SIXTH FLOOR, 900 HOWE STREET, BOX 250 VANCOUVER, B.C. V6Z 2N3 CANADA web site: http://www.bcuc.com IN THE MATTER OF the Utilities Commission Act, R.S.B.C. 1996, Chapter 473, as amended and the Insurance Corporation Act, R.S.B.C. 1996, Chapter 228, as amended and A Filing by the Insurance Corporation of British Columbia respecting a Proposal Plan for an Independent Third Party Review of ICBC’s Financial Allocation Methodology BEFORE: L.F. Kelsey, Commissioner P.E. Vivian, Commissioner O R D E R WHEREAS: A. By Order G‐73‐08 dated April 22, 2008, the British Columbia Utilities Commission (“the Commission”) approved for the Insurance Corporation of British Columbia (“ICBC”) a Negotiated Settlement Agreement dated February 20, 2008 with respect to the Regional Claim Centres Allocation; and B. Order G‐73‐08 and its Reasons for Decision included a direction for ICBC to prepare and file an application for approval of a Proposal Plan for the identification and selection of an independent third party (“ITP”) to review, report on and make recommendations with respect to ICBC’s financial allocation methodology. The Proposal Plan should address proponent qualification criteria, the detailed scope of work required including a review of the Work Effort Study, and the time frame for the review. The Proposal Plan application was to be filed with the Commission no later than October 31, 2008; and C. On October 31, 2008 ICBC filed its Proposal Plan for an Independent Third Party Review (“the Filing”); and BRIT ISH COLU MBIA U TIL IT IES COM MISSION ORDER NUMBER G ‐31‐09 TELEPHONE: (604) 660‐4700 BC TOLL FREE: 1‐800‐663‐1385 FACSIMILE: (604) 660‐1102 March 26, 2009 …/2
BRIT ISH COLUMBIA UTIL IT IES COMMISSION ORDER NUMBER G‐31‐09 2 D. The Filing outlines the objectives and scope of the ITP Review. ICBC suggested a process for finalizing the Terms of Reference by means of a working session with ICBC, Commission staff, and interested intervenors; and E. On November 7, 2008 the Insurance Bureau of Canada (“IBC”) submitted a letter of comment to the Commission regarding the Filing; and F. On November 19, 2008 the Commission issued Order G‐167‐08 that established a Regulatory Timetable that included a Workshop on December 9, 2008 and a timeline for Intervenor Submissions and ICBC Reply Submissions; and G. In accordance with Commission Order G‐167‐08 and the Regulatory Timetable set out therein, ICBC conducted a Workshop set for December 9, 2008. Subsequently, ICBC in its letter dated December 11, 2008, explained that at the conclusion of the Workshop, ICBC agreed to make some amendments to the Terms of Reference and re‐file it with the Commission. ICBC also requested the Commission’s approval of a revised timetable as agreed to by all Workshop participants; and H. By Order L‐59‐08 the Commission amended the Regulatory Timetable; and I. On January 23, 2009 ICBC filed its revised Terms of Reference for an ITP review as a result in the input received from the Workshop (“Revised Filing”); and J. The Commission received submissions on the Revised Filing from the IBC, Canadian Direct Insurance (“CDI”), and Family Insurance Solutions Inc. (“Family Insurance”). IBC submits that the drafted Terms of Reference in the Revised Filing are not acceptable. IBC in its Submission explains its position with regards to ICBC’s Objectives and Scope, particularly the Work Effort Study; Review of Allocation Methodology; the materials to be supplied to the ITP; and the independence of the ITP. CDI submits that the Revised Filing is limited and do not fulfill, in its entirety, the direction of the Commission and does not completely address the concerns raised by Mr. Sykes and …/3
BRIT ISH COLUMBIA UTIL IT IES COMMISSION ORDER NUMBER G‐31‐09 3 the ICBC over the independence of the Work Effort Study and the validation of the Work Effort Study and the proper allocation of costs between Basic and Optional. Family Insurance submits that the ITP should be required to have Canadian automobile insurance experience; and K. On February 20, 2009 ICBC filed its Reply Submission addressing the submissions of IBC, CDI, and Family Insurance. The Reply Submission included Appendix A – Revised Terms of Reference dated February 20, 2009 (“Amended Filing”); and L. The Commission has reviewed the Amended Filing and finds that its approval is warranted. NOW THEREFORE as set out in the Reasons for Decision attached as Appendix A to this Order, the Commission orders as follows: 1. The Commission approves the Revised Terms of Reference dated February 20, 2009, attached as Appendix B to this Order. 2. ICBC is to issue an Expression of Interest (“EOI”) based on the approved Revised Terms of Reference, as soon as practicable and without delay. 3. If any of the potential suppliers, and in particular the chosen ITP, have identified a need for modifications to the Revised Terms of Reference, ICBC will advise the Commission of these potential modifications. DATED at the City of Vancouver, in the Province of British Columbia, this 26 th day of March 2009. BY ORDER Original signed by: L.F. Kelsey Commissioner Attachment Orders/G‐31‐09_ICBC ITP Review RCCA
