Canadian Underwriter
Feature

History of Stability


May 1, 2005   by Vikki Spencer


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The year was 1944 and the nation was still recovering from the Great Depression and World War II. In Saskatchewan, the insurance industry had withdrawn in difficult financial times and coverage was both scarce and expensive.

This situation spurred the creation of Saskatchewan Government Insurance (SGI) through provincial legislation passed by Tommy Douglas’s Co-operative Commonwealth Federation (CCF) party. Operations officially started up in 1945, with the new Crown corporation able to pay back the $12,000 in seed money granted it by the province within its first year of business.

Now, 60 years later, new SGI president Jon Schubert reflects on the economic forces which led to the formation of Canada’s oldest public insurer. “At the time insurance was very expensive here and very hard to get. It’s estimated only 10% of cars on the road were carrying any insurance,” he says.

Today, the Saskatchewan Auto Fund provides compulsory auto insurance to one million drivers, and also regulatory services such as licensing, testing and road rules legislation. It acts as a “giant trust fund”, in Schubert’s words, operating on a break even basis over time and neither receiving money from nor paying dividends back to the government.

SGI Canada, also introduced in 1944, offers a slate of other insurance products ranging from homeowners’ to agricultural to optional auto to commercial lines. This is a separate, profit-driven operation selling only in Saskatchewan, Schubert explains, which pays dividends back to the government, its “shareholder”.

And within the last 12 years, SGI has expanded its presence beyond the province’s borders into Manitoba, Ontario and Prince Edward Island through SGI Canada Insurance Services Ltd. (SCISL). With a proposal on the table to open up the Alberta auto market to public insurers, SCISL may be spreading its reach even further in the near future.

In 2004, SGI wrote almost $830 million in premiums, Schubert notes, and over the past decade it has boasted a return on equity topping 17%, significantly outperforming most private insurers. Last year alone, SGI recorded its highest profit ever at almost $42 million, as well as the largest underwriting profit in its history at $15.9 million (the next best underwriting performance was a profit of $5.4 million recorded in 1989).

COMING HOME

Schubert enjoys a long history with SGI, having started there in 1976. He remained for 23 years, rising to the role of assistant vice president of claims before leaving to start his own insurance and consulting business in 1999.

When former SGI president Larry Fogg announced he would retire, Schubert was welcomed back by his former employer to take over this role in 2004.

Throughout much of his professional life, Schubert has been focused on the injury and rehabilitation side of the business, often speaking on the subject, and serving as insurance consultant to the “Quebec Task Force on Whiplash-Associated Disorders”.

Schubert says two of his most proud achievements are his roles as vice president on both the “United Nations Bone and Joint Decade 2000-2010 Task Force on Neck Pain and Its Associated Disorders” and the “World Health Organization Collaborating Center Task Force on Mild Traumatic Brain Injury”. He is also a past board member of the Saskatchewan Brain Injury Association and the Canadian Paraplegic Association.

THROUGH NO-FAULT

Among his achievements during his earlier tenure with SGI, Schubert led the team which implemented no-fault auto insurance in the province in 1995, serving as SGI’s assistant vice president of claims at the time.

The introduction of no-fault 10 years ago helped SGI to stem the tide of rising claims costs on its basic auto insurance program, which covers vehicle damage, third-party liability and injury, he explains.

“When we put no-fault in, there was an Auto Fund deficit of $100 million at the end of 1994.” This was largely the result of rising costs on the injury side, he adds. At the end of 2004, the fund boasted a surplus of $140 million, and average annual claims growth has been brought down to around 2.4%.

No-fault has also contributed to rate stability in the province, Schubert notes, with SGI boasting some of the lowest rates in the country. “The main driver of that is the no-fault [system]. It provides very generous benefits if you’re injured badly, but it does not pay for pain and suffering.” Serious injuries as a result of an auto accident can result in payments of up to $5.3 million plus income replacement and other benefits.

With the introduction of “tort option” coverage in 2003, there is the opportunity for claimants to go through the courts to sue for pain and suffering, or non-economic, damages, if the tort option has been selected. Schubert notes, however, that take-up of the tort option has been very limited. Of the province’s one million drivers, just 5,000 have opted in, while the rest remain under the no-fault plan.

CAUTIOUS GROWTH

Looking into the future, expansion weighs heavily in Schubert’s mind. However, SGI has always stressed caution and stability in its approach to growth.

Thus far, SGI’s out-of-province operations – SCISL in Manitoba, Coachman Insurance Co. of Canada in Ontario and Insurance Co. of PEI (ICPEI) – have accounted for just $50 million, or 18% of SGI Canada’s consolidated premium. And the path has not always been easy dealing in private auto insurance markets, Schubert admits. “We had some difficulty in our second year in Ontario with Coachman,” he says, reflecting on the loss posted by the newly-purchased operation in 2002. However, Coachman, which accounts for 11% of SGI Canada’s consolidated premiums, has posted a profit in each of the last two years, and in 2004 the focus was on building Coachman’s property business, which grew by 72%.

SCISL Manitoba also had a profitable 2004, bringing in income of $1.1 million on $11 million in premiums. And ICPEI kept pace with its counterparts, posting a profit of $1.3 million 2004 on just over $8.3 million in premiums.

Schubert explained the rationale for moving beyond the province’s borders in SGI’s recently published annual report. “Our out-of-province operations continue to spread our insurance risk, earn profits and just as important, create new jobs in Saskatchewan and the other provinces in which we operate. Although we will not always be profitable in all segments or markets each year, it will smooth out financial results over time and it is important that we continue to spread our risk.”

Schubert attributes the profitability of SGI’s out-of-province companies to the strong broker force in place in these provinces. “It’s like any other business, you have to know the market. We work with independent brokers – brokers know what’s going on in their own neck of the woods.” This is also the case in SGI’s Saskatchewan operations, where its close ties to brokers were highlighted at the public insurer’s recent 60th anniversary gala – three brokers received awards for having 60-year partnerships with SGI.

Now, SGI is looking to expansion in Alberta with the news of legislation proposed there which would open up the auto insurance market to public insurers. “We were very pleased about that,” Schubert says of the proposed legislation. “We would like to compete in Alberta – we’re preparing a business case about how we would compete.”

However, he is quick to note that SGI will do business in Alberta as it does in other provinces, with SCISL operating as a separate entity that has its own balance sheet and is not subsidized by other SGI operations. “I think it’s important when we operate in other provinces to be on a level playing field,” he says, which means paying taxes and being regulated “exactly the same as anybody else” writing business in the market.

Operating as a private insurer in some markets gives SGI a unique perspective, and a stake in the overall success of private market mechanisms, a
s evidenced in its recent annual report, which states: “Sustainable profitability and a more stable auto insurance market are crucial for the financial health of the entire industry in the years ahead.”

BEING THERE

While it considers growth in other markets, SGI’s focus remains clearly on its core product – low-cost compulsory auto coverage – and its heart remains squarely in Saskatchewan. This year, a priority is implementation of the new graduated licensing system which is slated for September, 2005. Schubert says the program “makes great sense” as a way to reduce accidents and thus keep insurance rates lower for everyone.

SGI also works on various road safety, anti-theft and road engineering programs with police and local governments.

Reflecting on the public insurer’s ability to maintain its standing even as governments have changed and the insurance market run through its cycles, Schubert says many factors are at work, including great community ties, strong branding and, above all, a good product. Simply put, he says, “it’s been successful because it provides very good coverage and its rates are low”.