Atlantic auto: Keeping the System on Track

It is fair to say that most stakeholders have had enough of the auto insurance issue for the moment. Rising auto insurance rates made headlines and took their toll on provincial governments in recent elections. All four Atlantic provinces have responded with auto reforms that, with the exception of Newfoundland and Labrador, appear to be working reasonably well. Governments are happy to move on, as is the industry.

This is not the case with opposition parties, however. In Nova Scotia and New Brunswick, in particular, there are opposition parties for whom there is political mileage in keeping insurance issues in the public eye. They continue to attempt to make arguments in the media that the system is not working and argue for government-run auto insurance. The best defence against these attacks is to ensure the system is working. It is, but in some areas it could work even better. The Insurance Bureau of Canada (IBC) continues to identify these challenges and develop solutions. By continuing to keep auto insurance a non-issue in the minds of government and the public, the industry can move forward – beyond the last hard market and the challenges it created – toward other improvements to the auto insurance system in Atlantic Canada.

PROVINCIAL ROUNDUP

Here is an overview of what is working in auto insurance in the region and where the challenges lie. There is no question of the success of the $2,500 cap on pain and suffering awards for minor injuries implemented in New Brunswick, Nova Scotia and P.E.I. We know that bodily injury claims costs in New Brunswick are down by approximately 40% following the introduction of the cap, and we expect the figures are similar for Nova Scotia and P.E.I.

These savings have been passed on to drivers. In Nova Scotia and New Brunswick, auto insurance rates have come down more than 20% over the past two years. In P.E.I., consumers paid 12% less for auto insurance in 2004. More good news in New Brunswick lies in the popularity of the new “First Chance” product, which came into effect from January this year. This product, which gives lower rates to first-time drivers as long as they maintain a clean record, has gone over very well with young drivers, according to early, anecdotal evidence.

While First Chance is a move away from the fundamentals of risk-based pricing, there is immeasurable value, especially in the current environment, in any auto insurance initiative that makes consumers happy. A “no frills” product also came into effect from January, but it does not appear to be as popular. Drivers seem to be concluding that the lower price of the no frills product is not significant enough to justify the reduced “Section-B coverage”. This is testament, in part, to the fact that rates for the regular product have come down substantially.

While the reforms are in place and are working, we continue to engage governments on the over-regulation of our industry. Preliminary meetings with governments in the region around some of the initiatives contained in our regulatory balance file have met with some interest and a desire to keep talking. The goal, ultimately, is to learn from the latest cycle and introduce changes that will prevent it from happening to the same degree in the future.

FA FACTOR

There are still some immediate challenges to face in Nova Scotia and Newfoundland and Labrador. One issue in Nova Scotia is the high population of drivers insured through the last-resort Facility Association (FA), which currently has 8% of the market. This is a lingering effect of the freeze on auto insurance rates, which was lifted November 2004.

The freeze kept FA rates too low for too long and caused insurers to tighten their underwriting rules. Given sufficient time, the market would correct itself, return to normal competition and depopulate the FA naturally. But, we do not have that much time.

Politicians are unconcerned with explanations of natural market forces. What politicians focus on is the fact that FA marketshare in Nova Scotia is 8% whereas it is only 2% in New Brunswick, even though auto reforms in the two provinces were essentially the same. As a result, there is pressure to depopulate FA in Nova Scotia at a faster rate.

The industry is responding. Three large-scale meetings were booked for April to bring brokers and insurers together. It is a forum that will allow brokers to shop around their clean FA business and find another home for it with their insurer partners. We are hopeful this joint initiative of the IBC and the Insurance Brokers Association of Nova Scotia (IBANS) will kick-start depopulation over the next 12 months – thus seeing the level of drivers insured through FA return to normal levels.

CAP FIGHT

A second concern in Nova Scotia stems from pending legal action from the province’s trial lawyers. They have served notice of their intention to take action against the government over the legislation that implemented the $2,500 cap. They are arguing that the cap is unconstitutional and that the regulations accompanying the legislation are not in keeping with the spirit of the legislation. It comes as no surprise that the plaintiff bar would fight the cap. What is disconcerting is that they may be successful, especially on their objection to the regulations. The regulations are unusually lengthy and complex – a symptom of the political complexities of a minority government – and are vulnerable to attack. Suffice to say, IBC will file for, and expects to receive, “intervenor status” in the case. It will diligently participate in the effort to dismantle whatever arguments the trial lawyers mount.

NEWFOUNDLAND FREEZE

Newfoundland/Labrador is the other province that has required extra attention recently. The good news is that the government lifted the rate freeze, as scheduled, on March 16. When it announced the freeze last year, the government reserved the right to extend the freeze and there was concern that reaction to February’s release of the 2004 industry earnings would inspire them to exercise this right. IBC spoke often with government officials in the months leading up to March 16, and they were persuaded to let the freeze expire.

The downside is that in announcing the end of the freeze, government also announced that the province was dropping its benchmark system for auto insurance rates and moving to a “file and approve” system. This follows a regional trend as Nova Scotia and New Brunswick also moved to pre-approval systems in recent years. Clearly, this increase in regulation is not welcome news. However, the legislation making the change has not yet been introduced, so there is still the opportunity to oppose it. The IBC will be vocal in that opposition.

The province’s Public Utilities Board (PUB) recently completed public hearings on auto insurance, in an attempt to provide input to government on further cost-saving changes to the product. A cap on pain and suffering awards for minor injuries is an option and both insurers and brokers made recommendations that such a change be made. The PUB is not making recommendations to government, simply submitting its findings.

It is unlikely the government will implement a cap or other significant changes at this time. Auto insurance is not a hot political issue in the province at the moment. This was demonstrated by the very low turnout at public meetings held by the province’s consumer advocate.

While the industry has lobbied for change, and will continue to do so, the fact that the rate freeze has been lifted in Newfoundland means insurers, once again, have control over pricing the product they sell. This is key to the industry future, not just in Newfoundland, but any province. However, industry critics will continue to try to argue the system is not working. We need to be aggressive in setting the record straight whenever these opponents make false arguments about our industry. The IBC closely monitors media reports and has been r esponding to most negative comments that appear in Atlantic Canada. Critics have the right to challenge the industry, but if they are ill-informed (and they often are), they will hear about it.

LOOKING AHEAD

By keeping the facts straight and ensuring that the system works properly, the industry should be able to restore and maintain consumer confidence in the region. And, with prolonged “peace”, there should be the opportunity to make further changes that will make the industry work even better.

Improvements could include reduced regulation (an unfortunate effect of recent reform efforts was even more regulation), and further advancement of the effort to harmonize insurance legislation across the four Atlantic provinces. As we emerge with renewed strength from one of the insurance industry’s darker periods in recent memory, we will continue to find opportunities to make the future of insurers, and their customers, even brighter.