventional tort reforms
 Erecting barriers to bringing suit or reaching trial (Statute of limitation, pre-trial screening)
 Limiting the amount the plaintiffs may take as an award (Caps...)
 Altering the way damages are paid (Joint-several liability, periodic payment)
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 Aside from caps, most of these reforms have had limited effects
 Joint-several liability reform did constrain the growth of insurance premiums
 Shorter statutes had an effect on claim frequency/premiums, but not on severity
 Efficacy of caps on damages has been hotly disputed
 Descriptive studies are more common than controlled ones
 Comparison groups have been constructed inappropriately
 Analysis sometimes group states with different caps
 Information on premium/claim trend may not be adjusted for number of physicians in the state
 Data on trends in premiums, insurer losses, or award average size may not be adjusted for inflation
 Evidence shows caps on damages reduce average claim size by 20-30%, no effect on frequency
 Caps only apply to jury verdicts, but also have an effect on settlements
 Studies have shown that caps are associated with an increase in physician supply
 Argument that caps provide an insulation from malpractice judgements, which attracts physicians
 Strongest studies showed 3% higher growth over 3 years
 Most recent studies have shown that caps constrain the growth of premiums
 Recent data has shown that caps moderately decreased growth of premiums
 Potential caveats in the studies
Studies did not control very well for the effect of regulation across states
The studies did not indicate what level of noneconomic damages cap had the largest effect
Caps on damages did not reduce premiums, only slow the rate of increase
Effect of the caps was not felt immediately
 Argument that caps on noneconomic damages adversely affect patient safety and equity
 Deterrence level
Very little evidence that medical liability system has a deterrent effect
Caps are not designed to reduce the incidence of medical error
 Fairness level
Elderly and female patients more affected by caps, since noneconomic damages are larger
Caps exacerbate inequities in compensation for most severely injured
 Alternative approaches to reform for the malpractice crisis
 Schedules of damages
Injuries classified into different severity tiers with different compensation (Guideline)
Because they would reduce insurer’s uncertainty in loss size, could control premium growth
Would ensure that similar injuries = similar rewards
Would limit juries discretion in giving out compensation
May be less effective at cost control that a flat cap
 Patient safety improvement
Implementation of clinical interventions which reduce rates of adverse event
Provide benefits to both patients + healthcare providers
Poor correlation shown between adverse events and malpractice claims
 Disclosure and “early offer” programs
Proposal for full compensation for past/future economic losses but not for pain & suffering
May lead to quicker settlements done at a lower cost
Fear that patients will be barred from filing suit before speaking with a lawyer
Some object to exclusion for non-economic damages
 Demonstration projects of administrative compensation
Moving the adjudication of malpractice claims from courts to an administrative process
Panel would award compensation to those whose injuries could have been avoided (not just
negligence)
Decision guidelines to fast track certain kinds of injuries
Administrative process would be more efficient (neutral experts) and would thus save money
A larger group of patients would qualify for compensation so total costs may not be lower
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Implications for Policymakers
 Malpractice crises are likely to reoccur
 Malpractice crises affect the supply & delivery of healthcare, though the effect is often overstated
 Malpractice crises are also associated with more defensive medicine
 No single policy solution will address all factors which lead to malpractice crises
 Policy makers may prefer to let the market correct itself, however this causes good & bad times in
professional liability insurance
 Caps on damages help constrain growth in litigations costs & premiums, but burden the most severely injured
 May be less burdensome ways to bring more predictability and cost control to the liability system
 Malpractice crises bring attention to the fundament problems with the medical liability system, which require
some sweeping reforms
 Evidence that current medical liability system performs poorly as a mechanism to bring
compensation to injured patients in a fair and equitable way
 Efforts should be made to improve the availability and quality of data on claims & premiums
________________________________________________________________________________________________
2007 Update on U.S. Tort Cost Trends (Towers Perrin)
 Study to attempt to quantify tot costs, not to support any point of view regarding costs
 US tort costs decreased by 5.5% in 2006 (decrease in claim frequency, with no significant change in severity)
 Since 1950, growth in tort costs has exceeded growth in GDP by an average of 2%
Key Implications
 Auto accidents: Decline in frequency in recent years, however period of decline expected to end
 Subprime mortgages: Lawsuit activity from investors and homeowners may result
 Backdating of options: Raises possibility of resurgence in director and officers liability claims
 Global warming: May lead to increased litigation toward organization accused of contributing
 New theories of liability: Burden of proof may change in some litigation
 Medical malpractice: Trends in medical malpractice have moderated
 Obesity: Link between obesity and health problems could lead to future litigation
 Employment liability: Age discrimination & overtime rules could lead to a review of employment practices
 Shareholder vs. 3rd party: Concept of whether shareholders can sue a 3rd party that helped a corporation to
defraud them
 Asbestos: Uncertainty about future litigation outcomes could affect reserves
Findings
 US tort costs decrease by 5.5% in 2006, 1st decrease since 1997
 Costs relative to GDP also decreased (average of 2%)
 Growth in US tort costs since 1950 have far exceeded population growth (slowed recently)
 Personal vs. Commercial torts
 Increase in commercial torts have exceeded the personal ones since 1990
 Recent decrease in commercial tort costs partially due to asbestos claims
 Other commercial liability claims also reported a drop in 2006 vs. recent years
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Methodology and Approach
Components of Tort Costs
 Losses
 Incurred losses used (since used to set reserves)
 Defence costs
 Split between ALAE & ULAE
 Administrative Expenses
 Share of total insured torts costs going to administrative expenses had decreased since 1950
 Insurers have an incentive to be efficient to strengthen their competitive position & increase profits
 Seen as a real cost of the tort system, but has a negligible effect on recent trends
Categories of Tort Costs
 Insured costs (Excluding medical malpractice)
 Derived from AM Best (Composite financial  reliable since use for audits)
 Commercial/Personal auto liability with personal injury protection are excluded (since 1 st party)
 Homeowners/farmowners are largely 1st party so only include 9% for liability
 Prior to commercial multi-peril being split 50% was used as an estimate for liability
 Workers compensation is excluded as 1st party
 Data slightly reduced to account for non-US business
 Administrative expenses are composed of commissions/brokerage, general expenses,
taxes/license/fees and other acquisition expenses here
 Self-insured costs (Excluding medical malpractice)
 Approximately 2% are personal tort costs
 No sources have full & precise data, so estimates are based on various organization data
 Certain extraordinary costs are excluded (ex: Tobacco settlement)
 Medical malpractice costs
 Medical malpractice data segregated since 1975
 Large fluctuation of insurance costs
 Estimate based on Tillinghast’s internal estimates of state-by-state medical malpractice costs
 Costs incurred by federal and states in administering suits are excluded
 Certain indirect costs, such as measures for litigation avoidance, are also excluded
Looking Ahead
 Decrease in costs not expected to continue in 2007
 Some personal auto data suggest the recent frequency declines may be coming to an end
 Anticipated US tort costs to range from 3% to 6%
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Commercial Practices in the Quebec Damage Insurance Brokerage
Sector (AMF)
 AMF findings show that brokerage firms, which should be independent of insurers, are subject to incentives
likely to inject bias into their roles as consumer advisers.
 Personal lines insurance: Insurance covering the property & personal liability of individuals (home, auto, etc)
 Commercial lines insurance: Insurance covering the property & personal liability of business and individuals in
connection with their business activities.
 Insurer products are sold in Quebec through two distribution networks
 Direct insurers who sell their product through salaried employees or with exclusive agents
 Brokerage firms, which act as intermediaries and advice their clients on the product which best suit
their needs
 AMF duties
 Issue licences to firms & individuals and ensure that they comply with all laws
 Protecting consumers
 Commercial lines product mainly sold though brokers
Concentration of Business Volume
 Personal lines brokers concentrate their volume of business with 1 or 2 insurers
 Large firms: 60% with principal insurer and 80% with two largest
 Small number of insurers hold a significant portion of the market
 The concentration of business volume in the personal lines insurance sector raises doubts to the
independence of brokers
 Commercial practices leading to this: Loans to firms, ownership ties, block transfers of business and
contingent commissions
 Commercial practice impose large financial pressure on brokers
Loans to Firms
 Insurers grant loans to firms with which they do business
 Of the large firms, 32% reported having obtained loans from insurers
 To qualify for the loan a firm may have to provide the insurer with a minimum volume of premiums
 Loans are often subject to conditions that limit which products they may offer to consumers
Ownership Ties
 Share of firms are sometimes held by insurers
 23% of large firms reported ownership ties with insurers
 An Act Respecting the distribution of financial products and service states than a firm which has more than
20% of its shares held by an insurer should only offer their products
 In over 90% of personal lines cases, if an insurer hold shares they receive most of their premium volume
 Seen as influencing the product offered to consumers
 Act require the disclosure of ownership ties to clients
Block Transfers of Business
 Firm transfers a volume of clients from insurer to another in exchange for additional remuneration (up to
15%) to recover the administrative costs of the transfer
 55% of large firms reported at least one transfer over the past 5 years
 Why transfer occur
 Original insurer withdrew from market or discontinued a line of business
 Broker wishes to sell products of new insurer
 Condition to get a loan from insurer
 Satisfy requirement to get increased remuneration
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Contingent Commissions
 Bonus added to basic remuneration by insurers
 Reasons
 Objective related to the sale of the insurer’s products
 Ensure profitability of portfolio
 Securing the loyalty of clients
 Majority of insurers, particularly personal lines ones, offer contingent commissions
AMF Actions
 Designed to ensure that ethical standards, trust and credibility reign in the insurance industry
 Regulatory measures
 Regulate with a view to banning certain practices in the insurance sector
Seek to ban certain practice that inject bias into the role of brokers
 Impose the disclosure of relevant information to consumers
 Introduce the concept of “independent broker” for firms
 Regulatory measure must be simple, easy to apply and verify and be fair
 In depth investigation of brokerage firms
 Investigation dealt with transparency, disclosure of business relations and with conflicts of interest
 Seek to determine the effect of commercial practices on advisory relationship between brokers and
their clients
 Production of information materials for consumers
 Designed to ensure that consumers know their rights and can make sound financial choices
Distribution of Financial Products and Services Section (AMF)
 Insurance representatives must, when placing a risk with an insurer with which they have a business
relationship, disclosure that relationship to the person with whom they are transacting business
 Insurance representatives must, before offering an insurance product, disclose to the person the names of
the insures whose products they are authorized to offer along with information prescribed by regulation
 Findings of investigation on commercial practices
 Majority of brokers in Quebec are not independent, with most of their business placed with 1 or 2
principal insurers
 Certain commercial practices in Quebec (loans, ownership ties, block transfers of business,
contingent commission) are not in the best interests of consumers
 AMF seeks an approach based on transparency (When disclosure must be made)
 When a broker places 60% or more of their total volume of business with one insurer
Does not apply to commercial lines brokers
 An insurer who holds an interest in a firm or a broker who holds ownership in an insurer
 When an insurer grant a loan to a broker
 Important that the business relationships above be disclosed to consumer before purchase
Verbally before a product is offered
Written confirmation when the insurance policy is issued
 Where disclosure is not necessary
 When the firm’s name indicates the interest that the insurer holds in the ownership of the firm
 If the firm has already disclosed that they have an exclusive contract with an insurer
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Life Insurance Laws of Canada (McDonald)
 First life insurance law in Canada was enacted in 1865, which made it legal for a person to insure his life to
benefit his family. The proceeds were to be paid free from claims from a creditor.
 In 1870 Ontario enacted a law which states that a policy for the benefit of a wife and children is deemed a
trust and is free from claims from creditors + not part of his estate.
