Atlantic Auto Reform: A Farce?

In June 2003, the Council of Atlantic Premiers announced the formation of the Atlantic Insurance Harmonization Task Force, which was provided with the mandate to:

Identify a common regulatory framework for automobile insurance in Atlantic Canada designed to ensure an efficient market that provided fair and affordable options for consumers;

Conduct and complete a comprehensive study of the full cost-benefit and legal implications of a government run auto insurance system in Atlantic Canada; and

Complete the drafting of a harmonized Atlantic Canada model Insurance Act.

In October 2003, the task force released its report, recommending a harmonized auto insurance system delivered through private enterprise. The report soundly rejected government as a monopoly supplier of auto insurance, citing the enormous costs to taxpayers, lost jobs and no benefits to consumers in transforming ownership. The rising cost of auto claims in the region, the report found, resulted from the design of the auto insurance product. The task force suggested the real issue was finding a balance between acceptable injury compensation and affordable premiums. Insurance rating based on risk was the best way to achieve a fair distribution of costs, the report concluded.

REGIONAL DISPARITY

A key recommendation put forward by the task force was for regional premiers to work collectively to achieve harmonization. The depth of understanding demonstrated by the task force was impressive, and I was optimistic it would give the industry an apolitical and knowledgeable foundation upon which to work with the Atlantic governments. So, what happened?

Instead of charting a steady course toward harmonization, some premiers could not resist the temptation to make a splash with the insurance issue. What we now have in Atlantic Canada is more chaos and confusion than when we began a year ago. Key findings were ignored and, in Newfoundland, the government has moved perilously close to completely undermining the auto insurance market.

PEI WISDOM

There are, however, some oases of calm and rational thought in the storm. In Prince Edward Island (PEI), Premier Binns passed Bill-8 in the spring of 2004. While greater claims savings could have been achieved through a cap on minor injuries, there was recognition that restricting risk rating was unnecessary and each insurer should file rates reflecting its own circumstances.

Rating approvals and refunds followed in a timely manner. Consumers in PEI now enjoying lower rates and a marketplace where insurers are competing for business. PEI stands out as a jurisdiction that understands the mechanics and benefits of a free enterprise system.

N.S. BUNGLING

In contrast, before the ink on the premiers’ task force report had dried, Nova Scotia did away with important risk factors as rating variables and slapped a 20% reduction on rates across the board thus ignoring the different starting place and level of rate adequacy of each company. In a comedy of bungling worthy of an episode of “Yes, Minister!”, the N.S. government found itself scrambling to respond to the daily six o’clock news items on insurance.

Insurers provided extensive advice and data to demonstrate the degree to which premium dislocation would result from the removal of age in rating. One can only deduce that this intelligence was ignored, or blithely dismissed as self-interested rhetoric. Rate filings reflecting the elimination of age and marital status had to be filed early this month in N.S., and apparently there was shock over the dislocation seen in these filings.

The reaction? The N.S. Insurance Review Board issued a bulletin in September this year (the day filings were due) advising that they were capping increases at 10%. By law, insurers could not issue policies effective from November, or later using age and marital status in rating, but rates must now be re-filed and the board will not indicate when they might approve these filings. The November 1 renewals should be in the hands of policyholders by now, and they will likely be faced with multiple hits to their bank accounts caused by late processing of renewals. Cancellations by registered letter and possible lapse of pink slip liability cards are not likely to improve the way consumers perceive insurance companies.

N.B. MODERATION

In welcome contrast, in New Brunswick, Premier Lord’s government introduced legislative changes that demonstrated a solid understanding of the fact that the product drives the cost. Unfortunately, insurers found themselves unable to pass on savings to policyholders because rate filings were delayed unnecessarily in the governmental approval process. As so often happens, the government succumbed to the temptation to take the political rather than the appropriate approach and publicly chastised insurers for the delays.

The insurance industry also suffered the “sideshow” that came to be known as the “Weir Committee” – a political sop to the NDP to allow it to vent and force the taxpayers of N.B. to pick up the tab. The foregone conclusion of the Weir Committee – that the insurance industry was evil – cost the taxpayers of N.B. a pretty penny, and seems to have been relegated to the dustbin of redundant studies where it truly belongs.

Fortunately, Premier Lord accepted the conclusions of the Atlantic Report: That consumers were better served by competition and choice, not an expensive government monopoly. In doing so, the premier announced a move to give N.B. consumers more choice through a “no frills” auto insurance option, but interestingly, ignored the task force findings on risk rating and introduced price subsidies for young and new drivers. In spite of a few detours, N.B. now stands with Prince Edward Island as a jurisdiction that understands the mechanics and benefits of a free market system.

NEWFOUNDLAND SHOCK

The turmoil and consumer confusion these changes caused throughout the early months of 2004 were an obvious lesson to anyone paying the smallest attention to what to do – and more importantly, what not to do – in going about auto insurance reform. Accordingly, I was shocked when the government of Newfoundland & Labrador introduced legislation earlier this summer, repeating emphatically the mistakes and ignoring the successes of its neighboring provinces.

Equally disconcerting was the Newfoundland government’s resounding disinterest in engaging in any meaningful discussion with auto insurers or independent brokers who work in that province. Bill-30 was introduced, with no consultation and little understanding of what really needed to fix the auto insurance system, or how to fix it. “One size fits all” premium reductions by line of coverage were prescribed in legislation regardless of the circumstances of individual insurers and without a corresponding reduction in costs. Insurers sorely in need of rate increases were treated the same as insurers with rate redundancies.

Bill-30 is repugnant. It effectively – without just cause or timely appeal – confiscates shareholders’ capital that has for decades supported the needs of drivers in Newfoundland & Labrador. Now, we await the outcome of a public hearing to learn what the rules of the Newfoundland market will be.

And, compounding the Newfoundland insurance anarchy is the recent release of its flawed “Study of Homeowner, Commercial Property, Liability and Marine Insurance”. The so-called “facts” presented in the report on insurers’ profitability are dreadfully inaccurate and I found it unbelievable that, without talking to a single insurer, the government would consider that this constitutes a comprehensive study.

QUICK FIXES

Politicians have pulled some easy levers to manipulate public opinion and deliver “quickie fixes” – however, they are anything but fixes with a very brief shelf-life, perhaps not even long enough to ensure re-election. The governments have traded on the publics’ lack of technical understanding of insurance regulation, products and pricing, to stoke a misguided mistrust of the insurance industry.

Ultimately, the approach taken by some of the A tlantic premiers will backfire as their poorly conceived actions will compound the losses to all stakeholders, including consumers. When the smoke clears, the mirror will not lie. At some point, all governments will be forced to address their systemic issues in an intelligent manner, ensuring the accountability they owe to their constituents.