Canadian Underwriter

What profit level this regulator expects of insurers

February 15, 2022   by David Gambrill

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Nova Scotia’s insurance regulator has approved Intact Insurance for a small rate increase for individually rated commercial vehicles, including interurban trucks, in a decision more noteworthy for its insight into the kind of profit level the regulator expects of insurance companies.

Basically, the regulator approved the company’s proposed rate changes, which vary by coverage and result in an overall increase of 0.20%. Intact’s “dislocation capping” will reduce the proposed increase to 0.07%.

The regulator had no issues with the proposal, save for one minor hitch – the profit assumption in the company’s rating model.

“Intact used a model that projects cash flow for a policy using assumptions about expenses, losses, investment income, and other components,” reads the Feb. 14 decision by the Nova Scotia Utility and Review Board. “It also used, as model inputs, a target return on equity of 12%, and the percentage of the Office of the Superintendent of Financial Institutions’ (OSFI) minimum capital test that the company desires to hold.

“While the test is a minimum capital test, OSFI requires companies to hold an even higher percentage. To stay above this regulatory level, Intact argues that it must plan and price for an even higher ratio. Intact used 194% of the minimum capital test.”

The regulator called on the insurer to pare down its rating assumptions so that the ROE target is 10% and its MCT ratio is 185%.

“For a number of years, the board has required companies to lower the target return on equity to 10% because of concerns that, as evidenced in part by the release of the 2012 and 2013 General Insurance Statistical Agency Financial Information Reports, the industry was earning returns on equity much higher than the 12% the Board believed it was approving.”

The board argued that Intact’s use of a 12% return on equity and 194% MCT assumption would result in a profit provision of 8%. “Under a more common [ROE and MCT provision], the board range of acceptable return on equity (i.e., 10-12%) would produce a profit provision range of 6.1% to 7.5%. The company’s provision is out of this range.”

Intact argued its assumptions were similar to those underlying approved increases to private passenger automobiles. The board observed that it had requested that Intact use the 10% ROE target and 185% MCT assumption in that filing as well.

Ultimately, the board approved the rate changes, as proposed.

“In all cases where changes are proposed, except [in] all perils [coverage], [Intact’s] proposed rates are in the direction of the [regulator’s] indications, and only the magnitude is smaller,” the regulator notes. “The smaller than indicated increases for bodily injury [coverage] and collision [coverage], while partially offset by smaller than indicated decreases for other coverages, produced an overall increase lower than indicated rates. As a result, the proposed changes result in a return on equity that falls below the 10% recommendation.”

Under the proposed dislocation cap, assuming there is no material change to the risk, Intact will apply a 10% cap  on renewal policy premium increases. In other words, if a renewal premium increase for the policy exceeds 10%, the premium increase will be limited to 10%.


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