British North America Act
 In 1867, the BNA act shared the powers to run the country between the federal and provincial governments
 Areas of exclusive federal Parliament legislative authority
 Regulation of trade + commerce
 Raising of money through taxation
 Banking
 Bankruptcy and insolvency
 Naturalization and aliens
 Criminal law
 Residual powers to make laws for the peace, order and good government of Canada
 Areas of exclusive provincial government legislative authority
 Incorporation of companies with provincial objects
 Property and civil rights in the province
 Matters of local or private nature in the province
Privy Council Decisions
 Until 1949 when the Supreme Court of Canada was created, the Judicial Committee of the Privy Council was
the highest court
 Dealt with whether a particular piece of legislation contravened the powers provided by the BNA
 Intra vires: Within the power of a particular government
 Ultra vires: Beyond the power of a particular government
 Citizen Insurance Co. v. Parsons
 Company questioned the constitutional validity of the Ontario Fire Insurance Act
Argued that the act regulated trade and commerce, which was a federal power
Argued that a province cannot deprive a federally incorporated company
 Privy Council upheld the act
Authority to regulate trade and commerce was seen as only interprovincial
Legislation properly passed due to authority to regulate property rights
Did not interfere with constitution or status as a corporation
Act dealt with all insurers in the same way regardless of whether they were incorporated
 Attorney General for Canada v. Attorney General for Alberta
 Federal Insurance Act requires all insurers operating in more than 1 province to get a federal license
 Privy council nullified the act
Regulation of trade and commerce did not extend to a particular trade
Licensing interferes with insurer’s civil rights in their province of incorporation
Insurer incorporated in one province can carry on business in another province without being
regulated by the federal government
Federally incorporated company has the right to operate in all provinces
Right to require federal license for foreign companies
 Reference re Reciprocal Insurance Legislation, Attorney General for Ontario v. Reciprocal Insurers
 Case brought since the federal government amended the Criminal Code to make it an indictable
office for a person to solicit or accept an insurable interest except for a federally licensed insurer
 Privy council invalidated the amendments since they were seen as an attempt regulate
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 Re the Insurance Act of Canada
 Special war Revenue act imposed a tax on policyholders of British or foreign companies not licences
under the Federal Insurance Act
 Privy Council invalided this since it was seen as an encroachment on provincial authority to regulate
 Re Section 16 of the Special Ware Revenue Act
3 Federal acts passed in response to Re the Insurance Act of Canada
Sections of the acts invalidated as seen as an attempt to regulate insurance within a province
 Canadian Indemnity Company, et al. V. Attorney General of British Columbia
 BC created a compulsory auto insurance plan and refused to renew licenses of insurers doing
business in the province
 Supreme Court upheld BC’s power to do so
Insurance companies argued that the matter was within the exclusive federal jurisdiction
Also argued the legislation interfered with the status of federally incorporated companies
Regulation of Insurance
Federal Regulation of Insurance
 Federal parliament can legislate incorporation and regulation of federally incorporated companies with
business in Canada
 Cannot interfere with the exclusive jurisdiction of provinces over civil rights in the provinces
 Parliament cannot provide a federally incorporated company with powers and rights such that it does not
need to observe provincial laws
 Foreign insurers are regulated by federal laws
 Federal legislation principally concerned with financial solvency of insurance companies
 Conditions for a company to enter the business of insurance
 Financial reports that must be regularly submitted
 Control over investments, calculation of asset values and policy reserves
 Protecting policyholder interests in other areas
 Uncertainty in application of Canadian Charter of Rights, which is Part 1 of 1982 Constitution Act
Provincial Regulation of Insurance
 Supervising the financial soundness of provincially incorporated insurance companies
 Insurance departments have staff that will supervise the and examine the affairs of the companies
 Smaller provinces may defer to the federal Department of Insurance
 Provincial legislation design measure to protect the policyholder by regulating the insurance contract
 Other areas of regulation: Licensing of agents + unfair practices + claims procedures
Office of the Superintendent of Financial Institutions
 Set up by Minster of Finance to administer certain federal acts
 Insurance Companies Act
 Cooperative Credit Associations Act
 Trust and Loan Companies Act
 Bank Act
 Investment Companies Act
 Determines the balance of net premiums received in Canada less dividends paid to policyholders in previous
year
 Funded through assessment of companies
 Pro rata basis against insurance companies
 Similar mechanisms for other financial institutions
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Insurance Companies Act
 Provided a modern framework by replacing British Insurance Companies Act and the Foreign Insurance
Companies Act
 Allowed insurers to operate similar to other federally controlled companies
 Broadening lending and investment powers
 New powers to diversify
 Flexibility to raise money by issuing shares or borrowing
 Act applies to all insurers operating in Canada under a Federal charter
 Factors to be judged before incorporation under the act
 Nature and sufficiency of financial resources of applicant
 Soundness of the business plan
 Business record and experience of applicants
 Character, competence and experience of those who will operate the company
 Will the incorporation be in the best interest of the financial system in Canada
 If the applicant will be a subsidiary of a foreign insurer, will Canadian insurers be treated as
favourably in the jurisdiction
 To sell life insurance in Canada a commencement order from the Superintend is required
 If registered under former act, a certificate of registry is enough
 A stock insurance company need start-up capital of 10 million
 A mutual insurance company requires an amount specified by the minister
 Commencement order will specify which class of insurance that they are permitted to insure
 Superintendant can revoke commencement order at any time, if the company is allowed to defend itself
Foreign Insurance Companies
 Companies incorporated elsewhere require approval from the superintendant to operate in Canada
 Those operating under the prior act are automatically approved
 Company must appoint a Canadian as its chief agent + an auditor & actuary
 Must have assets of a prescribed value vested in trust
 Trust in entitled to those assets and can manage them in any way they see fit
 Under the former act, foreign insurers were required to deposit securities with the Receiver General
 Must maintain adequate capital (required % of
) and have enough liquidity
 Foreign companies must follow many of the same rules as a other insurers
 “Reasonable and prudent” person investment standard must be maintained
 Rules dealing with the acquisition of assets from related parties are the same
 Corporate recordkeeping requirements are similar
Provincial Insurance Companies
 Superintendant must approved the commencement and carrying on of business of every new provincially
incorporated insurance company
 Similar rules to foreign companies
 No longer required to deposit securities with Receiver General
 Must appoint an actuary and auditor
 Must maintain certain corporate records
 Must establish a review committee to review reacted party transactions
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Protecting the Pledge (Noonan)
 Paul v. Virginia
 Agents business in more than 1 state not considered interstate commerce
 Policies were local contracts, and not tradable goods, therefore under state jurisdiction
 United States vs. South-Eastern Underwriters Association
 Case using Sherman antitrust act, where insurance considered commerce under federal regulation
 Brought on due to alleged price fixing + monopoly due to pooled member information
 Lead to passage of McCarran-Ferguson act, which let state preserve their rights over regulation
 Central theme of US insurance regulation
 Regular financial reporting
 Safeguarding insurer solvency
 Ensuring fairness to consumers
 Need for more uniform regulations seen, but not yet within reach
 Global economy has increase pressure for nationwide rules
 National Insurance Convention Formed in 1871
 Agreement to adopt common annual statement forms
 Use uniform terminology
 Development of common reserving standards
 National Association of Insurance Commissioners formed in 1936
 Requires Committee on Blanks to meet at least once a year to consider amendments
 Making formal provision for multistate examination of insurers
 Requires the securities valuation committee to report annually
 Collection of contributions authorized
 McCarran-Ferguson Act
 Granted limited exemption from antitrust laws to insurers, provided their business was regulated by
state law
 Cemented the states’ position as the principal insurance regulators
 Laid the foundation for modern P&C rate regulation
Rate-filing provisions
Prohibition against “excessive, inadequate or unfairly discriminatory” pricing
Federal Encroachments
 Federal HMO Act: Promote the creation of HMO
 Employee Retirement Act: Establishment of standards for employee-benefit plans
 In 1979 Congress instituted minimum loss ratios for individual and group Medicare supplement policies
 Health Insurance Portability and Accountability Act: Made health coverage portable for workers at small
employers
 Argument against federal regulation
 Elimination of competiveness found at state level
 Would put into doubt rules of the business
 Would decrease opportunities for citizen pressure
 Congress report found that solvency through state regulations was insufficient
 NAIC accreditation of state insurance departments
 Certify states based on their adoption of select NAIC model laws and standards
 States opposed due to a non-governmental agency violating state sovereignty
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Next Big Thing
 Glass-Steagal Act and the Bank Holding Company Act had separated insurance, banking and securities
 Gramm-Leach-Bliley Act in 1999
 Enabled new kinds of cross-ownership, affiliation and distribution
 Added more privacy regulations
 Threatened the creation of the National Association of Registered Agents and Brokers; unless the
states met stand of uniformity and reciprocity in licensing
 Proposed State Modernization and Regulatory Transparency Act
 Requires states to achieve uniformity in key areas or have their noncompliant laws pre-empted by
national standards
 World end most regulation of P&C insurance rates
 Many life and national commercial insurers have argued for the right to choose between state and federal
regulation
 Fragmented nature of the state regulatory system is seen as a barrier to entry of foreign companies
Private Passenger Automobile Filing Guidelines (FSCO)
 Rules applying for automobile insurance contracts/endorsements, except for fleets
 Types of processes for approval and authorization
 Prior approval (Section 410)
Simplified filing guidelines (if the filing satisfies the criteria)
Major filing
 File and use (Section 413)
Major filing (initial application, if the filing satisfies the criteria, if requested by FSCO)
Minor filing
 Filing requirements
 Application shall be in an approved form + contain specified information
 Separate filing must be submitted for each category of insurance
If the rating structure is dependent on the private passenger automobile rates, the
information for the dependant category can be submitted with the PP filing
 Different guidelines if the only change is the implementation of the CLEAR vehicle rate group table
 Separate guidelines for filing of endorsements (except OPCF 44R)
 Required rates and risk classification system elements
 Insurer must file rates for the following:
Optional accident benefits
o Increase income replacement benefit
o Increased death and funeral benefit
o Increase medical, rehabilitation, and attendant care benefit
o Increase caregiver and dependent care benefit
o Indexation benefit
$500 deductible for collision and a $300 deductible for physical damage
Retiree discount on the private passenger automobile insurance (Must be a percentage)
o Retired + no earn/receive income from employment + no professional occupation +
not operating a business + not have been employed for 26+ weeks out of the past 52
o Be 65 & up or receive a pension
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
Graduate licensing + insurance
Level one drivers are not rated
Level two drivers can be rated
Insurers must credit drivers for the time spent at level one/two (1 year max each)
Drivers moving from level 1 to level 2 should receive a 10% discount if they have no
conviction or at-fault accident. Similar for moving from level 2 to full license.
Driver training discounts and credits continue to apply
 Approval process
 Submit filling (ex: through ARCTICS)
 Receive a confirmation upon receipt
 Filing will be reviewed for completeness + time periods do not run yet
 Once approved, need to file rate manual to FSCO (1 hard copy + 1 electronic copy) within 30 days
Definitions
 Affiliated insurer: One insurer is a subsidiary of another, both are subsidiaries of the same corporation or
each is controlled by the same person
 Allocated loss adjustment expenses: Expenses that can be charged to a particular claim
Adjuster’s accounts (except staff adjusters)
Appraisal costs (excluding staff appraisers)
Legal expenses (excluding staff legal fees or costs)
All other external claims expenses
 Category of automobile insurance: Divided into personal/commercial/public + subdivisions (motor homes)
 Coverage: Liability (BI & PD) + Accident benefits + Uninsured automobile + Direct compensation + Specified
perils + Comprehensive + Collision + All Perils + Underinsured Motorist (OPCF 44R)
 Endorsement: Endorsement (standard & non-standard) approved by the superintendent (except OPCF 44R)
 Expedited approval: Insurers may have their filing approved within 30 days (Applies to PPA)
 Equity: Sum of capital + head office account + contributed/earned surplus + required reserves &
contingencies + general reserves
 File and use: Process in which insurers may the risk classification or rates 30 days after filing (PPA only)
 Fleet: Group of 5 or more vehicles that are under common ownership/management and used for
commercial/public/business purposes + if leased for more than 30 days to the same person
 Investment income: Income attributable to policyholder/shareholder funds, including realized capital
gains/losses net of investment expenses
 Prior approval: Process in which the insurer must wait for approval before using the risk classification or rates
in a filing (PPA & facility association)
 Rate: Amount payable for an insurance contract including surcharges/discounts + commissions + expenses
 Rate differential: Multiplicative or additive factors that are applied to the base rate
 Rating algorithm: Manner in which base rates, rate differentials & discounts/surcharges are combined to get
the premium
 Rating rule: Way by which a risk is assigned to a specific rating cell
 Return on equity:
(After tax basis)
 Proposed: ROE underlying the proposed rates
 Target: ROE underlying the actuarially indicated rates
 Risk classification system: Variables, criteria, rules and procedures used for classifying risks
 Territorial base rates: Rate used as the starting point for each territory
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 Unallocated loss adjustment expenses: All claims settlement and processing costs, excluding ALAE, but
including staff adjusters, appraisers, lawyers, etc. and for a portion of general expenses
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 Underwriting profit margin:
–
 Taxes do not include income tax & real estate tax
 Proposed: Underwriting profit margin underlying the proposed rates
 Target: Underwriting profit margin underlying the actuarially indicated rates
 Underwriting rules: Rules that govern whether an insurer accepts/declines a risk, coverage or endorsement
Guidelines
Certificate of the Actuary and of the Officer
 Certificate of the Officer: Must contain an original signature from President, CEO, CFO, COO chief agent
 Has knowledge of the matters which are the subject of the certificate
 Changes requested are in compliance with filing guidelines
 The information submitted is complete and accurate
 Rates in filing are reasonable, adequate and not excessive
 Certificate of the Actuary: Original signature from FCIA
 For filings with rate level changes or for a new product
 Data has been reviewed for reasonableness and consistency
 Rates have been calculated with acceptable actuarial principles
Actuarial Support
 Detailed support must be provided for any rate level change
 Details need to be given for all coverage even if a rate level change is not proposed for them
 Document should have sufficient detail to follow the results, however no specific methodology is required
 Overall description of the ratemaking methodology and summary
 May use either a pure premium or loss ratio ratemaking approach
 Specific and detailed information on the data should be included in the appropriate subsections
 Should include the most recent complete year of data that is available
 Losses
 If losses are combined with ALAE it should be noted
 Type of loss data (AY, PY) + experience period + valuation dates + source of data should be noted
 Direct losses are the basis for ratemaking and shouldn’t include losses incurred in the residual market
 Loss development: Data must be developed to ultimate with LDF methods shown/explained
 Loss trend
Specific trending approach must be outlined
If combination of past/future trend is used each component must be separately disclosed
 Treatment of large losses: Ensure that large losses do not cause rate instability
 Catastrophe procedures
 Auto reforms adjustment
 ALAE: If ALAE shown separately from losses (same detail)
 Premium
 Experience period and premium data source should be disclosed
 Direct premiums should be the basis for ratemaking (do not include residual market premiums)
 On-level adjustments: Include both adjusted/unadjusted premiums and method to arrive to it
Include rate change history for past 5 years
 Premium trend: Include for inflation sensitive exposure-base or where the mix of exposures changes
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 Other expenses
 Need to be separated between fixed and variable expenses
 If rates vary based on the distribution system, they need to be separately filed
 No expense provision established for Facility Association Residual Market
 Fixed expenses should be trended similarly to losses
 Profit provisions
 Show derivation for target underwriting profit margin from target return on equity
 Expected investment income from policyholder funds + equity taking into consideration new money
rates and the insurer’s historical investment returns
 Disclose pay out patterns expected to apply to losses and expenses
 If proposed rates ≠ actuarial rates estimate ROE and underwriting profit margin
 Credibility: Disclose methodology + sources of information
 Other adjustments: Any other changes which affect rates
 Summary rate level indications
 Explain how the data combines with adjustments
 If >1 year of data, disclose weights giving to each year of premium & loss data
 Territorial Indications
 Indicated differentials
Comparison of current/indicated/proposed territorial differential for each changing coverage
Include written premium distribution and the exposure distribution by territory & coverage
 Off-balance: If territorial differentials are not off-balanced, treat as a rate change
 Definitions: Changes to territorial definitions need to be accompanied by a current/proposed map
 Implementation of CLEAR system differentials
 Overall description for implementing CLEAR: Include rate group table and capping procedure
 Off-balance: If CLEAR groups are not off-balanced, treat as a rate change
 Classification/Limit of Liability/Deductible
 Indicated differentials
Comparison of current/indicated/proposed differentials for each changing coverage
Include written premium distribution and the exposure distribution by territory & coverage
 Off-balance: If change in differential are not off-balanced, treat as a rate change
 Rating based on group membership
 Types of groups (At least 100 members)
Group of employees of the same employer
Group of members of a credit union
Trade union
Profession or occupational organization
Alumni association
Two year old not-for profit entity (except those for purchases)
 Prohibited from using existence of medical or benefit plan in their risk classification system
 Indicated discounts or rates
Groups rates could be due to lower experience loss costs, risk management program or
characteristics which result in lower loss exposure
Support for discounts and rates must be actuarially credible
Comparison of current, indicated and proposed discount and rates must be provided
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Discounts and Surcharges
 Justification for discount
 Lower acquisition costs
 Lower administrative costs
 Lower loss costs
 Comparison of current, indicated and proposed discount or surcharges must be provided
Rating Rule Changes
 Rules by which a risk is assigned to a specific rating or by which a discount/surcharge is applied
 Differs from underwriting rules which govern whether to accept/decline if a risk should be insured
Final Rates/Rate Level Change
 Identify information for these categories in both current and proposed
 Algorithm
 Base rates
 Differentials
 Discounts and surcharges
 Calculation of final rates
 Calculation of rate level change
 Dislocation and capping
Rating Examples
 Rates are to be stated on an annual basis
 Risks should be rated according to information provided (No preferred rates unless stated)
 Indentify all applicable surcharges/discounts
 Do not assume the operator has progress through the graduate licensing system
 Rating territories should be as defines in the insurer’s rate manual
 Assume the same definitions as the Facility Association for conviction and at-fault accidents
 If the deductible/limit is not offered use closest deductible/limit
 If group discounts are provided, give non-group rate ad rate with highest discount
 For multiple operator policies submit individual sheets as well as a combined sheet
 If based on underwriting rules a risk would be rejected, it should be indicated and no example is given
 If example does not produce a unique rate, provide the lowest and highest rate
 Include the premiums for all perils only if collision and comprehensive are not offered
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Effects of Rate Regulation on the Volatility of Auto Insurance Prices:
Evidence from Canada (IBC)
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The regulation of insurance is one form of response to volatility, which can cause unease to consumers
Volatility: Measure of the degree of price movement in insurance premiums
Unexplained volatility: Price movements not related to claim related costs
Types of rate regulation
 Prior approval: System where rates must be approved before being used
 Flex rating: Approval system that may be expedited if rates are within a range
 File-and-use: Competitive rating where insurer files rates and they are deemed approved after a time
 Use-and-file: Competitive rating where insurer may begin using rates immediately after filing
 Regulation in the USA
 McCarran-Fergusson Act exempted any insurer subject to state regulation from anti-trust laws
 All states established regulatory agencies by 1951, primarily for solvency purposes
 Regulation in Europe
 Third Council Insurance Directive established a single European insurance market
 Designed to reduce barriers to competition
 Resulted in the removal of strict price regulation in European countries
Prior approval rates only allowed as part of general price-control
 Regulation in Canada
 Ontario was the first province to implement a strict prior approval regime of rate regulation
 Later passed a respond-to-market process to streamline filing requirement and approval times if rate
increase fell below a threshold
 Alberta + Atlantic provinces have a file-and-use system
 BC, Manitoba and Saskatchewan have government-run insurers for mandatory coverage and no
regulation for optional ones
 Quebec has a use-and-file system
Effect of Rate Regulation
 Strong statistical evidence that strict price regulation does not lead to lower insurance premiums, on average
 Stricter forms of rate regulation tend to temporally decrease the premiums collected per dollar of loss,
insurance premiums in jurisdictions are often higher than in those without
 Premiums vary primarily depending on product features
 Strict price regulation has been found to
 Limit competition
 Reduce insurance availability
 Increase volatility in insurance premiums
 Reasons for increased volatility in insurance premiums
 Volatility in clams-related costs
 Regulatory lags due to prior-approval, the delay could deteriorate the link between premium & cost
 Regulatory build-ups, where the insurer waits until they have a large rate increase to justify the costs
of preparing the filing
 Delays in changing insurance pricing usually takes longer than in other areas
 Price controls on insurance affect both the amplitude and length of the underwriting cycle
Premium Volatility and Rate Regulation
 Average costs of claims and accident frequency are the primary determinant of average premiums
 Underwriting profit margin is significant and positive
 When companies are able to link insurance costs to premiums, variable tends to zero
 Rising general price level also contributes to increased insurance premiums
 View that as claims increase with inflation, so do insurance costs/prices
 Primary difference in premium volatility (after accounting for product differences) is the regulation of prices
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 Suggestion that in regulated environment the scope to adapt & innovate is limited
 Change in the competitive environment is statistically significant for collision coverage
 Firms have a greater scope for engaging in strategic behaviour here
 Evidence in Ontario has shown that rate regulation, after accounting for changes in the environment,
increased volatility in auto insurance prices
 Unexplained volatility was much higher in Ontario, then in Alberta and the Atlantic provinces. Suggesting that
changes in changes in claims related costs largely account for changes in average premiums in those
provinces.
