MPI’s financial reserves, also known as our capital reserve fund, act like an emergency fund. These reserves can help maintain stability through a serious but unexpected financial situation.
The principle is no different than families having emergency savings in their personal finances to help them ride out a personal financial crisis, such as a job loss.
MPI’s capital reserve fund functions the same way, giving us the ability to ride out an unexpected investment loss or increase in claims costs. But how much capital should we have in our capital reserve fund?
The property and casualty insurance (P&C) industry standard for setting reserves is called the Minimum Capital Test (MCT). As the name implies, it is the minimum amount that should be held in reserve. MPI’s Basic Reserve Fund Target is now set at 100 per cent of the MCT. Comparatively, private insurers generally hold more than double this, or over 200 per cent MCT.
Goal
The goal of our capital reserve fund is simple: to manage financial volatility and ensure rates remain stable, predictable and affordable. No one wants rate shocks and massive increases following major adverse events.
By reducing our operating costs, improving the return on our investments, and with a little luck from good weather, MPI has reached the Reserve Fund Target.
Rate stability: two lines of defence
The fund is one element of MPI’s plan to maintain rate stability and prevent large sudden rate increases for Manitoba drivers.
Our first line of defence is to transfer any excess capital from our competitive lines of insurance (these include Autopac options such as rental vehicle insurance or increased third-party liability). After such a transfer, if the reserve fund remained below its target, we would replenish it gradually over five years to help maintain rate stability. Likewise, if operating transfers were to result in the fund exceeding its target, we would return that money to customers through lower rates in the future.
Sufficient capital
Setting reserves at 100 per cent MCT ensures that we have sufficient capital to absorb any unforeseen variations in revenues and claims costs, and that Basic compulsory rates are kept as stable, predictable and affordable as possible for Manitoba drivers.
Capital fund build or rebate
The capital build percentage is determined annually if the reserves are forecast to be below target when rates are being determined. Should a capital build (surcharge) be required, this is expected to differ from one year to the next, depending on the factors outlined above. This does not affect the customer’s base premium in future years.
On the other hand, if MPI’s reserves are above 120 per cent of MCT, MPI will apply for a rebate, lowering the capital reserve fund to the targeted amount.