APPENDIX A to Order G‐31‐09 Page 1 of 6 A Filing by Insurance Corporation of British Columbia respecting a Proposal Plan for an Independent Third Party Review of ICBC’s Financial Allocation Methodology REASONS FOR DECISION 1.0 BACKGROUND The Commission in its January 2005 Decision approved for the Insurance Corporation of British Columbia (“ICBC”) its current financial allocation methodology. The Commission approved a fully allocated costing, or pro‐ rata, methodology as the most appropriate methodology for allocating costs among ICBC’s three lines of business. In its January 2005 Decision, the Commission directed ICBC to conduct a workshop within 60 days to review the details of seven allocation functions, including the Regional Claim Centres allocation (“RCCA”). ICBC allocates Regional Claim Centres costs using work effort based on transaction costing. The Commission also directed ICBC to address another seven allocation functions in subsequent revenue requirements applications. A negotiated settlement process (“NSP”) on the initial seven allocation functions including the RCCA was held in April 2005. In its letter approving the May 2005 negotiated settlement agreement (“NSA”), the Commission stated that it was satisfied that the workshop and ensuing settlement process had dealt with the seven allocation functions of particular concern identified in its January 2005 Decision. The Commission also confirmed the agreement to the use of the work effort allocator based on transaction costing for the RCCA. The RCCA represents 25 percent of ICBC’s operating costs, or 3.8 percent of total costs. ICBC was directed to file an updated work effort study in 2007, including any revisions that ICBC proposed for the RCCA. On December 21, 2007 ICBC submitted a filing respecting the Regional Claim Centres Allocation, which included an updated work effort study relating to the Regional Claim Centres Allocator. By Order G‐2‐08 dated January 7, 2008, the Commission established a Regulatory Timetable that included a Workshop and NSP. A Negotiated Settlement Agreement dated February 20, 2008 (“2008 NSA”) was reached between ICBC and many of the participants. The 2008 NSA along with six Letters of Comment were circulated to all participants, Registered Intervenors, and the Commission Panel on March 14, 2008. The Letters of Comment from ICBC, Family Insurance Solutions Inc. (“Family Insurance”) and British Columbia Old Age Pensioners’ Organization et al. accepted the 2008 NSA. The Insurance Bureau of Canada (“IBC”) accepted the 2008 NSA and had three specific concerns regarding the Work Effort Study, recurring issues not addressed, and the focus on individual allocators. Canadian Direct Insurance Inc. (“CDI”) acknowledged the negotiated settlement document. The Letter of Comment from Mr. Russell Sykes did not agree to the 2008 NSA. In the Reasons for Decision attached as Appendix A to Order G‐73‐08 which approved the 2008 NSA, the Commission directed ICBC as follows: “The Commission Panel acknowledges the concerns expressed by IBC and Mr. Sykes regarding the independence of the Work Effort Study and the validation of the Work Effort Study and the proper allocation of costs between Basic and Optional Insurance. The Commission Panel determines that these issues are to be addressed by ICBC in the course of preparing for its next application with respect to financial allocation methodology. The Commission Panel considers that the importance of appropriate cost allocation between
APPENDIX A to Order G‐31‐09 Page 2 of 6 Basic and Optional Insurance indicates a need for an independent professional assessment. The Commission Panel determines that, for the purposes of this proceeding, the internal work undertaken by ICBC in support of its application, together with the results of the negotiated settlement process are adequate to support Order No. G‐73‐08. The Commission received a number of Letters of Comment that accepts the 2008 NSA with one dissent. The Commission approves for ICBC the February 20, 2008 NSA, attached as Appendix B to this Order. The Commission directs ICBC to prepare and file an application for approval of a Proposal Plan for the identification and selection of an independent third party (“ITP”) to review, report on and make recommendations with respect to ICBC’s financial allocation methodology. The Proposal Plan should address proponent qualification criteria, the detailed scope of the work required including a review of the Work Effort Study, and the time frame for the review. The Proposal Plan application is to be filed with the Commission no later than October 31, 2008. In ordering this independent review of the current cost allocation methodologies employed by ICBC, the Commission Panel is not directing a full cost allocation study. The current allocations will stay in place until amended by the Commission as a result of any second comprehensive cost allocation study. The purpose