Volatility and Rate Regulation: Illinois and South Carolina
 Ontario & South Carolina has repeatedly reformed their rate regulations, while Illinois has none
 Arguments for rate regulation
 Protect from high prices
 Protect from price instability
 Arguments against rate regulation
 Distorts incentives
 Increases price volatility without leading to lower average prices
 Evidence from recent studies has supported the hypothesis that rate regulation increases premium volatility
 Premium volatility in Illinois is relatively stable, with premium growth following inflation
 Ontario and South Carolina were subject to wide price swings
South Carolina
 Originally introduced a prior-approval system to prevent insurer insolvency
 Later focus of rate regulation became protecting consumers from rising insurance prices
 Eventually suffered from a significant availability crisis and a distortion of economic incentives which
escalated costs/prices and caused the residual market to balloon
 In 1999, reforms replace the prior-approval system with competitive market rating , eased underwriting
restrictions and phased out the residual market
 Result
 Doubling in the number of auto insurers
 Implementation of more refined risk classification and pricing structures + alternative policy options
 Improvement in the affordability and availability of insurance
 Still too early to tell the effect on volatility though
Illinois
 Only US jurisdiction which does not formally regulate auto insurance rates
 One of the healthiest markets with few affordability or availability issues
 Premiums in Illinois have consistently been lower and experienced less volatility
 Residual market has a very small number of drivers
 State insurance department focus its resources on insolvency issues and monitoring market conduct
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Summary
 Variation in insurance premiums is largely attributable to claim costs
 Rate regulation has been used as a policy tool for keeping insurance prices from rises as a result of increased
clams costs and providing consumers greater price stability
 Statistical evidence has supported the hypothesis that prior-approval rate regulation increased volatility
 Regulatory lags under prior-approval rate regulation increased the magnitude and frequency of price swings
 For TPL, collision and comprehensive analysis suggest that expected claims costs and uncorrelated shocks
drive changes in average price levels
 For accident benefits, while claim costs are the largest factor in price, the regulation of insurance was found
to be a significant variable in explaining changes in price not attributable to claim costs
 Prior approval rate regulation is reliably associated with greater volatility in auto insurance premiums after
controlling for other key variable that could influence volatility
 Experiences in Illinois and South Carolina have support the statistical evidence regarding the potential
adverse effects of rate regulation and the benefits for consumers of a less regulated system
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Canada’s Agricultural Business Risk Management Programs (AAA)
 Aimed to help Canadian agriculture industry
 Protect producers’ incomes from the effects of weather, pests and global markets
 Encouraging risk mitigation strategies
 Supporting growth, diversification and increased value-added activity
 Principles that have guided the design of the programs
 Minimizing countervail risk
 Minimizing distortion of producers’ production and marketing decisions
 Ensuring the stability of the entire farm entity
 Encouraging the use of risk management practices
 Simple to administer and transparent
 Minimizing the capitalization of program benefits into farm asset values
 Production Insurance
 Designed to manage the production risk inherent to the agricultural industry
 Canadian Agricultural Income Stabilization (CAIS)
 Designed to mitigate unforeseen income disruptions as we as promote long-term income stability
 Covers market price drops, fuel/input price increases
 Treats production insurance payments as income so larger payments under CAIS
Production Insurance
 Minimizes income losses caused by natural hazards, disease and insect infestations
 Reduces the need for ad hoc crop loss payments
 Leads to higher and consistent levels of protection and quicker payments
 Provincial agencies act as the insurer, but the cost is shared between federal/provincial governments and the
producers
 Participation in program is voluntary, however once a commodity is insured all its production must be
 Keeps premiums down by avoiding insurance of only the most risky production
 Basis of protection is the production guarantee
 Based on either an areas or a producer’s normal/expected yield
 For livestock/perennial plants the protection is based on the value of the asset
 Requires periodic actuarial certification of provincial methodologies uses to establish protection levels
 Must buy insurance before a commodity is planted or damage is possible
 Coverage is not 100%, so that the producer is responsible for the first loss (through deductible)
 Premiums are calculated on a provincial basis for each crop with larger provinces calculating premium rates
for smaller areas of homogenous risk
 Once crop damage is noticed it must be reported immediately so that a crop adjuster can investigate
 Losses are converted from a yield to monetary value using insurable prices
 Types of production insurance plans
 Individual yield program: Allows an individual to be indemnified when total production of a crop is
less than total production guarantee
 Area-based/collective protection: All producers in area, irrespective of actual production, are
compensated when the harvested yield in the area is less than the area’s guarantee
 Not based on yields: Coverage level is based on the long-term loss level of the commodity
 Optional benefits
 Protection against loss of quality: Gross production is adjusted downwards to reflect the loss in
market value for lower quality production
 Unseeded acreage: If excessive moisture during planting prevents a producer from seeding a crop
 Reseeding: Compensate a producer for the cost of reseeding, if damages destroys a crop early
Emergency works benefit: Compensate a producer for portion of costs to mitigate further damage
 Spot-loss peril: Available for perils that cause damage that is readily visible (ex: hail)
 Protection is also available against losses to perennial plant which produce crops
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 Cost sharing arrangements
 Consistent cost-sharing arrangements across all provinces to counter volatility
 Federal government agreements
60% of total premiums costs for catastrophic losses
36% of total premiums costs for compressive production coverage
20% of total premiums costs for high cost production coverage
 Both levels of government are also responsible for all administrative costs
Roles and Responsibilities
 Government of Canada
 Approving provincial program proposals
 Contributing a portion of the total premium and administrative costs
 Developing national standards for maximum level of coverage
 Ensure consistency and equity of federal support across provinces
 Provide a reinsurance program to provinces
 Provincial government
 Paying a significant portion of premiums and administrative costs
 Designing and developing insurance plans
 Promoting and selling the Production Insurance Program
 Underwriting Production Insurance policies
 Determining premium rates and collecting the amount
 Adjusting and verifying crop losses
 Providing an appeal process for producers
 Bearing responsibility for deficits with via loans or reinsurance
 Canadian producers
 Participating in the Production Insurance Program by paying a portion of total costs
 Comply with insurance contract requirements
 Manage their crops in a normal manner
 Suggest program revisions to administrators
 Private insurance companies
 Currently not part of program
 Do offer spot-loss hail and fire insurance for crops, protection for greenhouse crops and livestock
mortality insurance
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Alberta Insurance Act, Premium Regulation
 At-fault claim
 A liability claim paid for a driver who is wholly or partially at fault
 A liability claim where payment is likely to be made for a driver who is wholly or partially at fault
 Does not include claims where the insured has repaid the insurer within 90 days
 Driver training certificate: Certificate evidencing the completion of an approved driver training course
 Driving experience
 Combined time a person had a valid license in or outside of Canada
 Does not include time with learner’s permit or time licence was suspended/cancelled
 If a person goes through driver training they start @ 2 years and stay there till they have 3 years exp.
 Highest rated driver: Person who has the highest percentage in the grid calculation
 Inexperienced driver: Driver with less than 8 years experience
 Occasional driver: Inexperienced driver not matched to a vehicle
 Relevant date: Date on which basic coverage comes into effect
 Relevant driver: Person who is matched to a vehicle
 Steps to determine grid premium
 Determine the relevant driver and any occasional driver on a vehicle
 Locate the relevant driver and any occasional driver at a grid step
 Convert grid step to dollar amount
Relevant and Occasional Drivers
 Same number of drivers as vehicles
 Each driver must be matched to a vehicle
 More vehicles than drivers
 Each driver must be matched to a vehicle
 For vehicles not matched with a driver, drivers that are already matched are put with another vehicle,
starting with the driver who has the lowest percentage
 More drivers than vehicles
 Highest rated drivers are matched with vehicles first
Inexperienced driver may not be matched unless they are the principle driver
 Remaining drivers are not matched to a vehicles unless they are inexperienced
Inexperienced drivers considered occasional here
 If the number of occasional drivers is equal to or less than the number of vehicles, each must be
matched with a vehicle
 If there are more occasional drivers than vehicles, each one is matched starting with the highestrated driver (No more than one occasional driver may be matched to a vehicle in this way)
Computation of Grid Premium
 Determine base premium for the driver
 Determine percentage by which to multiply base premium  P = A + (AXB)
 A = Percentage of the base premium at the grid step
 B = Percentage surcharge
 Grid premium for basic coverage is the premium for the relevant driver plus 25% for occasional driver
Base Premium Calculation
 Determine territory (Edm. Cal. or other) in which policyholder resides
 Determine the policyholder’s choice of coverage
 Territorial differential between Edmonton and Calgary must be the same
 Board must ensure that the based premium for the rest of Alberta is 20% less than for Calgary
 If there is an industrywide adjustment, there must be a change in the same year to base premium
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Government Insurers Study Note
Reasons for Government Participation in Insurance
 Filing insurance needs unmet by private insurance
 Residual market plants, offering insurance in markets unserved by private insures
 Government requirements for insurability are different
 Government has the financial capacity to subsidise losses; either through taxes (TRIA) or by charging
less than the actuarial rate & making it up through government funds (CROP)
 Federal Crime Insurance Program
Provide coverage for homeowners and small business in areas with high crime rates, where
insurance was not available at an affordable rate
With proper loss prevention methods, private insurers started offering better rates
 Crop/Flood insurance are only available & affordable only because of federal government
 Compulsory purchase of insurance
 Since some insurance products are mandatory stare legislature felt obliged to offer it to those who
had trouble purchasing it from private carriers
 State programs are not-for-profit, which makes insurance cheaper
 Worker Compensation: Often times a state-fund or private company in competition
 Auto Insurance: Assigned risk plans, reinsurance facilities and joint underwriting associations
 Convenience
 Government insurance programs can sometimes be set up quicker than private insurance
 Government may already offer services such as loss mitigation development and funding
 Greater efficiency
 Argument that certain government programs could offer services at a lower cost
 Cost savings may be overstated when factoring in other departments involved
 Social purposes
 May be the main reason for government insurance programs
 Certain services may be best offered under governmental system
Crop Insurance
 Risk Management Agency formed to subsidize the cost of insurance for farmers against crop losses
 Policies are sold and serviced by private insurers and the losses are reinsured by the Fed
 Private insurers have realized underwriting gains
 Federal government has realized underwriting losses
 RMA also subsidizes the premium paid by the farmers and reimburses the insurers for their admin costs
 Agricultural Risk Protection Act passed to increase the portion of premium paid by the government and
improved the coverage offered to farmers affected by many years of losses
 Farm groups felt the program did not provided adequate coverage
 Opponents of the program felt the subsidies encouraged overproduction
 Increased premium subsidies to encourage higher levels of coverage
Increased participation in the program at higher levels of coverage
 Catastrophic coverage is available to farmers at no premium charge, just an admin fee
 2005 reinsurance agreement were revised to lower repayment rates to insurers for admin/operating fees
 New proposal: To received farm program benefits a participant would need to purchase crop insurance
protection for at least 50% of expected market value
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Workers Compensation Insurance
 Evolved as a means by which employees injured on the job could be adequately compensated without suing
 Depending on the state WC is either offered by a state fund, private insurer or the two compete
 Federal workers compensation programs
 Federal Employee Compensation Act
Compensation benefits for non-military, federal employees for occupational injury or illness
Exclusive remedy for federal civilian employees + Designed as non-adversarial
Regulations generally bar dual benefits for same event and mandate the reduction in benefits
if there is another source of compensation
Purpose is to return people to work while containing the admin/litigation costs
 Longshore and Harbour Workers’ Compensation Act of 1927
Requires employers to provide WC for long shore, harbour, and other maritime workers who
are injured while working on or near navigable waters in the USA
Provided by employers by getting coverage from insurers or self-insuring
Act provides for the offset of compensation paid under any other WC law for same injury
 Black Lung Benefits Act
Wage-replacement and medical benefits to coal miner (+family) disabled by pneumoconiosis
Established because state WC programs rarely assisted victims of black lung disease
In cases where both state/federal benefits are received, the federal benefit is reduced
 State workers compensation programs
 Partnership with private insurance
WC insurance can be purchased from private insurers, through state funds or self-insurance
Partnership which since insurers provides benefit that are established by state law
 State funds
Issues of fear due to cost and mandatory nature of WC insurance were addressed by state
legislators by establishing funds to provide a stable source of affordable coverage
Competitive state fund
o State where there is competition between the state and private insurers
o States are often “insurers of last resort” and replace an assigned risk plan or pool
Exclusive state funds
o Private insurers are not allowed to sell insurance as states hold the exclusive right
o Some jurisdictions allow self insurance
 Evaluation of workers compensation insurance
 Private insurers are largest providers of coverage
 Proponents of state funds argue that they offer more intensive levels of rehabilitation and other
services than private insurers
 Insurers who specialize in WC may offer same level of service
 State funds are designed to be self-supporting from their premium/investment revenue
 The fact that more states have not creased state funds suggests that private insurers provide
coverage in an efficient manner
Unemployment Insurance
 Federal government provide unemployment benefits who are unemployed through no fault of their own and
meet other eligibility requirements under state law  Temporary financial relief
 Benefit amounts and durations are determined by state law
 Premiums are paid in advance through employer taxes on wages
 Taxes must be experience rated, so that tax rates move with a firm’s layoffs + unemployment charges
 Workers generally file weekly claims and report and work, job offers/refusals during the week
 Benefits are subject to federal income taxes
 Suggestion that EI payments slightly prolong time unemployed  Need job search workshops
 Social adequacy: Not everyone collects (2/3) + program centers on prime-age full-time workers
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Catastrophe Funds
 Florida Hurricane Catastrophe Fund
 State trust fund to maintain insurance capacity
 Insurers that write covered policies are required to participate in programme subject to a retention
Policies that insure residential property in the state for wind peril (except Reinsurance &
excess/surplus)
 Contents and additional living expenses are covered; but not rental value, loss of use or bus. Interrupt
 FHCF pays claims from the balance in the fund, from reinsurance and from issuing bonds
 The fund also pays for all administrative costs
 Supports programs for hurricane preparedness, structural upgrades and infrastructure protection
 If FHCF did not provided coverage, private insurance would assume the exposure at higher cost
 Exempt from federal income taxes, with this amount going to loss mitigation
 California Earthquake Authority
 Created due to non-renewing or not writing policies because of solvency concerns after Northridge
 Receives no operating funds from state or contribution of premium taxes to state fund
 Policies not subject to California Insurance Guaranty Association protection
 Authorized to purchase reinsurance, enter capital market contact or issue bonds to pay claims
 Insurance industry’s capital exposure to catastrophic earthquake in California is minimal
 Policy is minimum coverage required under California law
 Coverage is dwelling limits equal to insured value on homeowners policy
 CEA earthquake policy rates are required to not be excessive, inadequate or unfairly discriminatory
 Program has allowed private insurers to continue to provide coverage to California homeowners
 Did not increase the level of earthquake insurance however
Pension Benefit Guaranty Corporation
 Program to insure certain retirement plan so employees still get benefit if the employer terminates the plan
 Defined benefits program
 Employee receives a fixed amount or sequence of payments upon retirement
 Protection though reduced investment risk, risk of outliving benefits or spending them too quickly
 Increase the predictability of future retirements which makes business planning easier
 Defined contribution program
 Employee receives whatever benefits are payable from a retirement fund to which they contributed
 Problematic since creates incentive to retire based on stock market performance
 PBGC takes over plans when the employer shows it lacks the resources to fund the plan
 PBGC may also act to terminate a plan to preserve the interests of the participants or itself
 Created to meet the social purpose of safeguarding the retirements of employees + not satisfied by insurers
 Benefits are paid from premiums charged to the plan providers, not always adequate though
Terrorism Insurance Act of 2002 & Extensions
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After 9/11 insurers/reinsurers attempted to exclude terrorism coverage or substantially increase prices
Without coverage: Delay of construction + Problems meeting legal/contractual issues tied to insurance
Fed could intervene in cases of terrorism, but lacks claims handling infrastructure
Terrorism Risk Insurance Act (TRIA)
 Insured P&C losses must exceed $5,000,000
 Event must be dangers to human life, property or infrastructure
 Damage must occur within USA or at premises of US mission + certain US flagged vessels
 Event must have been committed by people acting on behalf of foreign person/interest to coerce the
civilian population of the USA or to influence governmental policy
 Under TRIA companies writing P&C insurance are required to offer coverage for terrorism on the same terms
and conditions as for other perils
 Described as insurance, is similar to a government indemnity program, since insurers don’t pay premiums
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 Government reinsures each insurance company subject to:
 Insurer paid more than its deductible
 Insurer retains 15% of the losses exceeding the deductible
 Modifications
 Trigger for federal reimbursement was increases to $100 million in 2007
 Definition of certified act was expanded to include domestic terrorism
 Program served a social purpose as the coverage was deemed uninsurable and TRIA needed to be passed to
avoid economic disruptions
 Dispute on whether the private insurance market would be equipped to provide terrorism coverage
 Possibility of financing of terrorism coverage with catastrophe bonds also low, since market is too small
 Concerns + criticisms
 Amount of time required to certify an event and distribute payments
 Concern about time lag between payment of claims and reimbursements
 Does not cover personal lines
 Possible lack of public acceptance since a low percentage of policyholders are covered
Landmark Legal Insurance Cases in Canada
Whiten v. Pilot Insurance Co.
