AUTO “burn”

Ouch! Auto insurers just cannot seem to win. Across Canada auto claim losses are pouring in with the supposed “prize market” of the country — Ontario, which accounts for about a third of all premiums in Canada — delivering some of the worst results as rate adjustments are left in the dust of accelerating bodily injury claims. Already, one Ontario player, Markham General, has thrown in the towel against the onslaught of claims.

In addition to the usual provincial governmental “political meddling” with regard to the filing of rate adjustments and blocking much needed product reform, auto insurers now have to contend with McNaughton. The recent dismissal by the Supreme Court of Canada of an appeal made by Co-operators General Insurance Co. in this much vaunted case has left the door open to not only potentially thousands of class action lawsuits against insurers, but also concern over the wording of the “statutory conditions” of policies as applied across nearly all the provinces. As one senior defense lawyer observes, even though the McNaughton v. Co-operators case (which is pending certification as a class action suit) applies to the Ontario Insurance Act, the same statutory condition is contained in auto policies in most of the common law provinces. A number of class actions have been filed in several of the provinces in wait of the outcome to the McNaughton filing (see cover article for further details of the case).

Needless to say, insurers have bemoaned the Supreme Court’s dismissal, and the potential of very large dollar amounts that may have to be paid by the industry to policyholders from past claims. Notably, the collecting of deductibles from policyholders on scrapped vehicle claims has been a common industry practice around the world. With the interpretation of the statutory conditions of the standard auto policy having now been challenged, insurers may have to look at “rewriting the book” — which would require cooperation from the provincial regulators — to stem this new “bleeding claims wound”. Which, of course, will do nothing to limit the cost of past vehicle write-off claims where deductibles were charged. And, the question is also raised to whether there is any point to offering policy deductibles as a tool to temper rate increases if it is not effective in the eyes of the courts.

At present, there is great uncertainty to what a successful outcome of a McNaughton class action may have on the insurance industry from a cost perspective. However, industry commentators agree that a precedent set by this case will likely cost insurers hundreds of millions of dollars — at a point when losses are at an all-time high. The Insurance Bureau of Canada’s chief economist Paul Kovacs concurs that the McNaughton situation could force insurers to further shore up claim reserves thereby placing greater stress on the industry’s financial performance. Kovacs notes that part of the reason for the dramatic drop in the industry’s profitability for 2001 was due to companies having to top up reserves to counter unfavorable development on past claim years. However, he points out that, historically, no single loss event has ever occurred that has prompted an industry-wide move to shore up reserves. In this sense, he does not see the McNaughton case as having potentially that significant an impact on the industry’s financial position.

However, it is very clear that the auto insurance market in Canada has become that more volatile, with a host of problems that will require a lot more corrective action than just rate adjustments. As Kingsway Financial Services’ president Bill Star observes, much of the problem lies with the political interference of the provincial regulators in limiting the actions open to insurers to counter mounting losses.

In this respect, he says insurers as a collective group need to take a hard line in not accepting writing business in regions where regulatory demands can only result in further escalating losses. In order to overcome some of the obstacles involved with filing rate adjustments, the Kingsway companies began filing for six-month policies in Ontario. This initially drew objection from the regulator, he adds, but the terms have since been approved. This kind of “creative” response in overcoming hurdles within the rate approval system should not be necessary, Star comments, as market competition under a “file and use” approach would be the best means to ensure stable pricing — as well as the financial soundness of insurers.