Rate Regulation, From Bad to Worse

With the first quarter results of Canadian insurers rising to a combined ratio of 112%, you can readily see the effect that automobile insurance rate regulation in Ontario has had on the insurance industry.

Automobile insurance in Ontario represents approximately one-third of property and casualty insurance premiums in Canada. With the insurance commissioner forcing rates down over a period of several years, insurers are now experiencing an uphill battle to bring rates up to a proper level. It is unfortunate that such a situation has occurred since Ontario has been a jurisdiction where insurers and regulators have worked in harmony to provide a stable market for consumers. The stable market is now in jeopardy and this situation is a direct result of over-regulation.

Arbitrary powers

The Financial Services Commission of Ontario (FSCO) creates the regulation and guidelines that must be followed by insurers. They also require insurers to submit an excessive amount of detail to support any rate change. In spite of the detail and actuarial evidence submitted by companies, they frequently use their arbitrary powers to reduce the rates requested by companies.

They are also the body that is responsible for mediation and arbitration hearings which has become an expensive and unnecessary service. This system has added substantially to the claims cost in Ontario as well as allowing fraudulent claimants to force many insurers into economic settlements. Insurers who try to resist fraudulent claimants are often criticized for their claims practices by this same commission. The problem is becoming intolerable.

The unreasonable rules which companies must follow to process an accident benefit claim forces companies to make payments before a thorough investigation is completed. Lawyers and paralegal firms have sprung up to take advantage of the system and FSCO has not made an effort to alter this terrible legislation. They merely enforce the rules and make it easy for the fraudulent practices to prosper. The higher claims settlements eventually add to the cost of insurance, and since the government collects a tax on the premiums they benefit from any increase in cost to the motorist.

New filing guideline

Earlier this year FSCO released an updated filing guideline, which they allege will make the filing process easier. After reading approximately 300 pages of instructions and forms, it is obvious that the guidelines have not been simplified, and in fact have added additional red tape.

Since my last article published in CU August, 2000, the rate filing process has not been made easier. It has become an even more cumbersome and expensive system that Ontario insurers must deal with. Even after a company’s actuary submits significant detail supporting a rate change, FSCO will often challenge and reject the request in an arbitrary manner.

Ontario is now comparable to some of the worst states in the U.S. for over-regulation and poor legislation. In Massachusetts, the industry has experienced the insolvency of two insurers. In both cases the insolvency was a direct result of the Insurance Commissioner in that state refusing to given adequate rate approval to the insurers. Thousands of insured motorists suffered a great deal of inconvenience and financial loss due to the attitude of the rate regulator in that jurisdiction.

Recently problems have been escalating in New Jersey as a result of the commissioner’s attitude towards insurers in that state. Rather than allowing adequate rate increases, the commissioner has ordered rate reductions. At the time of writing this article, two major insurers announced that they were leaving the state – State Farm and AIG. This is a severe blow to the insuring public, as well as the many insurance agents that are forced to re-market the business. With the reduction in competition in the state, consumers will ultimately pay dearly for the mistakes of the regulator.

Personal injury

In Florida, fraud has been a serious problem due to the lax wording of the personal injury protection coverage (PIP). Runners are hired by clinics to obtain information on people involved in accidents. They then offer a payment to the individuals to attend their clinic. In Ontario, a similar scheme is in operation and with the unreasonable timelines required under the guidelines, insurers are forced to pay excessive amounts to claimants. If they refuse the legislation allows the claimant the opportunity to build the claim. The situation is becoming worse as claimants, clinics and advisors become more attuned to the system.

We should all be concerned about the future of the Canadian insurance industry since the major product line in Canada, Ontario automobile, is being over-regulated.

Certain people within the Ontario commission are exercising undue force upon insurers and interpreting the laws any way they see fit. Auto insurers in Ontario must take a firm stand against this unreasonable approach to rate regulation – otherwise we will not see the combined ratio for the industry drop below the 112%. Very few insurers in Ontario have an adequate rate level for their book of private passenger automobile insurance.

Lip service

In almost 50 years that I have spent in the insurance industry in Ontario, I have never seen a more deplorable situation than what we have today. FSCO is merely paying lip service to the simplification of rate filing where in fact they are adding more red tape. More forms have been added and a determination must be made to select the proper form to be submitted for a rate change. This is not making it easy, it is making it more difficult and expensive for insurers. Ultimately, the cost is passed on to the consumer.

When Bill 164 was replaced the insurance industry was lead to believe the new product would eliminate fraud and benefits would be reduced. Over the past few years decisions made by the arbitrators at FSCO have broadened the coverage far beyond what is expected to be covered by the auto insurance product. Ontario is the only jurisdiction that interprets automobile insurance to cover almost any injury involving an automobile. If controls are not put in place, automobile rates will continue to rise.

The most effective way to control the cost of insurance is to restrict coverage and have an active, competitive environment. We are not seeing that in Ontario at this time. Possibly the next person appointed to the position of the insurance commissioner will take an interest in correcting the problems. The combining of financial portfolios may also lead to a better environment to ultimately benefit the consumers of Ontario.