 Case where house burned down and insurer cut off rent without notice and refused to make any further
payments, alleging that the family had deliberately set the house on fire.
 Case appealed where it was decided that the punitive damages, though high, was within rational limits due to
the insurer’s reprehensible conduct
 Since denial of claim was designed to obtain an unfair settlement
 In the case, the insurer did not just have a contractual obligation to pay the claim, but also had the obligation
to deal with the policyholder in good faith
 Review of punitive damages in common law jurisdictions
 Objective of punitive damages are punishment, deterrence and denunciation
 Should be used in exceptional cases and with restraint (Rational award would be lowest possible)
 Use of punitive damages where compensatory damages only would amount to nothing more than a
licence fee to earn greater profits through disregard for the law and rights of others
 Juries can and should receive more guidance and help from judges
 Punitive damages can be modified by an appellant court if the award exceeds rational limits
 Requirements for actionable wrong
 Vorvis v. ICBC: Punitive damages are recoverable if the defendant’s conduct is an actionable wrong
 Breach of the duty of good faith is independent and in addition to the breach of a contractual duty to
pay the loss. It is an “actionable wrong” and does not require an independent tort.
 Adequacy of jury charge
 Punitive damages should be the exception rather than the rule
For malicious, arbitrary or highly reprehensible misconduct
 Should be assed in a manner reasonably proportionate to harm caused
 Purpose is not to compensate plaintiff
 Should only be awarded when compensatory damages are not enough to punish/deter defendant
 Factors for judicial review of punitive damages Proportionality
 Proportionate to the blameworthiness of the defendant’s conduct
 Proportional to the degree of vulnerability of the plaintiff
 Proportionate to the harm or potential harm directed at the plaintiff
 Proportionate to the need for deterrence
 Proportionate, even after taking into account other penalties, both civil and criminal
 Proportionate to the advantage wrongfully gained by a defendant from the misconduct
 Due to this case, the benchmark for punitive damages in Canada has been set higher
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Submission by CIA on Future of Health Care in Canada
 Medicare was intended to be a plan of insurance
 Hospital Insurance and Diagnostic Services and Medical Care Act
 Ensure that every Canadian has access to necessary medical care regardless of ability to pay
 Ensure that no Canadian suffers undue financial hardship due to medical bills
 Coverage should focus on medically necessary services
 Legislation does not rule out the private sector
 Failure to view Medicare as insurance and view that there should be no direct costs is a problem
 Principles of Canadian Health Act
 Universality
 Comprehensiveness
 Accessibility
Originally meant people should get care regardless of ability to pay
Now seen as also requirement timely access
Belief that is should also mean that new technologies/treatments are available to patients
 Portability
 Public administration
 Medicare should have appropriate incentives for providers and users to act in economically responsible ways
 Many see that only the Federal Government can change the system
Medicare as a Plan of Insurance
 Insurance Principles
 Medicare requires actuarial analysis for design/financing/claims just like other insurance plans
 Absence of deductibles + co-insurance and availability of certain coverage causes costs/utilization to
increase
 RAND study showed that free health care did not improve benefits
 Problem with Medicare is lack of accountability/cost-control incentives rather than of lack of funding
 Need for a risk management system:
Arrangement that involves risk identification/assessment/control/financing
 Canada is only industrialized country in world prohibits user charges
 Sustaining a Systematic Approach
 Quantify and understand the financial and service delivery interactions in the system before making
financial and human resources allocations
 Require a comprehensive and integrated model that defines and quantifies the interrelationships
 Apply similar analysis to the introduction of new drugs/procedures/instruments
 Data Requirements
 First step to objective management of health care is access to extensive/high-quality data
 Need a clear definition of claims + data for their proper analysis
 Without appropriate data it is difficult to do cost-benefit analysis or long-term predictions
 Periodic Actuarial Reviews
 Decide what Medicare should cover
 Need periodic actuarial reviews to assess the long-term sustainability + future costs of program
 Intergenerational Equity
 Problem is not aging population, but decreasing ratio of


Expected to diminish to 2.5 within 25 years
Need for alternative funding mechanisms, or the tax burden on the workforce won’t be sustainable
Recommendation to move away from a pure pay-as-you-go system to one with partial funding of
future health care costs
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 Complementary Roles of the Private & Public Sectors
 Private sector was never expected to be excluded from healthcare
30% of healthcare costs in Canada are privately funded
Doctors are private entrepreneurs working on a fee-for-service basis
Hospitals are generally private not-for-profit corporations
 Only 45% of total healthcare spending goes towards hospital care + physicians
 A growing portion of healthcare services involve non-emergency treatment & prevention
 Decision about what to cover should include an evaluation of medical efficacy
Any procedure whose cost is less than the actuarial valuation of the benefit should be
covered by the publicly financed system
Challenges to Fiscal Sustainability
Requirements for fiscal sustainability
 Predictable funding
 Cost control
 Providing timely access to high-quality medical care
Funding
 Demographic issues & aging are not the main problems with Medicare, they do exasperate them though
 Key contributors to problem
 Increased drug utilization
 Development of new drugs + treatments
 Improved technology and procedures
 Rising expectations on the part of Canadians
 Schools of thought regarding funding
 Operating the healthcare system will save enough money that no new sources of funding are needed
 It will be difficult to implement changes to enhance efficiency due to attitudes and the behaviour of
those with vested interests in the healthcare system
 Need to see if demographics have an impact on the equitable distribution of care by region
Cost Drivers
 Need to distinguish between factors that are beyond the control of the system + those than can be controlled
 Beyond control: Aging, price inflation and new technologies/drugs
 Controllable: Level of care and quality expectations, management performance/tools
 Not all cost drivers are independent, many are highly correlated (ex: age + drug cost)
 Aging
 On its own, aging is not a significant problem
 No meaningful link between the aging of a population and the rate of increase in healthcare costs
 Relationship between age and healthcare costs is the result of more people dying at older ages
 Suggestion that more attention should be giving to palliative care
Advance directive: Document granting power of attorney over healthcare and providing
guidance into a patient’s wishes
o Possibility of less expensive care with no extraordinary measures
Very sensitive subject, since placing a value on quality of life
30-50% of total lifetime health care costs occur in the last six months
 Price Inflation
 Other than the prices of drugs most other health care costs are wage-related
 Need to investigate alternative remuneration arrangements (e.g. Salary vs. Fee-for-service)
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 New Technologies, Diagnostic Procedures and Drugs
 Cost impact of new technologies/procedures/therapies is difficult to predict and can only be
controlled by restricting supply
 Rarely submitted to rigorous cost-benefit evaluation
 In the 90’s only 3 new drugs were significant
 3 options for reducing the cost of prescriptions
National drug formulary
o National buying agency with the power to obtain drugs at a low price
Requiring the use of the lowest-cost therapeutically effective drug
Maintaining the current prohibition on the advertising of prescription drugs
 Options for a drug program under Medicare
Catastrophic coverage: Only cover drugs after an individual out-of-pocket amount
Provision for mandatory drug coverage
Public insurance pools
List of eligible drugs, based on cost-benefit analysis, selected by National formulary
 Level of Care and Quality Expectations
 More procedures target quality of life
 Acute beds filled with long-term patients, due to lack of facilities
 Measuring quality should emerge as a high priority in 21st century healthcare
 Level of Management Performance
 It can be show using econometrics, that certain hospitals are more efficient than others
 Need to restructure hospitals to improve efficiency
 Lack of Availability of Modern Management Tools
 Due to speed of innovation difficult to determine their relative value
 Cost-benefit analysis often done my manufactures
 Lack of data to evaluate financial impact of decisions
 Change unlikely to happen until political responsibility is separate from operational management
Flood Insurance and Hurricane Katrina (CPCU)
 Flood insurance is not included in standard homeowners or business owners policies
 NFIP was established in 1968 to provide flood insurance and stronger flood controls
 Financially self-supporting
 Cost-effective flood risk mitigation
 Flexible in evolving to meet changing requirements
Overview of the National Flood Insurance Program
 Flood are more common than other natural disasters
 Standard property polices from commercial insurers generally do not include coverage for it
 Flood coverage can be added to a property form, but generally only in low risk areas
 All-perils policy or Difference in Conditions policy
 Often separate deductible/limit
 Areas with a high risk, will have a high deductible + low limit
Development and History of the NFIP
 Flood Control Act of 1936
 Funding of flood controls by Federal government
 Southeast Hurricane Disaster Relief Act
 Provide catastrophe relief for 1965 hurricane
 Authorization of a feasibility study on a national flood insurance program
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 Task force on Federal Flood Controls
 Improve knowledge about flood hazards
 Coordinate and plan new developments in floodplain management
 Move towards a practical national program
 Enhance the federal flood policy by establishing sound risks mitigations programs for floods
 National Flood Insurance Act of 1968
 Reduce future flood damage through community flood plain management ordinances and provide
protection for potential losses though an insurance mechanism paid for by premiums
 Communities must adopt and enforce floodplain management regulations that meet or exceed the
criteria in the act to qualify
 Flood Disaster Protection Act
 Mandated participations in the NFIP for many properties
 Properties located in identified areas needed flood insurance to get a federally regulated mortgage
 National Flood Insurance Reform Act
 Stronger mandatory flood insurance requirements to increase compliance
 Increased coverage limits
 Provided flood mitigation grants to communities to reduce future flood damage
 Required FEMA to reassess flood hazard maps every 5 years
Goals and Components of the NFIP
 Provide flood insurance for property owners
 Federal government assumes liability and establishes rates and limits
 Flood is defined as an inundation of two or more acres/properties from
Overflow of inland or tidal water
Unusual and rapid accumulation or runoff of surface waters
Mudflow
Collapse or subsidence of land along a shore due to erosion
 Under NFIP’s Write Your Own Program private insurers sell policies and adjust claims
 Government pays a fee for this service and is responsible for underwriting losses
 Maximum policy limits
Homeowners: Building limit = 250k + Content limit = 100k
Renter/Condo: Content limit = 100k
Non-residential: Building limit = 500k + Content limit = 500k
 Policy takes effect 30 days after purchase
 Policy includes a 1000$ reimbursement for measures to mitigate flood damage
 Coverage not offered in designated ecological zones
 Reduce the costs of disaster relief
 Indentify and implement controls to minimize damage
 Floodplain ordinances, requirements for zoning/building
 Reduce flood damage through flood plain management
 FEMA identifies flood hazard areas throughout the USA on maps
 Zone A: Usually near a lake, river, stream or other body of water
 Zone B: Beachfront properties
 Other zones can often by insurance through private insurers
Historical Performance f the NFIP
 Previously Financially Self-Supporting
 Income collected in premiums covered the amounts paid in claims and operating expenses
 In years with high losses, the NFIP can borrow from the Treasury and repay with interest
 Mitigation
 Goal of NFIP is to minimize damage through floodplain management and building standards
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
Multi hazard Mitigation Council of the NIBS study
Every dollar spent on mitigation saves an average of $4 in future losses
FEMA mitigation grants are cost effective and lead to non-federally funded mitigation
Each dollar spent allows savings in post-disaster relief costs and increases in federal taxes
Mitigation is cost-effect and warrants further federal funding
Mitigation is most effective when it is carried out in a community wide and long-term basis
 Disasters and Democracy  Analysis
NFIP flood mitigation program discourages state/local/individual mitigation responsibility
Encourages the belief, that when a natural disaster strikes, the Fed will provide relief
 Evolved to meet Changing Requirements
 Modification of the program structure and financing over time
 Institution of mandatory purchase of flood insurance
 Revising and improving the nation’s flood maps
Hurricane Katrina and the NFIP
 Damage Caused by Katrina
 Flooding due to 3 causes
High amount of rainfall
Storm Surge
Breached levees
 Losses from Katrina are likely to exceed $125 billion with 40-60 billion for private insurers
 Claims from Katrina & Rita are 11 times the annual premiums collected
 Financial Problems with the NFIP
 Shortfall of Premiums
Subsidized Insurance Rates
o Designed to encourage participation in program
o Mainly for older properties in high-risk areas
Basis in Average Annual Losses, not in Potential Catastrophic Losses
o Not enough premiums to have a surplus for a catastrophic event
Repetitive Loss Properties
o Two or more losses > $1000 in past 10 years
o Severe repetitive: 4+ claims or 2-3 losses greater than insured value of property
o Insurance payment encourage rebuilding in same location
o Flood Reform Act of 2004
 Financial assistance to mitigate risk (elevation, relocation)
 If refuse to take actions, rates are raised and not subsidized
 Lack of Participation
Failure to Buy or Renew NFIP policies
o Regulated lenders have done a weak job of enforcing
o Properties without mortgage not covered
o Unregulated lenders to not require it
Not Enough Coverage
o Coverage only up to remaining amount on mortgage
o Highest limits not enough to cover all damage
Failure to Recognize Risk
o Areas protected by levees were not required to purchase the NFIP
 Operational Problems with the NFIP
 Claims Processing
Problem exposed by Katrina is processing of a large number of claims
One streamlining measure is to identify which properties with losses above policies limits and
immediately pay the limits
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

Encouragement of Development in High-Risk Areas
Rate in these areas are subsidized
Paying claims for recurring damages provides minimal incentive to reduce risk
Failure to require flood issuance for structures behind levees
Questioning if 100-year flood plain criteria is stringent enough
Flood Plain Management not Robust Enough
Flood maps are out of date + often hand drawn
Modernization plan
o Update existing flood maps
o Digitize the maps for easier updating and access via the internet
Lawsuits from Katrina
 Mississippi Attorney General sues insurance companies
 Seeking to declare void and unenforceable certain provisions regarding water damage
Argument that they are contrary to public policy
 Insurers argue that they have specifically and purposefully excluded damage caused by flooding
 Senator Trent Lott of Mississippi sues State Farm
 At issue is the controversy of wind-caused versus water-caused damage and whether wind-driven
water is the same as flooding
 Early consequence of litigation is that only State Farm will offer wind damage coverage in Mississippi\
National Catastrophe Plan
 Objectives
 Ensuring the affordability/availability of insurance against catastrophic risks
 Spread catastrophic risk broadly among individuals/insurers/reinsurers/governments
 Reward mitigation of hazards
 First Layer of Protection: Private Insurance Industry
 Proposed protection is an all-perils coverage provided by insurers with actuarially sound pricing
Policy would cover all natural disasters
 Private insurers would not provide flood coverage separately
 Existing NFIP would be converted into a federal reinsurance program, providing 1st dollar coverage
 NCP calls for meaningful discounts and federal tax credits for effective mitigation measures
 Second Layer of Protection: State & Regional Catastrophe Fund
 Every state would be required to create a catastrophe fund or participate in a regional one
 Would operate independently and be responsible for creating and managing the insurance capacity
Up to costs expected for a 1-in-50 year catastrophe
 Structure
Select financing mechanism
Establish its own operating structure
Choose an appropriate definition for qualifying catastrophes
Ensure than aggregate premiums are actuarially sound
Determine amount of retention between private insurers and fund
Determine participation of surplus line companies + residual market
 Third Layer of Protection: Federally Funded Reinsurance Program
 Create the National Catastrophe Insurance Commission
 Serves as a channel between sate funds and the US Treasury
 Commissions would ensure that states have the required building codes, land use, disaster response
and mitigation programs
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 Requirements for all states
 Establish building codes that properly reflect catastrophic exposure
 Develop high hazard land use plans
 Maintain a rigorous anti-fraud program
 Let prospective home buyers know about the disaster resistance of the structure
 NCP is designed as an actuarially sound plan, spreading the catastrophic risk among many groups
 Business owners are not included in plan, but could benefit from a similar one
Other Solutions
 Revamping the National Flood Insurance Program
 Significant reduction in subsidies to reduce losses and return actuarial soundness
Also need to deal with repetitive loss properties
 Increase property owner mandatory participation in the program
Aggressive education and outreach programs
Stronger minimum training requirements for agent who sell flood insurance