to be served by the ITP study would be to provide objective third party analysis that would address some of the concerns raised in this proceeding and provide a base for the Commission to evaluate whether or not a second full cost allocation proceeding is required.” ICBC filed its Proposal Plan on October 31, 2008 that included the Terms of Reference for an ITP Review (“the Filing”). With regards to the Filing, the Commission by Order G‐167‐08 established a Workshop on December 9, 2008 and a regulatory process. Subsequently, ICBC in its letter dated December 11, 2008 to the Commission it explained that at the conclusion of the Workshop, ICBC agreed to make some amendments to the Terms of Reference and re‐file it with the Commission. ICBC requested the Commission’s approval of a revised timetable as agreed to by all Workshop participants. Consequently, the Commission issued Letter L‐59‐08 which allowed time for ICBC to amend its proposal and for Submissions by participants and Reply Submission by ICBC. On January 23, 2009 ICBC filed its revised Terms of Reference for an ITP review as a result in the input received from the Workshop (“Revised Filing”). Submissions were received from IBC, CDI and Family Insurance in which they outlined their concerns with the Revised Filing. On February 20, 2009 ICBC filed its Reply Submission addressing the submissions of IBC, CDI, and Family Insurance. The Reply Submission included Appendix A – Revised Terms of Reference dated February 20, 2009 (“Amended Filing”). The proposed February 20, 2009 Revised Terms of Reference reflected further changes in response to the Submissions from Intervenors. The changes include providing the ITP with all ICBC application materials and decisions of the Commission related to its financial allocation methodology, confirmation by the ITP that it had access to the materials and persons necessary to complete the report, confirmation by the ITP that it has no concerns regarding its independence, and preference with experience with the Canadian automobile insurance business.
APPENDIX A to Order G‐31‐09 Page 3 of 6 2.0 ISSUES Although ICBC has accommodated most of the concerns of Family Insurance and some of the requests of IBC, there is a fundamental difference of interpretation of the Commission’s direction in Order G‐73‐08 and its Reasons for Decision in respect of the scope of the proposed ITP review. These issues are discussed in the following subsections. 2.1 Objectives and Scope of ITP Review ICBC interprets the Decision to direct an ITP review of the RCCA work effort study to provide independent validation whether the approach used by ICBC resulted in a fair and equitable allocation of costs, and to provide advice on specific issues. IBC believes the prime objective is to have the ITP review, report on and make recommendations with respect to ICBC’s financial allocation methodology, including a review of specific allocators identified by the ITP. The ITP would also review ICBC’s work effort study that underlies certain of the ICBC allocators, particularly those that underlie the RCCA. The ICBC scoping results in a limited review of the RCCA work effort study to validate the allocations made by ICBC’s work effort study group prior to the last hearing. IBC would like to have the ITP review the full cost allocation process, including a review of all evidence and filings in previous proceedings. IBC proposes that the objectives be stated as follows: • Review, report on and make recommendations with respect to ICBC’s financial methodology, including a review of specific allocators identified by the ITP; • Review ICBC’s work effort study that underlies certain of the ICBC allocators, particularly those that underlie the Regional Claims Centre Allocation, so as to address specific concerns raised by intervenors. CDI in its Submission states: “CDI submits that ICBC’s Objectives and Scope, within their Proposal, are limited and do not fulfill, in its entirety, the direction of the Commission. As well, the Proposal does not completely address the concerns raised by Mr. Sykes and the IBC over the "independence of the Work Effort Study and the validation of the Work Effort Study and the proper allocation of costs between Basic and Optional." as referenced by the Commission in this 2008 Order.” ICBC’s Reply submission argues that IBC’s proposed objectives are too broad to be instructive, and amount to a request that the ITP conduct a full cost allocation study. IBC's objectives would have the ITP duplicate work already undertaken in the regulatory proceedings regarding allocation over the past five years. Since the Commission has already approved ICBC's pro‐rata methodology based on cost causality and reviewed and approved the allocation functions associated with the majority of ICBC's operating costs, ICBC believes that duplication of work already done in Commission processes would not be cost effective or add value to the cost allocation process, and would not be in the best interests of Basic insurance policyholders.
