Auto claim costs PILE UP

For consumers, the auto insurance issue is clearly defined in dollars and cents – 22% of the average car owner’s costs go to insurance. For the insurance industry, the cost of auto claims, coupled with unsustainable soft rates, has become a mammoth problem and one that shows no signs of abating in the near future. Members of the insurance, collision repair and auto manufacturing industries met for the annual Automotive Insurers and Manufacturers (AIM) Forum recently in Mississauga, hosted by the Vehicle Information Centre of Canada (VICC), part of the Insurance Information Centre of Canada (IICC). And, not surprisingly, much of the discussion centered on the state of car insurance, with a view to reducing the severity and frequency of collisions, and to address the rising cost of auto claims.

The problem is no more evident than in Ontario, notes Mark Yakabuski, vice president of Ontario for the Insurance Bureau of Canada (IBC). Insurers in that province have seen dismal returns on equity of between 6% to 7% over the past three years, with no significant sign of improvement in the first quarter of 2001. “That simply is not sustainable. The loss ratio in Ontario auto is at an almost historically high level.”

The size of the Ontario market, which accounts for about 54% of the national auto market and 27% of the overall Canadian insurance market, is a microcosm of sorts for the country (see charts 1 and 2). “As goes Ontario, as goes the Canadian p&c market…if you don’t get it right in Ontario, you won’t get it right in the rest of the country,” Yakabuski asserts.

Health care costs

What needs to be addressed is the gap between inadequate rates and soaring costs. Accident benefit costs are rising about 12% per year and collision repairs increasing over 10% per year, but premium inadequacy is estimated at 26.1% for 2001, Yakabuski notes. For this reason, the IBC hopes to see a “file and use” system put in place to allow insurers to more quickly make necessary rate corrections.

But, rate increases are not the only solution, he is quick to note. If rates rise too dramatically, the number of uninsured drivers on the road is also likely to rise. Costs, particularly for health care associated with accidents must be contained. Among the IBC’s recommendations for dealing with the auto insurance crisis is greater regulatory control of health care providers. Yakabuski notes that health care costs paid by auto insurers are escalating rapidly, from $312 million in 1991 to $967 million in 1999. “There are still very few controls is the system for those who use the system as health providers.”

CAPA in Canada

Containing rising collision repair costs is also key, speakers noted. “Making sure there is efficiency in the repair industry is the responsibility of those who pay the bills”, namely insurers, says Jack Zacharias, president and CEO of Manitoba Public Insurance (MPI), and chair of the Canadian Vehicle Research Council (CVRC). Speaking on behalf of the CVRC, Zacharias notes that one area where these costs might be contained is through the use of aftermarket parts.

A CVRC position paper on aftermarket parts states that their use could account for as much as $122 million in savings annually for insurers, not only through the use of less expensive parts, but also by forcing OEM (original equipment manufacturer) parts to become cheaper. The study reflects a 1996 report by the Research Council on Automobile Repairs (RCAR) which, according to RCAR steering committee chair Kenneth Roberts, found that “cosmetic panels play no part in the structural integrity of vehicles”.

However, greater control within the aftermarket parts industry is needed, Zacharias stresses. This could be achieved by adopting the Certified Automotive Parts Association (CAPA) program from the U.S. to Canada. “The CAPA program is certainly in a very strong leadership position,” he says. A central registry of the approximately 120 aftermarket parts dealers in Canada is also needed.

Jack Gillis, executive director of CAPA, says that the group is in discussion with the IICC about the potential for CAPA in Canada. Gillis believes the CAPA standards are transferable to the Canadian market. “From VICC’s perspective, we are not suggesting companies use aftermarket parts, that is up to the companies. What we are saying is, if you use aftermarket parts, use quality ones,” says VICC president and COO Henning Norup.

State Farm debate

CAPA has seen its share of controversy lately, however. Following a multi-million dollar lawsuit loss, U.S. insurer State Farm ceased its use of aftermarket parts. The next month, Gillis contends, the insurer paid out $4.8 million more than expected in repair claims.

However, Gillis disputes the verdict which, he says, suggest car manufacturers are “the arbiters of quality…whatever they build consumers will have to accept”. The assumption that OEM parts are always the best, whether in quality, fit or installation is not necessarily true, he adds. And if OEM parts are the only ones available, consumers and insurers are certain to see a rise in costs. He predicts the State Farm verdict could create a monopoly situation for manufacturers, resulting in higher costs and higher premiums.

U.S. legislators have been reluctant to put limits on the use of aftermarket parts. Of the 40 state bills presented to do so, 39 have been defeated, Gillis says. Part of the reason may be that despite CAPA’s existence, many body shops continue to use non-certified and recycled parts (see chart 3). “Aftermarket parts aren’t going to go away, so there needs to be control, there needs to be a quality check. If we [CAPA] do go away, the bottom line is the car companies will be the only winners,” Gillis notes.

Doing the research

Aftermarket parts are not the only subject of study for RCAR, the international research body sponsored by insurers and including Canadian centers at MPI, the Insurance Corporation of British Columbia (ICBC) and VICC. Roberts notes that RCAR members spend US$60 million annually to research damage, repair, safety and security data, with a view to reduce claims costs. And, while RCAR has concentrated mainly on material damage in the past, as it remains the largest cost to insurers, members are now turning their attention to personal injury reduction.

One example is the recent paper “Evaluating Vehicle Head Restraints”, which used the ICBC’s “head restraint measuring device” (HRMD) as a vehicle for developing better car design to reduce the incidence of whiplash. The international standard developed addresses a serious and growing problem which, Roberts says, accounts for 80% of all personal injury costs in the U.K., a figure he expects is reflected in other countries.

MPI has been turning its attention to the use of adhesive in roof replacements, a move that could save up to 40% in labor time and cost, Zacharias notes. And ICBC has released results of testing which shows “no discernable difference” in performance between salvage airbags and OEM product, he adds.

And to deal with one of the costliest insurance industry issues, auto theft, the RCAR international standard has been brought to Canada, a move Zacharias hopes will motivate manufacturers to take the lead in theft deterrent installation. “It’s time all manufacturers got proper security devices in all their vehicles.”