 Develop accurate digital maps
 Provide effective oversight of flood insurance operations
 Hurricane Katrina and Rita Flood Insurance Buy-In Act
 Bill allows for retroactive purchase of NFIP insurance for properties not located in recognized flood
plains, but who had insurance for wind damage when Katrina/Rita struck
 Policy limit would be the lesser of the NFIP maximum or the windstorm limit
 Reasons for lack of support
Seen as a direct bailout of owners and lenders
Does not provide differentiating treatment based on occupancy/use or income
 Consumer Mortgage Coalition proposal similar, but that would cover all properties in a flood zone
 Both proposals are seen as setting a precedent for “changing the NFIP in a conduit for federal grants
... that will be cited when lesser disasters strike”
Might make it difficult/impossible for plan to be financially self-supporting in the future
 Policyholder Disaster Protection Act
 Allow P&C insurers to created disaster protection funds for future catastrophes
 Contributions to a tax-exempt fund would be tax deductible
 Catastrophe Savings Account Act
 Create a homeowners tax-free savings account for mitigating of losses from catastrophes
Conclusion
 Many problems seen in NFIP
 Not enough participation in the program
 Flood mitigation controls failed
 NFIP is now essentially bankrupt
 P&C industry is suffering from bad publicity due to lawsuits
 Need seen for more individual & community responsibility
 Need to better under risk from flooding and develop risk mitigation measures
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Facility Association (Dutil)
 Unincorporated non-profit organization whose role is to administer the involuntary residual market of auto
insurance on behalf of the private auto insurers in Canada
 All provinces; except BC, Manitoba & Saskatchewan (Govt. Insurer) + Quebec (PRR)
 Facility Association Residual Market
 Residual market for drivers who would have trouble getting auto insurance otherwise
 In each jurisdiction, the Facility contract with Servicing Carriers to issue & administer policies + claims
 All these policies are subject to the rates, rules and classification of the Facility Association
Require regulatory approval
 Agents/brokers who are unable to find auto insurance for their clients will contact a Servicing Carrier
 Carriers can only underwrite a FARM policy if it meets the minimum coverage for the jurisdiction
 Particular risk must be a “Residual Market Risk”
Any motor vehicle that is not a PPV
Any PPV which an insurer was allowed by law to decline coverage or non-renew
 Financial results of the vehicles in the FARM are pooled among all auto insurance (Participation ratio)
 Risk Sharing Pools
 Allows auto insurers to transfer some of their higher risk auto policies to an industry-wide pool
 Pools act as an industry reinsurance mechanism that is largely invisible to consumers/agents
 Member companies underwrite individual policies according to their own rates and rules
 Then have the option of keeping the business or transferring it based on min requirements
 Financial results of the vehicles in the pool are shared among all auto insurance (Participation ratio)
 Uninsured Automobile Funds
 Administers funds for compensation to people who were the victim of damage from an uninsured or
underinsured driver
 Atlantic provinces
 Facility Association monitors the investigation, defence and settlement of these claims
 Board of Directors and Membership Rights
 Considering and approving suggested rate changes and rate filings
 Authorizing expenses
 Establishing and monitoring standards for Servicing Carriers + pool members
 Appointing committees and sub-committees
 Participation Ratios and Sharing (5 classes of business)
 Private passenger non-fleet non-pool auto business
 All auto business not included in above or transferred to a risk sharing pool
 Business transferred to a risk sharing pool other than a pool in Alberta, New Brunswick or Nova Scotia
and other than a catastrophic claim fund established for Ontario accident benefits
 Business transferred to a risk sharing pool in Alberta, New Brunswick or Nova Scotia
 All uninsured/unidentified motorist claims + catastrophic claim fund established for Ontario accident
benefits
Risk Sharing Pools
 Pool to which auto insurers can transfer their higher risk drivers
 Facility Association administers the pools and dictates the risk transfer mechanism rules
 Pools are designed to promote stability in the market place, by allowing companies to accept risk for which
their pricing is not totally adequate
 Companies share in the financial results of a particular pool based on their total voluntary private passenger,
non-fleet, third part liability direct earned exposures that is not ceded to a risk sharing pool
 In Ontario the number also depends on the number of risks cede to pool
 Even if a company does not transfer any risks to the pool it is allocated a share of the financial results
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 Minimum requirements for pool transfer eligibility
 Each pool only accepts PPV
 Residual market risk should be insured through the FARM  So not eligible for pool
 Risk transferred should carry at least the minimum third party liability limit
 Company must follow the appropriate classification and rating procedures
 Premiums charged for the insurance transferable to the pool must be the approved amount for risk
 Member company who performs the underwriting decides the coverage and limits for risk
 Minimum deductible and maximum limits apply though
 If higher limit or lower deductible the excess coverage must be carried by the insurer
 Transfer premium should be the premium actually charged
 Insurer will then receive a portion of the transferred premium as an expense allowance for
acquisition, operation and loss adjustment costs, but not for premium tax and professional fees
 Transfer limits are a percentage of the voluntary private passenger non-fleet TPL amount from the past year
 Ontario Risk Sharing Pool
 Pool only covers 85% of risks that are transferred
 To ensure that pool does not serve as a marketing tool, the maximum transfer is 5% of total
 Alberta Risk Sharing Pool
 Grip Pool
No limit on amount of risks that are transferable, since law requires insurance companies to
accept risks for which they do not control price
 Non-Grid Pool
Max amount transferable is 4% of the voluntary PPV exposures not transferred to grid pool
Purpose is to help cope with the “take-all-comers” environment in Alberta
 New Brunswick Risk Sharing Pool
 Transfer PPV insurance exposures for which at least one household member is entitle to receive the
“recently licensed drivers with good driving records” discount
 Max amount transferable is 8% of PPV exposures
 Nova Scotia Risk Sharing Pool
 Designed to accommodate inexperienced drivers with good driving experience
 Can only transfer risks for which at least one household member is a driver with less than 6 years
driving experience and who did not have any accidents/convictions in the period
 No limit on amount of risks transferable
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Risk Sharing Plan - Procedures Manual
Chargeable Accident  Any accident
 For which the insured, as operator or owner of an auto, is to any degree responsible for damage to a 3rd party
 Where the insured as operator of an auto, or anyone as operator of the insured auto, is the author, in whole
or in part, of damage to the auto, to their property or to their person
Market Availability Program
 Provisions established as an emergency measure to counter a temporary lack of auto insurance for a class of
risk
Risks Eligible for Transfer
Maximum Policy Period
 All risks covered for a twelve month or less policy term can be transferred
Rating  Eligibility for transfer
 Premiums transferable for the risk, must have been determined according to insurer’s rate manual
 Insurer must keep a large portion of the risk in the category on its own accounts + show it
 Must be able to show that premium for category is not substantially less than industry average for category
Mandatory Coverage
 Risk transferred must have at least the minimum third party liability limits
 Except seasonal vehicles and vehicles in storage
Indivisibility of Risks on Transfer
 Insurer cannot retain any transferable coverages of the risk transferred
Limitation as to the Number of Risks
 Unless approved, no insurer can transfer more than 10% of its premium volume
Limitation-Exclusion
 Premiums for risk insured under the Market Availability plan do not count towards 10%
Limitation Exceeded
 Committee may withdraw an insurer’s right to transfer risks to plan and require that the insurer immediately
withdraw from the plan a number of risks to bring the volume of risks below the maximum
Coverages Eligible for Transfer
 Subject to terms of the regulation, any coverage is eligible transfer provided the coverage is in a form
approved, while it applies with Canada, the USA or upon a vessel/aircraft serving either country
Limitation – Private Passenger Risks
 For PPV all coverages are eligible for transfer, but 3rd party liability is limited to $2,000,000
Limitation – Commercial Risks
 All coverage are eligible subject , to the following
 TPL limited to $2,000,000
 All perils or collision deductible, not less than $100
 Comprehensive or specified perils deductible, not less than $100
 Accident Benefits: Death/Dismemberment $10,000, Medical/Funeral $2,000
Excess Coverage in Policies
 Insurers are allowed to issue policies with coverages exceeding those eligible for transfer
Supplementary Coverage – Quebec
 If a broader coverage or higher limit than the regulations allow is required by statute it may be transferred on
specific approval of the committee
Supplementary Coverage – Outside Quebec
 If a broader coverage or higher limit than the regulations allow is required by statute it may be transferred on
specific approval of the committee + Executive Committee agreed to principle
Change to the Statutory Minimum – Quebec
 A change in statutory minimum coverage in Quebec implies a modification in coverage transferable
 The change is deemed incurable in all existing auto policies, including risks already transferred
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Change to the Statutory Minimum – Outside Quebec
 If another province or US state changes their statutory minimum, risks in the plan will be covered
Premiums, Additional Charges and Surcharges
Premium
 Premium transferred for a risk, shall not be less than premium charged for that coverage or rate manual
Cost of Financing Excluded
 Premium payable by insured is net of interest or admin charges due to payment method
Minimum Earned Premium
 The minimum premium transferred to the plan will be $25, except if insured cancels
Percentage
 Surcharges and additional charges need to be expressed as a percentage of the premium
Percentage Added
 In the event of a surcharge, the percentages will be totalled and applied to the premium
Maximum
 Total of surcharges and additional charges cannot exceed 200%
Prior losses/Convections known within 60 days
 Premium for a risk transferable shall be adjusted retroactively if a loss/conviction would change the premium
Prior losses/Convections known after 60 days
 Premium for a risk transferred does not need to be adjusted
 If another loss/conviction occurs during the policy period and the risk is transferred again the premium will
be adjusted
Accidents/Convictions during Policy Period
 Accident/convictions will not affect the premium for that policy period
 Premium must be adjusted if risk is transferred for a further policy period
Mid-Term Transfers and Withdrawals
Massive Transfer
 No massive mid-term transfer of risk
Mid-term Transfer
 A risk may be transferred midterm if:
 If a request is submitted within 60 days for new business
 If a modification to the risk or a claim occurs and the transfer follows the insurer’s practices
 If it can be demonstrated that the nature of the risk at the effective date of coverage would have
warranted a transfer
Premium
 Premium transferred shall be calculated pro-rata, except for seasonal risks
Mid-Term Withdrawal
 A risk may be withdrawn midterm, subject to minimum premium requirement
Premium Refund
 Premium refunded shall be calculated pro-rata, except for seasonal risks
Reimbursement of Claim and Expense Payments
 Insurer’s retain the full responsibility to settle/defend claims on transferred risk
 Plan may intervene and is entitled to the insurer’s full cooperation
Claim Payments
 Subject to terms, insurers are entitled to a full refund for paid claims
Expenses
 Full reimbursements of claims expenses except for claims adjusters
 Adjuster fees are repaid for original appraisal in BI under TPL or if fraud is suspected
Claim Adjuster Expenses
 Full reimbursement of external claims adjustment and for the cost of using their own adjusters
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Submission Delay
 Insurer shall submit to plan initial notice of loss within 12 months
Special Reports
 Special report to Committee for all losses >$50,000 or > $100,000 for vehicle damage
Obligations of the Parties
Premium Payments
 Insurer shall pay to the plan the full premium due under regulations
Premium Due Date
 Insurer shall pay the premium to the plan on the day the request for the transfer is submitted
Premium Allowance
 Allowance remitted to insurers by the plan is 25% of premiums
 20% for taxis, public busses and interurban transport vehicles
Sharing
Object of Sharing
 Participants shall share in premiums paid and in claims and settlement expenses reimbursed to insurers
Separate Sharing
 Sharing is done separately for private passenger and commercial risks
Private Passenger Risk
 Sharing for PPV is based on the PPV premium volume of the participant
Commercial Risks
 Sharing for commercial auto is based on the commercial auto premium volume of the participant
Assessment - Private Passenger Risk
 30% is apportioned based on PPV premium volume
 70% is apportioned based on PPV risks transferred
Assessment -Commercial Risks
 30% is apportioned based on commercial auto premium volume
 70% is apportioned based on commercial auto risks transferred
General Description of the Plan
Plan Objective
 Assist Quebec auto insurers to meet their obligation to provided auto insurance (TPL) to all that request it
Transfer of Risk
 Insurers which has underwritten a risk it considers undesirable can transfer the risk to the Plan
Transfer and allowance percentages
 100% of the premium for the risk is transferred
 An allowance is given to the insurer for underwriting and claims handling expenses
Responsibility of the Insurer
 Insurer who has transferred a risk to the plan is responsible to treat it as it would if it were not transferred
Sharing among Insurers
 Premiums and claims transferred to the Plan are shared among insurers based on total premium volume
 PPV & commercial auto risks are handled separately
 Assessment is based on both premium volume for the year and the by the use of the Plan
Reserves for Outstanding Claims
 Plan reimburses insurers for amount actually paid on claim, however the plan must be kept up-to-date on
reserve amounts
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Residential Insurance Availability (IBC)
 IBC information center offers assistance to consumers having difficulty finding residential insurance
 Receipt of the call at the information centre
 Before obtaining help from the center, the consumer must have already tried to obtain insurance
 First call, recommendation will be for consumer to call several brokers and direct writers
 If this fails, the consumer will receive the “Residential Insurance Availability” form to complete
 If possible, the form must be accompanied by the consumer’s insurance policy + notice of
cancellation or non-renewal
 File review
 Receipt of document failure to obtain insurance
 Confirm or obtain additional information
 Discuss attempt made or arrangements which may help to get insurance
 Risk assessment
 Non-Renewal or Termination of Existing Policy
Insurer designed by the agent is the last to have insured the risk
 Underwriting of a New Policy
Consumer has other Insurance
o If an insurer already covers the bulk of the insured’s property, it will be assigned
o If several other insurers insure other property, assign in this order
 Insurer of another residence owned by the consumer
 Consumer’s auto insurer
 Consumer’s any other insurer
Consumer has no other insurance
o On a rotating basis, each insurer is designed by IBC based on market share in Quebec
 Insurer may modify the policy or impose certain conditions before accepting the risk
 Grounds for refusal
 Arrangements that may be made to make the risk insurable
 Fire coverage restrictions, cannot result in the building being insured for less than mortgage value
 Physical Risk
If reason for declining risk is physical condition of building, insurer may request changes
Terms and condition must be forwarded in writing, with enough time given to comply
Modifications can also be made to coverages, amount of insurance or deductibles
Once consumer has complied with requirements, the insurer must accept risk
 Frequency of Claims
If reasons for refusal are based on frequency, the insurer can modify the policy or rating
 Non-Payment of Premiums
Insurer must accept policy and may require premium payment in cash
 Vacant Residence
Insurer shall grant a vacancy permit for a minimum period of 3 months
 Animals
Dogs: Risky breeds can be examined for risky behaviour & aggression
Reptiles: Insurer may require that client not own any prohibited reptiles
Insurer may excluded liability coverage for damage caused by animal or add a deductible
 False Declarations, Fraud and Criminal Acts
If refusal of insurance stems from this, IBC will not intervene + no need to insure risk
 Obligations of Insurer
 Insurers assigned risks must cover them for 1 year + termination only if risk increased significantly
Agent handling the file must be notified of termination
 If insurer refuses to accept, centre agent will contact them to remind them of agreement terms
 If still refuse, supervisor will be contacted + then CEO contacted by general manager
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Supporting Evidence on ICBC’s Proposed Increase of Basic
Insurance Rates
 In 2005, ICBC made a significant adjustment to ultimate claims cost estimates for current and prior accident
related largely to bodily injury claims costs
 Reduction in ICVC’s retained earnings + capital surplus available
 Lowered basic insurance MCT level
 Increase in actuarial rate indications
 2 factors are affecting the bodily injury claims costs: Change in the mix of claims + Increase in claim size
 Change in the mix of claims
 Decrease in the frequency of small claims
 Slight increase in the frequency of larger claims
 Total claim frequency is down though
 Loss development factors increased over time due to the change in mix of claims
 Increase in size of payments
 Costs trends in major areas are changing from historical values
General damages
Past + future lost wages
Legal costs
 Analysis is done on a cost per policy basis to normalize the payments for growth in policies
 General damages comprise the majority of BI claims so the small increase here increased expenses
 Significant cost increase in future wage losses