APPENDIX A to Order G‐31‐09 Page 4 of 6 Based on IBC’s broad interpretation of the Study Objectives, IBC proposed a number of modifications to the Scope of the ITP review. ICBC Replied to the IBC concerns. Commission Determination A number of proceedings have established and refined a cost allocation methodology and specific allocators for all cost categories applicable to Basic Insurance. The last review of the RCCA allocators focused on joint costs that were difficult to allocate between Basic and Optional Insurance. The approach taken by ICBC was to convene a group of knowledgeable ICBC employees to estimate the time spent on Basic and Optional tasks. Joint costs in an integrated business are by their nature difficult to allocate and there was a concern by some intervenors that the use of ICBC staff could result in a bias to allocate more costs to Basic Insurance to make ICBC more competitive in its Optional business. The Commission finds that Order G‐73‐08 was specifying that the ITP review would be focused on validating, or not, the RCCA allocations of the ICBC study group. The ITP would not review the broad allocation methodology or all evidence and filings since 2005. Based on this more limited scope for the ITP review, the Commission believes that the February 20 2009 revised ICBC Terms of Reference for an Independent Third Party Review of Regional Claim Centres Allocation and Specified Allocation Functions are a focused and cost effective method to consider the validity of the allocations done by the ICBC study group. With all the work done over the past five years, it does not seem productive to initiate a broad ranging ITP review of the cost allocation methodology and decisions rendered to this time. Full utility Rate Designs are normally requested only every 5‐8 years, or when a fundamental change in circumstances has occurred. The Commission’s review of the ITP Report will assist it in determining if a comprehensive review is required. The Commission accepts that the use of the word “validation” in the Terms of Reference is not to imply any tacit approval or agreement with the existing study results. In response to IBC’s concern that the ITP must be given sufficient authority to comment on the methodology of the four selected allocation functions, the Commission expects that the ITP will provide advice it deems reasonable and that information will be considered in future rate design filings. 2.2 Materials to be Provided to the ITP Based on its expanded view of the ITP Review, IBC identified additional information materials it believes would provide sufficient information for the ITP to understand the issues that have been raised by each of ICBC, the Commission and the Intervenors. ICBC disagrees with IBC and CDI that the materials to be given to the ITP should include the detailed record of prior Commission proceedings related to cost allocation, and that all of the evidence relating to cost allocation (or at least the evidence filed by intervenors) be comprehensively listed in the Terms of Reference. However, ICBC has amended the Terms of Reference to specify that it will provide the ITP with “all ICBC application materials and Decisions of the Commission related to its financial allocation methodology”.
APPENDIX A to Order G‐31‐09 Page 5 of 6 Commission Determination Given the Commission Determination above on Objectives and Scope of the ITP review, some of the requests of IBC for broad ranging historic information on all rate design filings and evidentiary records are excessive and would be unduly costly for the approved Objectives and Scope of the ITP Review. The Commission considers ICBC’s Revised Terms of Reference dated February 20, 2009 to provide the basis for an appropriate and cost effective review of the RCCA work effort allocators in question. 2.3 Independence of the ITP IBC requests that the ITP confirm it has had access to the materials and persons necessary to complete the report and to confirm that there are no concerns regarding independence. ICBC made changes to the Terms of Reference to state that the ITP, as it deems necessary to gain a better understanding of ICBC’s overall business and operations, may meet with appropriate staff, and ICBC will provide the ITP with information as it requires. ICBC agrees that the ITP is to be procured through an objective process and will remain independent throughout its review. Commission Determination The Commission accepts that the Independent Third Party reviewer is to remain “independent” and expects the ITP will attest to that in its Report. 2.4 Canadian Reviewer Family Insurance suggests that the matters under review are uniquely Canadian and the ITP should have Canadian automobile experience. ICBC replied that participants at the December meeting agreed to delete this requirement because this experience was not necessary and, given the specialized knowledge required, the search parameters should not be further limited. In the February 20, 2009 Terms of Reference ICBC in the Qualifications section added the words: “Experience with Canadian automobile insurance business is preferred.” Commission Determination The Commission accepts that Canadian automobile insurance experience need not be mandated. 2.5 Other Issues Several additional minor issues were raised by IBC. ICBC considers that they need not be addressed individually by the Commission. Commission Determination The Commission has reviewed the remaining issues and finds that no further changes to the revised Terms of Reference are necessary. Therefore, the Commission approves the Revised Terms of Reference dated February 20, 2009, attached as Appendix B to Order G‐31‐09.
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