Newfoundland Homeowners’ Political Smokescreen?

They seem unfazed by the fact that homeowners’ and commercial lines are not regulated for good reason, and do not need to be regulated. Competition is alive and well in these non-mandatory products and has served consumers well for 200 years. Nevertheless, Nova Scotia’s “Insurance Review Board” commissioned Mercer Oliver Wyman Actuarial Consulting Inc. to conduct a study on the availability of insurance in the province. The report is scheduled to be filed with government from the beginning of November this year.

The industry has good reason to be concerned over this latest government interference.

HOMEOWNERS’ PROFIT?

The last such report by Mercer – “The Study of Homeowner, Commercial Property, Liability and Marine Insurance” for the government of Newfoundland and Labrador – was, to say the least, problematic. The Insurance Bureau of Canada (IBC) responded with a press release and letter to the provincial premier criticizing the study and strongly urging government not to base any decisions on the report’s incorrect conclusions.

The Newfoundland report found the industry’s profits on commercial property and commercial liability were “less than reasonable” and that insurers had lost money on marine insurance. No argument here. But the report also concluded the industry’s profits on homeowner’s insurance were excessive. It found that companies selling this line of business in the province produced an average profit of 13% of premium over a five year period.

According to our calculations, this is simply not true. Insurers have experienced a loss of at least 3% of premium on this line over the past five years. Had the report been subjected to a peer review, a common actuarial practice, this discrepancy likely would have surfaced. But, the current government of Newfoundland and Labrador seems to prefer working in isolation and has a history of avoiding scrutiny and consultation. Earlier this year, it announced seriously-flawed auto insurance reforms – based on actuarial advice from Mercer – without any consultation with the very industry that delivers the product it was attempting to fix. And they repeatedly ignored industry warnings while pushing the auto reform legislation through the House of Assembly and proclaiming it into law.

The reform’s key component, a deductible on pain and suffering awards, has been proven not to work in other jurisdictions. While the government of Newfoundland and Labrador has been a supporter of regional harmonization of insurance legislation, they opted this time not to follow the successful lead of the other three provinces, all of which introduced a cap on pain and suffering awards for minor injuries.

FIGHTING BACK

Fortunately, the government’s misguided determination to keep the insurance industry away from insurance discussions ends this fall when it holds public hearings on all lines of insurance. At the hearings, IBC will shine a spotlight on all the errors contained in the actuarial report commissioned by the government.

A further flaw in the report is its assumption that 5% is an acceptable target profit margin. The use of this figure ignores the colossal losses that would result from a catastrophic event. Events like hurricanes and wind storms can inflict millions of dollars of damage, wiping out several years profits in one fell swoop. Insurers need to have the money ready for when these events inevitably occur. It is not profit, but money our customers will need. And 5% simply does not account for the contingency margin required.

Perhaps this was overlooked because Newfoundland and Labrador has been fortunate enough to have not been hit with a catastrophe in recent years (although many St. John’s residents remember the infamous 1992 wind storm that left the city without power for several days and caused $8.2 million in insured damage). But, it is only a matter of time before catastrophe strikes the province again.

NO CRISIS

It is a shame that the insurance industry has to highlight errors in poorly constructed government sponsored reports simply to be able to conduct its business according to basic and fair rules of commerce. One has to wonder why these hearings are even being held, or at least why the mandate is so broad. There is clearly no crisis in the province in the areas of homeowners’ and commercial insurance. True, these lines have recently been through the high point of the pricing cycle, but all evidence suggests premiums are on the way back down.

Insurers did a lot of work to make the hard market as painless as possible for insurance buyers in Newfoundland and Labrador, and all across Canada. In fact, the Insurance Brokers Association of Newfoundland (IBAN) deserves credit for essentially solving this problem through cooperative efforts with insurers and the government. A national industry availability steering committee was also formed, and there was plenty of communication with businesses, individuals and government.

The only insurance crisis in Newfoundland and Labrador has been in auto insurance and the problems in this line have yet to be satisfactorily dealt with. The government’s attempt will bring virtually no savings. The use of a deductible will solve nothing because we can expect courts to raise awards to account for deductibles.

The bill also freezes rates and rolls them back, depending on the coverages purchased. It mandates a 9% rollback on third-party liability, but IBC’s actuarial analysis has shown there could have been more than 20% savings achieved with the right set of reforms. The rate freeze is in effect until at least March 2005.

SMOKESCREEN

Some believe that the real reason for the extensive and unnecessary analysis of unregulated lines of insurance is to create a distraction from the fact that government failed to fix auto insurance. They argue the hearings are a diversion for the rest of us while government scrambles to find the real solution.

Regardless of whether government is, in fact, engaged in the art of distraction, IBC will work aggressively to help it solve its problem. The upcoming hearings are on all lines of insurance so there will be opportunity, amid the needless analysis of homeowners’ and commercial, to also discuss the important issue of auto insurance. The IBC will be there to show, through sound actuarial evidence, how auto insurance works, where the problems lie and how to make the product better. And, if government still wants to talk about other lines of insurance, we will do that too, including a demonstration of how the actuarial report it commissioned missed the mark.

The industry is always pleased to participate in any discussion of the product it delivers, even if those who most need our help are slow to invite us to the table. Meanwhile, the real loser, the consumer, waits for meaningful action by government.