 What is driving the increasing bodily injury claims costs
 Number of factors that lead to the increases and that also work together
Quantum of court awards
Types of injury claims presented
Vehicle design
Personal injury litigation environment
 Analysis also needed of internal ICBC claims handling processes and data reporting
New methodologies to tract trends
Analysing claims files to better understand representation rates
Analysing claims files payments for reasonableness
Enhancing consistency in reporting among claims staff, finance staff and actuaries
Developing new data reports
Reviewing current claims processes
Developing mitigation strategies
Identify and prioritize business responses to mitigate BI claims costs
 Management Responses
 Look at BI claims themselves and to make changes to claims handling to mitigate cost increases
Refining claims segregation
o Will assist in the allocation of resources
Development of programs to deal with high risk litigated files
 Review the quality and type of data analysis and reporting + make updates
Review of actuarial methodologies
Testing and adopting actuarial methods to stratify bodily injury claims costs under and over
$40,000
Developing new data analysis tools and reports to assist in more in-depth analysis, and
developing actuarial and financial reports based on accident year to help with early
identification of changes in claims costs
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Motorvehicle Insurance in British Columbia – At the Crossroads
(KPMG)
 ICBC has been challenged to improve or maintain its products and service s while reducing it costs
 Public Monopoly
 ICBC established in 1973
Provide less expensive universal coverage
Elimination of private profits + economies of scale
Keep insurance jobs in BC and let claim reserve investments benefit BC
 Wooton Commission of 1960’s
Mandatory liability insurance
Limited no-fault accident benefits
Procedure for institution of a private insurer
 Dynamics of public insurance
Future premium increases would take on a political dimension
Social issues like fairness/prevention would take on more priority
 1976 Optional coverages unbundled from compulsory one
Left room for private insurers, but ICBC still dominates
 Reforms
 Elimination of discriminatory rating variables: age, sex, marital status
 Claim-Rated premium system which rewards claims free drivers
 Improvements to no-fault accident benefits
 Prevention
 Educational programs for youths
 Attitudinal and crash research
 Tough safety publicity
 Funding of enforcement campaigns and roadway improvements
Autoplan
 Statutory Insurance
 Policy spells out obligations, perils covered and types/limits of compensation/benefits available
 Specific terms of the insurance product are spelled out in the Government Acts and Regulations
 Mandatory coverage
 Autoplan
Accident benefits
Third party liability
 Policyholder must also purchase underinsured motorist coverage
 Other coverage options
 Higher amounts of third party liability
 Collision
 Comprehensive
Overall Conclusions
 Short term cost-reduction strategy
 Product Reform
 Reduce cost in the administration of claims & distribution of insurance
 Reduce payment of taxes to government
 Longer term attack on growth
 Programs to change behaviour + other forms of cost avoidance
 Road Safety
 Anti-fraud + Anti-theft
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Motor Vehicle Injury Compensation Systems
 Continuum of compensation is bounded by full tort (liability) to total no-fault (injury insurance)
 Due to misleading of the general public, certain terms will be renamed
 Liability insurance instead of total tort or fault based
 Injury insurance instead of no-fault
 Combined liability and injury insurance instead of threshold
Basic Types of Insurance Protection
 Liability insurance protects a party responsible for a crash from having to pay the loss up to a policy limit
 Injury insurance protects the injured party by covering the loss, no matter who is responsible
 Fault and no-fault
 Drivers are only partially held accountable for their actions in a no-fault system by premium increases
 In a no-fault system compensation can also be reduced for particularly bad actions
 Punishment for at-fault drivers by being denied liability-based compensation
 Inherent problem in differentiation between minor errors and highly irresponsible acts
 Liability Insurance – Basic Philosophy
 Tort philosophy is based on the fact that people need to compensate those they have wronged
Need to try and return person to condition before injury
 Combines the common law of tort with the indemnification protection of insurance
 Insurance held so that when someone causes an injury they will not have to pay the loss themselves
 Overtime government made this type of insurance mandatory
 Liability Compensation in Practice
 Tort process does not distinguish between different wrongdoers according to their degree of fault
 Weakens direct link between wrongdoing and punishment
Except if loss exceeds policy limits and wrongdoer is sued
Or if wrongdoer was in breach of insurance contract, and insurer subrogates against them
At-fault drivers will pay significantly higher premiums
 In cases of more than one at-fault driver liability is apportioned between them
 Process is inherently adversarial, since claims must be defended
Delayed compensation for past damages
o Compensation for future damages is paid upfront though
Significant legal transaction costs
 Tends to overcompensation people with temporary/minor injuries and undercompensated those
with permanent/severe injuries
Large non-economic loss awards for temporary soft-tissue injuries
Compensation for severe injuries are capped
 Provides highly individualized compensation to injured person, especially in severe and catastrophic
cases
 Tort process tends to stretch concept of fault, seeking someone with a deep pocket
 Injury Insurance – Basic Philosophy
 Based on social view that injured people should be assisted and compensated
 Largely as 1st party insurance mechanism, but ay also compensate pedestrians
 Attempts to restore a surviving person as nearly as possible to their condition before the accident
 In the case of death compensates the victims family
 Criticized since it does not directly punish wrongdoers + richer people get greater benefits
 At fault drivers are however punished by higher premiums
 Injury Compensation in Practice
 Less adversarial and provides a more certain outcome than liability insurance
 Compensation for economic losses paid quickly, while future economic losses are not paid until the
need to replace the losses actually occur
 Lower process and transaction costs
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
Tends to overcompensation people with temporary/minor injuries and undercompensated those
with permanent/severe injuries + those with higher income levels
 Provides less individualized compensation
 Combined Injury and Liability Insurance – Basic Philosophy
 No provinces have a pure liability system and only Manitoba and Quebec are pure injury insurance
 Certain jurisdictions allow the choice of plans
Problem when one policyholder had liability while one has injury insurance
Administrative difficulty in dealing with injured parties who did not make a choice
 Threshold systems
Most cases compensated on an injury basis without regard to fault
Allow people with a specific injury or a large claim to file a claim against the wrongdoer
 Advantages
Offers a compromise between injury/liability insurance
Transaction costs are reduced making system more affordable
Claims for minor non-economic losses are usually limited or eliminated
 Combined System in Practice
 Threshold conditions must be clearly defined
Often only to non-economic damages
 Threshold may be accompanied by a deductible on some tort damages to discourage exaggeration
Flat deductible: Applied uniformly to all claims
Franchise deductible: No longer applies when claims reach a 2nd larger amount
Diminishing deductible: Decreases as claims size increases
 Conclusions
 May be the end of pure liability in BC due to cost impacts from social inflation
Otherwise substantial premium increases
 Injury system
Tightly managed administrative process
Adequate protection while maintaining some responsibly for causing accidents
Shift the operating mission to focus on wellness
Potential to become impersonal and oppressive
Requires a credible independent dispute resolution process
 Combined system represents a compromise
Preserves access to the judicial system for more serious cases
Transfers resources from minor injuries to more serious ones
Product Variable – Coverages and Benefits
 Economic Losses
 Income Support
Wage Loss: Actual income/salary + lost opportunity
Fatality Compensation: For surviving dependants
 Care Costs
Medical Costs
Vehicle + home modifications
 Expenses
Replacement costs: Housekeeping + Dependant care
Funeral costs
 Non-Economic Losses
 Intangibles such as pain and suffering and lost opportunity
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Other Product Variables
 Payer Priority and Other Collateral Benefits
 Injured person may be able to get compensation from both insurer and “collateral” source
 If insurer pays first  Payment regardless of other coverages
Rules might have been established by collateral sources so insurer is sole payer
Insurer may need to be reimbursed for amounts from collateral sources
 If insurer pays second  Compensation only if no collateral benefits
Claimant may feel entitled to recovery
Limit the insurer’s ability to manage care/recovery
Makes it difficult to obtain complete data
 Net vs. Gross Wage Losses
 Injured person should receive after tax wages
 Wage loss benefits should be reduced by 10-20% to account for job holding expenses
 Liability systems compensate wage loss at 100% of gross earnings
Not grossed up to compensated taxes on investment income due to lump sum payment
 In BC, innocent parties get full compensation while guilty ones get 75% of wages (up to $300/week)
Benefits paid prior to claim are deducted from the award
 Structured Settlements
 Lump sum payment replacement by an annuity
 Payments are not income-taxable
 Structured settlements are voluntary, both the insurer and claimant must agree
May be encouraged by limiting future wage loss to a percentage of net wage loss
Lump sum recipient, may be penalized due to income tax on investment income
 Prevent the imprudent squandering of a large sum
 Level of Injury Benefits
 In a liability system the cap in compensation between at-fault + injured is greatest
 In a threshold system tort liability is restricted, but more generous injury benefits
Compensation for non-economic losses through liability system
 Pure injury compensation system, benefits between at-fault party and injured are similar
May also provide compensation for non-economic losses
 Wellness Model
 Tort liability process tends to discourage rehabilitation because of delayed resolution and to ensure a
higher settlement or award
 Some injury-based models also discourage rehabilitation as the focus more on entitlement and
indemnity than on rehabilitation/recovery
 Vehicle Based Insurance
 Only owners of vehicles choose optional benefits on vehicles
 Argues for a fairly high basic level of no-fault benefits
 Threshold under Combined Products
 Need to decided which coverages compensated by the tort system will continue to remain so
 Cost and Sustainability of the Product
 Injury compensation will need to be reasonably affordable and not have excessive future trend
 Need fair and equitable trade-off between cost and benefits
 Solicitor and Client Costs
 Significant element in the tort process (reduce net benefits)
 Indemnity vs. Entitlement
 If not appropriately designed no-fault benefits may be paid based on entitlement and not indemnity
 Interface with the Social Safety Net
 If benefits are not covered by insurance they may fall into a social safety net
 Trade-off between societal fairness and individual fairness
65
 Public vs. Private Delivery Mechanism
 In a competitive market pricing cross-subsidies (coverages/classes) cannot persist for a long time
 In Quebec, the government is the monopoly supplier of bodily injury, other coverages for insurers
Product and Service Evaluation Framework
 Role of Insurance
 Reduce risk by spreading out the consequences of losses
 Providing protection for individuals for specific losses
 Making profits for private insurers
 Essential Types of Protection
 Security provided against potential losses
 Restitution of actual losses through claim settlements
 Prevent and mitigation of losses to control costs and protect policyholders
 Basic Design Requirements
 Equitable and fair benefits
Benefits provided only for legitimate losses and claims
Serious injuries receive priority
Benefits are equitable and non-discriminatory
Fair level of benefits between classes of insured
Victims + wrongdoers are treated fairly but differently
 Affordable and sustainable coverage
Cost drivers are identified and addressed
Costs and cost trends are predictable, monitored and manageable
Priority for crash and injury prevention, rehabilitation and fraud prevention
Premium increases close to the general increase in cost of living
Major product changes attempt to reduce cost of insurance
 Adequate benefits
Recovery and economic needs of injured party are met to a socially acceptable level
Large percentage of premium dollars is returned to claimants as benefits
Benefit levels directly reflect the loss experiences
Benefit levels are affected by survivors/dependants
Coverages + benefits are adequate and comprehensive
Basic product minimized the burden of additional losses met by society
 Personal responsible
Individuals causing crashes/injury suffer some consequences
Design features discourage frivolous or fraudulent claims
Moral values are advanced to prevent abuses of the system
Options to the basic product should minimize social + economic costs
Customers are given the option to select additional coverage
 Promotion of wellness
Benefits emphasize recovery, rehabilitation and replacement of past/future income losses
Benefits adjudication process is administered in a fair manner
Process and product are designed to minimize antagonism and disputes
 Customer oriented service
High levels of service for policyholders + claimants
Accessibility to products/services/benefits is facilitated by product design
Individual rights and entitlements are coherent and comprehensible
Benefits are comprehensive in scope and flexible enough for individual needs
Benefits are provided in a certain, predictable and timely fashion
Adjudication, benefit delivery and dispute resolution is fast/efficient and fair
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Morneau Sobeco Handbook of Canadian Pension and Benefit Plans
Retirement Income Plans
 Government pensions
 Old Age Security (OAS)
Flat monthly pension for Canadians 65 or older
After a certain income threshold the money starts to be paid back to the OAS
 Guaranteed Income Supplement (GIS)
Flat monthly benefit, which is reduced by 1 dollar for every 2 dollars of other income
 Canada/Quebec Pension Plan (CPP/QPP)
Earnings-related plans that are financed through employee/employer contributions and the
investment income from them
Provides a pension equal to 25% of the worker’s average earnings, subject to a maximum
Problem with pay-as-you-go as contribution rate would be 14.2% of earnings by 2030
1998 amendments
o Contribution rate increased
o Year’s Basic Exemption no longer indexed
o Year’s Maximum Pensionable Earnings increased due to indexation
o Combined survivor/retirement & survivor/disability were lowered
o Establishment of the Canada Pension Plan Investment Board
Same sex partners can receive benefits after 2000
 Employer-sponsored retirement savings plans
 Individual retirement savings
Old Age Security
 Programs
 Old Age Security
 Guaranteed Income Supplement
 Allowance and Survivor’s Allowance
 Old Age Security Act
 Provided universal pensions as a right
 Since 1972, OAS & GIS benefits have been indexed to CPI, with quarterly adjustments
 The pension under OAS is paid in addition to CPP/QPP
 Payment start 1 month after application approval, retroactive 12 months for missed ones
 Qualifications for OAS benefits
 Before July 1st, 1977
40 years of Canadian residence after age 18; or
10 years of continuous Canadian residence after pension application date; or
If applicant did not have 10 full years between 55 & 65 in Canada, they may replace each
missing year with 3 years in Canada between 18 & 55
 After July 1st, 1977
Full pension is payable to those with 40 years of residence in Canada after 18
Proportionate pension for those with 10-40 years of residence & Canadian resident @ age 65
If not Canadian resident @ age 65 20 years of residency is required after 18
If person was older than 25 on July 1st, 1977 they get whichever version is most beneficial
 Portability of OAS Benefits
 Persons who spent portions of their working life in many countries can get benefits from each one
 If there is no reciprocal arrangement between counters pensioner is paid for 6 months after leaving
Canada and resumes if they return
 If the Pensioner was a Canadian resident for 20 years after 18, pension is not affected by departure
 Originally OAS pension was universal and paid all applicants regardless of wealth/income
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 Financing
 Financed on a pay-as-you-go basis from Government of Canada tax revenues
 Increasing % of GDP as population ages
 Taxation
 OAS pension is included in income of taxpayers + income tax
 Since 1996, OAS benefits are paid on a net basis, after taking into account expected tax clawback
Differences are settled upon the filling of a tax return
 Non-residents are subject to the claw back on their worldwide incomes
 Guaranteed Income Supplement
 GIS is available to all recipients of the OAS pension
 Supplement is reduce by 1$ for every 2$ of income
Income: CPP/QPP (except death benefits), private pensions, earnings and investments
 GIS payments are indexed quarterly to CPI
 Benefits from GIS are not taxable income
 Maximum amount of GIS is the same for single person or couple where one person does not get OAS
 Allowance and Survivor’s Allowance
 Must be between 60 & 64 and must have spent at least 10 years in Canada after age 18
If less than 20 years the person must be a Canadian resident at time of application
 Allowance is reduced by 3$ for every $4 of the couple’s income from sources other than OAS
At that point reduction is $1 for every $4 of income
 Allowance is payable to month of death or month before turning 65
 Allowance ceases in the event of separation
 Survivor’s allowance is payable to month of death, month before turning 65 or date of remarriage
Canada and Quebec Pension Plans
 Introduction
 Government sponsored plan designed to partially replace employment income in case of retirement,
death or disability
 Quebec opted out of Federal plan (except Military & RCMP in province)
 CPP/QPP are compulsory and cover most employees and self-employed; except
Casual and migratory workers
Exchange teaching
Certain religious groups
Employment of a child without remuneration
Employees of a provincial government (unless the gov agrees)
 Benefits are supported by contributions from employees + investment income
 Benefits are earnings-related and indexed annually to CPI increases
