How to deal with loss trends in new DCPD auto insurance scheme
Nova Scotia Utility and Review Board (NSURB) has approved Facility Association’s (FA) overall rate increase of 11.1% as well as a proposed revision of its risk classification system for taxis.
In doing so, the board had some words of advice for Facility Association about how to examine loss trends for the province’s new direct compensation physical damage (DCPD) auto insurance scheme.
Nova Scotia introduced DCPD in 2013. It “allows insured drivers to be compensated by their own insurer for property damages resulting from an automobile collision caused by another party,” as the province describes it. “Working with their own insurer allows drivers involved in an automobile collisions to complete the claims process more efficiently and get appropriate compensation quickly.”
Introducing DCPD didn’t change a consumer’s right to sue for other damages, the province noted. Those rights are maintained under the tort system.
However, the DCPD being somewhat new in Nova Scotia, loss trends do not go back a long way. And so the regulator addressed this in Facility Association’s latest rate filing.
For DCPD in particular, FA used a loss trend estimate of 6.1% for both past and future trends (based on an average of its own 5.6% trend estimate and Oliver Wyman’s loss trend selection of 6.5% for both past and future trends in the Board’s published commercial trends).
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“In the circumstances, and despite some differences in the indications depending upon which of the loss trends is used, [the insurance regulator’s] staff recommend the [regulator’s] board approve Facility’s selected loss trend for its proposed rates (6.1%), based on the average of its determined trend estimate and Oliver Wyman’s higher selection,” the decision read.
While NSURB approved the average loss trend “in the circumstances,” it cautioned the use of an average loss trend for DCPD in future applications may not always be appropriate.
McGrath pointed to a 2021 NSURB decision in which the methodologies used to determine loss trends were quite different (FA selected a trend rate of 5.4% and Oliver Wyman selected a 0.0% trend). For this, FA used separate model estimates for property damage-tort (PD-Tort) and DCPD trends.
“Oliver Wyman used combined PD-Tort and DCPD experience to develop a trend to use for both coverages due to a concern that there had not been enough data since the introduction of DCPD in Nova Scotia to develop a reasonable separate trend for that coverage.”
In a past decision, the regulator shared Oliver Wyman’s concern that data available since the introduction of DCPD was “too limited to develop fully credible loss trend selections.” Ultimately, NSURB concluded that while Oliver Wyman’s 0.0% trend may be too low, the FA estimate of 5.4% may also be too high.
“As a result, the board required Facility to use a trend estimate for DCPD that gave equal weighting to the Oliver Wyman selection and the Facility estimate,” read the past decision. “The board concluded this weighted approach allows for the recognition of some growth until more data emerges under DCPD to develop a separate trend.”
In its most recent commercial trends report (published after the board’s 2021 decision), Oliver Wyman analyzed PD-Tort and DCPD experience data separately and developed unique trends for each coverage – producing a 6.5% DCPD trend selection.
“Since the methodologies that Facility and Oliver Wyman used to determine a loss trend for DCPD are now more aligned, there is no need for a weighted average calculation,” McGrath wrote. “Further, to the extent that part of the board’s concern in the taxi application was that the Facility and Oliver Wyman trend selections were quite different and may have been, respectively, too high and too low, the board observes that the trend selections are now similar.”
NSURB kept the 6.1% loss trend estimate for the most recent rate application, noting the estimate is “not significantly different” from Oliver Wyman’s 6.5% selection or FA’s estimate of 5.6%.
“The Board is satisfied that Facility has supported the loss trends used to develop its proposed rates and finds them reasonable in the circumstances,” McGrath wrote. “However, the board notes that, as the methodologies that Facility and Oliver Wyman used to select a loss trend for DCPD are now more aligned, the continued use of an average loss trend for DCPD in future applications may not be appropriate.”
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