 CPP/QPP + OAS replace approx 40% of national average wage
 Administered by Minister of National Revenue or Quebec Minister of Revenue
 Contributions
 Contributions are paid on earnings between YBE and the YMPE
YMPE is lined to average wage
 Employers/employees each contribute 50%, if self-employed 100%
 Contributions are required from age of 18 to the date of death/retirement/age 70
 Contributions by self-employed are on income-tax return
 For employees contribution is directly on pay
 If an employee works for more than one employer and overpay, they can get a refund on income tax
 Qualifying Conditions
 Retirement Pension
Normal commencement age is 65
Under age of 65 person must earn less than max pension amount for 2 consecutive months
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For pensions starting before or after 65, benefits are ↕0.5% for each month
Once a person starts receiving their pension they can work without affecting pension
 Phased Retirement and QPP
Amendments in 1998 so that workers could reduce hours without QPP benefits reducing
Those whose salary has decreased by 20% can work part-time and still get a QPP pension
 Disability Benefits
Pension for disabled contributor and any dependent children
Must have severe and prolonged mental/physical disability which prevents gainful work
For QPP a person 60-64 can be deemed disabled if they cannot return to same job
Under CPP must have contributed 4/6 past years earnings = to 10% of YMPE
QPP  2/3 past years or 5/10 past years or half of years in contributor period (min of 2)
Disability benefit is payable as long as alive or until reaches 65
 Survivor Benefits
Survivor’s Pension
o Survivor = person who as married or common-law couple
o Must be aged >35, have dependent children or be disabled @ time of death
o Entitled to spouse’s pension (Amount depends on age/children/disability)
o CPP/QPP benefits are payable if more than 1/3 of years or at least 10 years
Orphan’s Benefit
o Paid to each dependent child of a person who has made contributions for min period
Death Benefits
o Lump sum for 6* monthly retirement pension up to $2,500
o QPP lump-sum $2,500
 Determination of Payment and Benefits
 Retirement Pension
CPP/QPP retirement pension is based on the contributor’s past earnings
Average earnings up to the YMPE of each from 18 until moment of the claim
Earnings are excluded for these “drop-outs
o While receiving CPP disability benefits
o While caring for children under the age of 7
o Up to 15% of the lowest earning months (need at least 120 months)
o Months including any period of indemnity
o Periods after 65 while contribution to CPP
Calculation
o Adjust each year’s earning by multiplying by 5-year YMPE ratio
o Pension equals 25% of adjusted average monthly earnings
o Maximum is 25% of 5-year YMPE
 Disability Benefits
For disabled contributor, flat-amount + 75% of retirement pension
For dependent children, same amount as for deceased contributor
 Pension to Eligible Spouse/Survivor
CPP disability pension
o 45-64 or under 45 with disability/child: Flat rate + 37.5% of pension
o 35-44: As above minus 1/120 for each month younger than 45
o Under 35: No benefits until aged 65 or disability diagnosis
o For QPP flat rate varying with age
Combined disability + Pension (CPP)
o 65+
 Retirement pension & lesser of
 60% of deceased pension – 40% of own pension or 40% of deceased pension
 Or Ceiling of maximum retirement pension in the year to deceased party
69
o
60-64
 Adjusted retirement pension
 Survivor flat-rate benefit; plus lesser of
 37.5% of deceased pension –min( 40% of that amount or 40% of own pension
 Or Ceiling of maximum retirement pension in the year to deceased party
Combined disability + Pension (QPP)
o Less than 65
 Flat rate benefit for survivor
 Min(37.5% deceased pension, ∆max retire benefit and survivor’s pension)
o Over 65: Survivor’s pension is equal to the lesser of
 ∆max retire benefit and survivor’s pension
 Max(37.5% of deceased pension, 60% of deceased – 40%survivor’s)
 Pension to Dependent Children
Payments stop when children reaches 18
CPP – Full time student between 18-25 gets payments
CPP- If child orphaned and both parents contributed double payments
 Lump-Sum Death Benefits
CPP – 6 times monthly retirement pension up to $2,500
QPP- $2,500
 General Provisions
 Indexing of Benefits
Before retirement use wage index, after retirement use CPI
Benefits cannot decrease even if CPI does
 Income Tax
Benefits are taxable income
Employers contributions are fully tax deductible
Employees receive a tax credit of 16% of contributions
 Credit Splitting
If marriage or common-law ends, earnings during time are evenly split
 Assignment
Pension may be divided between many spouses
Both spouses must be >60 and have stopped contributing
 Integration with CPP/QPP benefits
Private/public arrangements may reduce their benefits to account for CPP/QPP
If additional benefits are added to pension they are called Stacked Benefits
 Funding and Future Contributions
 Concerns on sustainability of the CPP/QPP due to pay-as-you-go arrangement
Maturation of the plans
Higher than expected disability payments
Aging population
Slower than expected economic growth
 CPP Investment Board
Manage funds in best interests of contributors
Invest assets to maximum return, but by avoiding undue risk of loss
Independent board that will both diversify and enhance the performance of CPP
 In Quebec, QPP is managed by the Caisse de depot et placement du Quebec
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Provincial Hospital and Medical Insurance Plans
 Healthcare falls under provincial jurisdiction
 Federal government objection to user fees + extra billing led to passing of the federal Canada Health Act
 Penalties for provinces which impose barriers to essential health services
 Public administration
Must be administered on a non-profit basis by a public authority
 Comprehensiveness
Must cover all necessary hospital and medical services
Encouraged to include additional expenses
 Universality
All eligible residents must be covered
 Portability
Coverage must be portable from one province to another
Maximum waiting period is 3 months
Canadians in another province are covered at host’s level
Canadians outside of the country have payments at home province levels
 Accessibility
Services must be provided on uniform terms and conditions for all residents
Reasonable compensation must be given to providers
Deductibles, for essential services, are seen as a breach of criteria for funding
Scope of Coverage
 Hospital Services
 Cover all necessary costs of a hospitalization up to ward level rates
 Coverage included
Nursing care
Drugs + antibiotics administered in hospitals
Operation room and administered facilities
Laboratory and diagnostic services
Radiotherapy + physiotherapy
Out-patient services for emergencies
 Only some jurisdictions cover: Ambulances, psychiatric care, rehabilitation, etc.
 Elective services are not covered
 Provinces can charge user fees if the hospitalization is for chronic care
 Medical Services
 Necessary coverage
Physician services
Medically required surgery + Anesthetics + X-ray + Tests
Certain oral surgeries in hospital are covered
 Other coverages
Optometrists
Physiotherapists
Chiropractors
 Physicians participating in provincial health plans cannot charge the patient extra
 In some provinces, a physician may choose not to participate in the provincial plan
Fee are limited by a schedule though
 In Quebec, no reimbursements for physicians not part of plan
 Supplementary Benefits
 Dental care for children
 Annual Eye exams
 Prescription drug plans [Often with co-pays & deductible]
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 Out-of-Province Benefits
 Al jurisdictions, except QC, have reciprocal fee arrangements
 The jurisdiction that provides the service will bill the medical plan of the recipient’s province
 Usually in QC the recipient must pay the service provider and later get reimbursement
 Most plans cover emergency care out of country, up to provincial levels
 Non-emergency care may be covered if the service is not available in the province
 Out-of-Canada is often insurable under private plans
Financing
 Federal
 Canada Health and Social Transfer to provinces and territories, provides them with cash and tax
transfers for health-care, post-secondary education and social programs
 Federal government also covers: Armed Forces, RCMP and Natives
 Provincial
 BC, AB & ON – Direct cost sharing by residents and employers
 ON, QC, NF, MN – Payroll tax on employers
 Other provinces through general revenues
 Taxation of insurance plans and most self-insured plans
 Taxation
 Income Tax Act does not permit deduction of premium payments from income
20% tax credit on contributions in Quebec
 Employer contributions are taxable income to individual
 Individuals may claim certain medical expenses as tax deductions
 Except in Quebec, employer contributions to a private health plan
Worker’s Compensation
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Operating principle is of no-fault insurance
Injured employee is guaranteed benefits for injury, disease or death due to employment, but can’t sue boss
Injured is entitled to prompt medical and rehabilitation treatment + compensation for lost earnings
If employee claims benefits the Board acquires the right to sue responsible party
Objective appeal mechanisms exist for both employer/employee
Eligibility
 Mandatory for all employees in industrial occupations
 In some provinces, not required for casual, domestic, service or “knowledge” employees
 No coverage required for owners or officers, but they may elect to be covered or get private insurer
 Assessment Basis
 Funded solely by assessments paid by covered employer’s to Board
 Individual Liability
Basis for government, public, crown and large public transport corporations
Annual assessments are paid to reflect actual costs incurred + admin expenses
Generally assessed on a pay-as-you-go basis
 Collective Liability
Yearly assessment rates (% payroll) determined based on experience of group/class
Costs cover
o Expected current and future benefit costs
o Administrative expenses + Prevention programs
o Necessary adjustments to meet fund requirements due to policy/legislation
Assessment rate is applied to annual payroll up to assessable earnings maximum
 Accountability
 Province encourage cost management + safety programs with experience rating
 Prospective: Applying discounts/surcharges based on past experience
 Retrospective: Assessments are adjusted based on actual experience for year
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 Benefits
 Health Care
All medical expenses incurred are covered (including those normally in provincial health plan)
Also covers transportation costs for treatment, clothing/long-term care allowances
 Short-Term Disability
Benefits payable until disabled is capable of returning to pre-accident work or having gone
through a rehabilitation program is capable of earning the same income level
If cannot return to work or get same income becomes eligible for long-term disability
 Long-Term Disability
Permanent total: Unlikely to ever work again so paid a monthly benefit
Permanent partial: Unable to return to regular job, but could perform some employment
activities, so paid a monthly benefit for portion of average earnings
“Dual award system” in many jurisdictions that pays a monthly benefit + lump-sum payment
for non-economic damages
Payments are usually indexed annually to cost-of-living increases
 Rehabilitation
Medical or vocation rehab program funded by Workers’ Compensation Board
 Survivor Benefits
Survivor benefits after death + Lump-sum for burial expenses
Payment to spouse depends on age, number/age children and if they are disabled
Payment to children stop @ 18 unless also disabled or attending school
 Taxation
 Employer contribution is tax-deductible operating expense
 Employer contribution is not taxable benefit to employee
 Payments to injured employees are not subject to tax
Employment Insurance
 Unemployed Insurance was introduced to Canada by BNA act giving the responsibility for it to Federal gov
 Eligibility
 Originally covered all Canadians working for the same employer for 15 hrs/week or 20% of max
 Employment Insurance act was drafted to more closely link earnings and benefits
 Individuals working less than 15 hr/week no longer excluded
 All hours worked will count for minimum eligibility criteria (420-700)
 Qualifying period is shorter of:
52 week period before claim
Period since start of previous claim if that claim has started during the 52 week period
 New entrants and those re-entering the work force after 2 years will need to work 910 hours
 Reentrant parents who have received 1 week of mat/pat benefits in the past 4 years aren’t reentrant
 Maximum Insurable Earnings (Now $39,000 will be tied to average industrial wage)
 Contributions
 Financed from employee and employer contributions
 Also special programs and benefits funded by federal government
 Premium Reduction Program
 Employer plan is deemed to be “first payer” while EI is “second payer”
 Cost to the EI fund is reduced if the employer operates a short-term disability plan
 Minimum requirements to qualify for EI premium reduction
Disability benefits that are at least equal to EI benefits
Payments staring on or before the 15th day of disability
Payment of benefits for at least 15 weeks for each disability occurrence
Payment of benefits with no reduction for EI received
Reinstatement of full disability coverage within 1 month of return to work
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 Income Tax on Employment Insurance
 EI premiums are tax-deductible for employer and do not give rise to taxable income to employee
 Premiums paid by the employee give a tax-credit
 EI benefits are taxable income to recipient
 Benefit repayment program introduced to discourage individuals with higher annual incomes from
collecting repeatedly
First-time claimants are exempt (less than 1 week of benefits in past 10 years)
Those with who receive special benefits will no longer have to repay them
If claimant’s net income exceeds $48,750, repay 30% of lesser of
o Net income in excess of $48,750
o Total regular benefits paid in taxation year
Scope of Coverage
 Regular benefits are paid to people unemployed due to loss of work, though no fault of their own
 Special benefits are also paid for sickness, care of newborn or compassionate care
 The applicant who refuses to apply for suitable employment or does not take a training course will not
receive EI benefits  Second goal of EI
 People who leave their jobs voluntarily, are fired or on strike/lockout for cause do not receive benefits
 Amount of Benefits
 Benefit rate is based on claimant’s average insured earnings in past 26 weeks
 Intensity Rule
Previously claimants who made extensive use of EI received reduced benefits
Removed since infective and punitive (especially to seasonal workers)
 Family Supplement
Additional benefits to low-income families with children who receive Child Tax Benefits
 Duration of Benefits
 Reflects the number of insurable hours worked during the reference period
 Max of 45 weeks
 Compassionate Care Benefits
 Temporarily leave from work to provide “care or support” person at risk of dying with 26 weeks
 Eligibility criteria
Decrease of more than 40% of regular weekly earnings from work
Accumulation of 600 hours in the past 52 weeks or since last claim
 Unemployed person on EI can apply for this benefit
 “Care or support” means psychological/emotional support, arranging for third party care or directly
providing care
 Medical certificate from doctor must show risk of dying
 6 weeks of compassionate leave can be shared with another person
 Supplemental Plans
 Employer supplement when person is receiving maternity/paternity or compassionate care benefits
When combined with benefits cannot exceed 100% of normal weekly salary
Payment cannot be used to reduce sick/vacation leave or severance pay
 Supplement can be paid during EI waiting period
 Payments are not considered insurable income, so no EI premium deductions
 Waiting Period
 Waiting period for first 2 weeks of claim
 Benefits begin on the latter of the Sunday claim occurs or is submitted
 Working While Receiving EI
 Can earn max of 50$ or 25% of benefits per week, without reducing EI
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Extended Health Care and Drug Plans
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Coverage under extended health care plans for employees and their eligible dependants
Employees: Generally full time only, but may also include part-time + retired
Dependants: Spouse (including same sex) + Children under 18, 18-25 @ school or disabled
Employees pay for a portion of the plan through payroll deductions + deductibles/copayments
EHC plans are designed to supplement provincial plans + provide services not provided by them
 Plans operate as second payer to provincial plans
 Limited to medically necessary expenses covered by plan
Prescription Drug Plans
 Eligible drug are those that legally require a prescription or are life-sustaining (insulin)
 Upward pressure on drug prices due to more expensive drugs + early release from hospital
 Most drugs claims under EHC are processed by reimbursement or pay and submit basis
 Person fills in sheet + later gets reimbursement & explanation of amount eligible
 Pay-direct basis also exists, where the payment is done automatically at time prescription is filled
 Individual only pays pharmacist for required plan deductible or coinsurance
Hospital
 Provincial plans in Canada only pay for ward level, unless semi-private/private room is medically required
 Unlimited private room coverage is decreasing most cover unlimited semi-private
 Claimant assigns payment to hospital who submit claim directly for reimbursement
 Average length of stay decreased, but room fees increased. For a net cost increase
Medical Services and Supplies
 Private duty nursing
 Ambulance services
 Paramedical practitioners
 Prosthetic appliances and durable medical equipment
 Accidental dental
 Emergency out-of-province
 EHC covers additional medical costs, not paid for by provincial plan
 Usually no deductible or coinsurance, however limit on covered travel days and max coverage
Vision Care
 Most provincial plans have limited coverage for children and seniors
 Benefits tend to be expressed as 100% coinsurance up to a fixed dollar amount
 Some insurers participate in provider networks to provide discounts
Dental Plans
 Generally represent the largest portion of total benefits costs
 Procedure guides for dental services prepared with each province selecting which fees to include
 Purpose of fee guide is to provide guidance as to reasonable + fair charges for dental services
 Categories of dental services
 Basic services: Diagnostic, preventative & restorative
 Supplementary basic services: Endodontic, periodontal and some surgical procedures
 Major services: Crowns & prosthodontic
 Orthodontics
 Plans are generally limited to basic + supplementary services
 May require minimum period for eligibility or only cover natural teeth present at time coverage starts
 Higher coinsurance for basic services and lower percentages for major services + orthodontics
 Annual dollar limits usually apply + deductible per person or family
 Eligible benefits are usually limited to maximum suggested fees
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 Pre-Determination of Benefits
 When there will be a significant expense, dentist can file a statement of proposed services and fees
 Alternative Benefit Clause
 If there is a choice of dental services, some plans will limit coverage to least costly option
 Employee can choose which treatment, but is only reimbursed up to amount of least costly one
 Assignment of Benefits
 Standard claim form allows for authorization payment directly to dentist
 Employee is still responsible for portions not reimbursed by plan
 Electronic Data Interchange
 Electronic transmission of claim data from POS
 Able to check coverage automatically
 Cost Management
 Decreasing coinsurance or increasing deductibles
 Reducing frequency of recall exams
 Seen as short-term solutions since cost continue to rise due to inflation and utilization
Managing Rising Extended Health Care Costs
 Annual inflation of EHC is far above CPI levels
 Changing demographics: Older people with more medication that is expensive
 Government cost-shifting: Provincial govts are reducing coverage, which is being transferred to EHC
 Increasing Deducible and Coinsurance
 Most cost-sharing for individuals, but with safeguards for catastrophes
 Modification to Drug Program
 Generic Substitution
Most provinces, have mandated generic substitution unless prohibited by physician
 Lowest Cost Alternatives
Payment is based on price of lowest price drug with same active ingredients
 Drug Utilization Review
Monitor + analyze drug utilization to contain costs
Allow to focus on wellness prevention and disease management
 Therapeutic Substitutions
Substitution of a less expensive drug in the same therapeutic category instead of prescription
Then move patient through a medically accepted protocol of treatment from least to most
expensive drugs
 Lifestyle Drugs
Limits on drugs related to patient lifestyle + not medically necessary
 Managed Care Formularies
Selection of drugs that are covered (often chosen from provincial list)
 Three-Tier Co-Payments
Amount reimbursed is influenced by patient’s choice
Patient may choose generic/brand drug, but coverage up to price of generic
 Health Care Spending Accounts
 Individual employee account that involves the allocation of a fixed dollar amount
 Allows more choice to the employees without an overhaul
 Utilizes defined contribution approach vs. defined benefits
 Concept is easier to administer
 Better communication of the value of benefit
 To qualify for tax-favored treatment, a HCSA needs to be structured like a private health services plan
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 Coordination of Benefits
 Purpose of CoB is to eliminate overpayments by plan sponsors and maximize reimbursements
 Often people are covered by two private health plans (spouse + own or mother/father)
 Own plan pays first, followed by spouses plan
 For children the plan of the parent whose birthday falls first in the calendar year pays first
Income Tax on Health Plans
 Premiums paid by employee are not tax deductible, but contribution can be included in medical expense tax
credit
 Employer contributions can be charged as an operating credit
 Employer contributions to plan are not added to employee’s income for tax purposes, except in Quebec
 CRA permits a plan to provide benefits to same-sex couples
 If employer pays any part of a provincial plan, the amount is taxable income to employee
 Individuals may claim a non-refundable and non-transferable, tax credit for medical expense
 Medical expenses that have been reimbursed are not eligible for a tax-refund
Select Committee on Private Passenger Insurance (New Brunswick)
 Uninsured Drivers
 Public safety problem due to unlicensed drivers
 Unlicensed drivers in unlicensed vehicles are held at fault/responsible
 Manitoba insurance program requires people to show valid insurance before getting a licence, even if
they do not own a vehicle
 Age & Gender Discrimination
 All new drivers should be required to take a driver’s education program
 Insurance premiums would not be tied to age/gender by driving record
 Repeat driving offenders would get high-rate premiums from the Facility Association
 Driver Safety
 Road Side Safety and Driving Safety for all new drivers
 Saving from reduced costs in health care + public safety
Public Hearings
 Protect the Public
 Control and punishment of uninsured drivers
 Protection of victims rights
 Higher minimum coverage
 Tighter over insurance companies + rates
 Elimination of age/gender discrimination
 Enhance Preventative Initiatives
 Road safety design, construction and signage
 Extending safety and risk education to the public
 Establishing stricter fraud controls
 Tighter inspection of vehicles
 Explore New Approaches
 Change driver’s licensing system
 Small claims commission
 Set limits on catastrophic loss claims
 Retest for driver competence
 Structured settlements for most non-catastrophic claims
 Rewards for good drivers
 Changes to tort system
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 Address Industry Issues to Make Insurance Accessible and Affordable
 Reduce the cost of doing business
 Establish higher minimum coverage
 Control fraud for injury and damage
 Develop strategies to avoid inappropriate claim payouts
 Employ fair and just compensation principles
 Change the territorial systems
 Impose courts structural settlements
Response to Select Committee
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Insurance telemarketing should be more strictly licensed and regulated
Ensure the continued presence and growth of middle markets + expedient Facility rate filing requests
Full time consumer advocate to be appointed by the govt. to intervene in rate hearings
Insurance coverage be tied directly to vehicle registration
 Print insurance certificate on vehicle registration
 Synchronize registration and insurance due dates/renewals
 Requirement to turn in licence plate when cancelling insurance
Arbitrated Resolution Process be developed to help in claim resolution
 Arbitration process to deal claims under the amount of $50,000
 Arbitration process could also be used for larger claims if mutually agreed by both parties
 Ensure victims’ rights to appeal
 Expedient, fair resolution; at a lower cost + less frustration
New directions for driver education and public safety
 Graduated licensing programs
 Compulsory driving safety courses for all new drivers
 Mandatory vision test every 10 years
 Mandatory driving safety courses for repeat offenders
 Enhance classroom road safety programs
 Education programs that focus on accident prevention & saving lives
Recommendations for repeat offenders
 Escalating fine schedule
 Loss of driving privileges for 5 years for repeat offenders + impaired drivers
 Stricter guidelines regarding licence reinstatement
TPL minimum coverage should be increased to $500,000
Mandatory structured settlement for under age victims + those with serious & permanent head injuries
Full time-students fulfilling requirements of their programs should be entitled to same rights as employed
Review of territorial rating system, since closely associated with rating
 Changes to territorial rating system needs to be examined + adjusted for regional losses
 Readjustment of current boundaries for a more equitable distribution
 Companies writing business in New Brunswick need to write in all territories
 Make it difficult for companies who leave the province to re-enter
 If territorial ratings is redefined access to insurance must be guaranteed (North)
Return to pre-1997 regulatory regime
 Revert from current “file and use” system to the former regulatory regime
“File and use” has not benefitted consumers as intended
Will help address the issue of affordability + rate increases
Creation of an Automobile Insurance Panel to review future rate increases and monitor
insurance issues + Collect accurate data on accidents/claims
Insurers will be required to file rates at least once every 12 months
Insurers who file rates more than 2 times in 12 months will need to appear at Panel
Insurers who raise their rates by more than 3% in 12 months will need to appear at Panel
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 Uniform & consistent industry standards that are known to the public
 Mandatory minimum underwriting guidelines for New Brunswick
 Amendments to Insurance Act regarding prohibitions on not accepting or cancelling insured’s
Age of driver + vehicle
Past claims where the driver was not at fault
One missed premium payment or lapse in coverage
Fact that person was in a group plan and left the plan
Fact that another insurer refused or did not renew coverage
 Look at gender, age and other driver profiling to eliminate discrimination, so that rates are based on ability
 Anti-fraud measures with success in other jurisdictions
 Establish and share information regarding false/exaggerated claims
 Monitor nuisance claims
 Develop inter-provincial cooperation
 Consequences commensurate with level of fraud
 Create holding compounds for accident vehicles
 Verification system for vehicle repair expenditures
 Anti-fraud communication programs
 Additional measure to increase consumer confidence by establishing more transparency
 Justification processes concerning operational costs
 Reasonable premium adjustments
 Stringent claims management
Earthquake Exposure Sound Practice Guidelines (OSFI)
 Earthquake insurance covers 2 principle risks:
 Shake
Usually sold as an endorsement/rider to an insurance policy
 Fire-Following
Fire damage severity due to broken gas lines, lack of water and road blockages for firemen
May be sold as an endorsement/rider to a policy or may be part of standard policy
 Measurement of Earthquake Loss
 Probable Maximum Loss [PML] is a dollar threshold beyond which earthquake losses are unlikely
Gross PML is the amount after deductible but before reinsurance
Net PML is the amount after deductible and catastrophic/reinsurance protection
 Insurers in BC & PQ should use a computer model to estimate net/gross PML
 May also use default loss estimate standards
Based on aggregate data, simplifying assumptions and conservative bias
 PML model must be understood + assumption & sensitivity of estimates
 Operative loss estimates (PML) must be compared to default loss estimate factors
 Common Parameters
 Event Return Period: Inverse of probability of an earthquake size occurring (250 years)
 Loss Return Period: Inverse of annual probability of a certain loss size (250 years)
 Damageability Confidence Interval: Probability that the actual damage ratio will be less than or equal
to model damage ratio
 Location of Earthquake: Distance from epicentre affects damage sustained
 Sums insured + deductible
 Building age, height, occupancy ,construction and soil
 Post Event Inflation: Factor to account for escalating costs after a disaster
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 Automobile Physical Damage Exposure
 Models do not generally estimate the PML for damage to automobiles
 Companies will be expected to move towards accumulating aggregate information for auto
 Consider number of vehicles * average value of vehicles
 Fire Following
 Computer model should provide a sound basis for estimation of fire-following loss
 Otherwise use industry estimates
 Exposure Management Test
 Company’s gross PML must not exceed, on an ongoing basis, the sum of these elements
OSFI mandated earthquake reserve
Amount of company retention
Reinsurance coverage
Approved capital market financing
 Board and Management Oversight
 All BC & PQ companies should have document polices/procedures for earthquakes
 Senior management should regularly review estimate gross/net PML and adequacy of financials
 Companies who want to use a model must be able to demonstrate that it is thoroughly researched
 Earthquake Reinsurance
 Reinsurance programs should be with sound & creditworthy reinsurers with claims paying ability
 Look at reinsurers’: Capital base, financial strength, regulatory regime, expertise & reputation
 Analysis can be done by rating agency, reinsurance brokers + international auditing firm
 Capital Market Financing
 Requires prior approval from OSFI
 Debt obligations cannot exceed 2% of total assets
 Minimum conditions for approval
Risk has been given to an investor that meets suitable counterparty standards
Catastrophe-linked financial instruments are subordinate to policyholder interests
Redemption of instruments will require prior OSFI approval
Capital instrument is acceptable substitute for other financial resources
Will be noted in companies financial statements
 Parental Backing
 Formal reinsurance agreements between a Canadian insurer and their foreign parent comp. is valid
 Contingency Plans in cases of Earthquake
 Emergency communication link
 Adequacy of claims and adjustment service personnel
 Off-site system back-up
Earthquake Reserve Required by OSFI
 Reserve Formula
 ERRO = EPR + ERC
 ERC = PML250 + N/25 [PML500 – PML250] – Reinsurance collectable – Retention – Approved capital
market financing – EPR
 EPR: Earthquake premium reserve that consists of accumulation of earthquake premium
Must be less than or equal to PML500
Earthquake premium in EPR must remain unless material decrease in exposure
 Premiums: Amount < 75% of (current yr earned earthquake premium – earthquake reinsurance)
 ERC: Earthquake reserve complement
 N = Current fiscal year minus 1997
 Retention: Amount of retention company is using to manage its earthquake exposure
Limited to 10% of capital & surplus
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 Companies must already meet PML250 level and must meet PML500 level by 2022
 Should an earthquake occur create unpaid claims + claims adjustment expense provisions for accounting
 ERRO starting with EPR component should be reduced by an amount equal to the claims reserve
Default Loss Estimates
 Default PML must be calculated, even if companies uses “operative” PML
 Calculation
 Calculate earthquake exposure by line of business * default loss estimation factor
 Sum these amount to provide aggregate default PML estimate
 Compare to operative PML
 Areas where understanding should be shown
 Deductibles of shake & fire coverage
 Mix of occupancy types in portfolio
 Mix of construction classes
 Mix of buildings, contents, additional living expenses and business interruption offered
 Confidence levels
 Return periods under study
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Options to Ensure another 15 Successful Years of Service (PACICC)
 Mandate Options
 Manage a compensation plan to provide reasonably recovery of claims and unearned premiums
when an insurance companies becomes insolvent
 Equal treatment for all Canadian consumers
 PACICC is not upon to make any payments until winding-up order has been made
 Preventing insolvency
Research in to the factors that contribute to failure
Identification if industry practices to manage risk
Prepare confidential assessments of each member
Participate in intervention with regulators before winding-up order
 Currently the PACICC mandate only concerns providing reasonable recovery after a P&C failure
 Governance Options
 PACICC was originally governed and managed my its member insurers
 Overtime its governance board got more independent members
 In 2003, OSFI decided that the board should be fully independent and that till then they would not
share staging information
 Differences between P&C and life insurance
When a P&C insurer fails, the objective is to get consumers coverage with other insurers
When a life insurer fails, the objective is to find an insurer who will continue coverage
When a life insurer is in difficulty, there is extensive sharing of confidential company
information and plans + complex dialogue
 Coverage Options
 Objective of the plan is to provided policyholders with basic coverage
 Maximum recovery is limited to $250,000
 Claims for unearned premiums are limited to max of 70% or $1,000
 Excluded lines: Policies from life insurers, aircraft credit, crop, D&O, employer’s liability, error and
omissions, fidelity, financial guarantee, mortgage, surety & title + government insurance
 PACICC should regularly assess limits, especially maximum recovery
 Commercial Property
Why coverage is sometimes excluded for large companies
o Risk management plant should have analyzed financial soundness of insurer
o Large entity can absorb impact of insolvency
o Personal lines bear the largest part of the cost of protection
In the USA, an exclusion stops the fund from paying claims to insured whose net worth is
above a threshold
Subrogate-type provisions, where the fund pays third party liability claims but then recovers
the payment from insured with net worth beyond a limit
 Auto cover in BC, MN & SK
Originally not covered by plan since it was argued that public insurers would not fail
Optional auto coverage from these insurers now covered
o Public insurer practices may affect insolvency risk
o A government insurer that competes with private insurers, but does not participate
in the plan possesses an unfair competitive advantage
Comparison of Canadian Financial Service Guarantee Funds
 PACICC
 Protect policyholders and claimant against loss due to failure of a P&C insurer
 Board elected by member companies
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 CompCorp
 Protect policyholders against loss of benefits from insolvency
 Monitor level of financial failure risk in industry
 Work together on risk mitigation + interventions
 Independent board of directors
 CDIC
 Protect depositors against loss
 Promotion of sound business and financial practices
 Pursue objectives to minimize the exposure of loss
 Half of board are ex officio
Pros and Cons of Independent PACICC Board
 Advantages
 PACICC will be a full participant when a member fails that is affiliated with a bank, trust or life insurer
 Stronger relationship with regulators
 Advice from board will reflect a broader range of experiences
 Board members may have more time for PACICC
 Disadvantages
 Reduced board engagement with current industry issues
 Member insurers may become detached from PACICC
 Weakened linkages between complementary industry issues
 Higher levels of supporting infrastructure and data requirements
 Enhanced board compensation and incentives may be required
 Senior management would need to spend more time communicating with board members
 Greater attention will be needed to ensure focus on priority issues
 Reduced board flexibility
Policy Issues That Could be Addressed with a Change in PACICC Staffing
 How should PACICC assess the role of risk-based assessments
 How large should the pre-fund be
 What is the optimal size for the board of directors
 What are the appropriate practices regarding conflicts of interests in insolvencies
 What is the most efficient method for funding the PACICC
 Allocation of a portion of investment income or assessment of members
 Should PACICC establish an insurance company
 Manage insolvencies
 Smooth out the flow of funds between the corporation and its members
 Majors factors that could cause a PACICC member to fail
 New companies
 Insurers operating in multiple jurisdictions
 Relationship between regulation requirements and guarantee funds
 Canada has more regulatory requirements than others which may lower the total net cost for
guarantee funds
83

Table of Contents - Actuarial Outpost

Transcription

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