Auto Choice – Clarity or Confusion?

Everyone wants choices. It does not matter whether the product is cars, clothes or computers, we expect to have variety when we purchase a product or service. Customization and competition are precepts that have moved to the point of “motherhood and apple pie” truisms in today’s economy.

So, why not auto insurance? Insurance regulators, companies and intermediaries in most jurisdictions across Canada, and especially Ontario, all say policies should provide more flexibility to customers. The black and white issue of choice, however, turns decidedly gray when it come to precisely how that choice should be offered. Should there be a base product, and options to purchase customized coverage over and above? If so, what should that base product look like? Should consumers be able to opt out of certain coverages they do not need, such as seniors doing without income replacement benefits? Do buy-down options simply blind clients to reduced coverage by waving discounts in their faces? And how do you get consumers engaged in the insurance research and buying process?

These and many more detailed questions are what regulators in Ontario are currently struggling with as they try to mold a customized auto insurance plan. After releasing a proposal this summer, the finance ministry received dozens of responses this fall from interested parties, including insurers, the Insurance Bureau of Canada (IBC) and the Insurance Brokers Association of Ontario (IBAO). And, many are waiting to see what comes out of the cast in early 2005.

OPTIONAL BENEFITS

“In the past, the Ontario auto policy was fairly standard and, beyond some limited options, consumers never really had to make choices or decisions, ” says Mike Colle, parliamentary assistant to Ontario’s minister of finance and the person in charge of turning the proposed reforms into a workable solution. “What we are trying to do now is provide those choices and make the process as transparent as possible. Clearly, that is not easy to do with a product as complex as auto insurance.”

The Ontario government’s proposed customized policy maintains existing accident benefits as standard coverage, but allows “buy-up” and “buy-down” of optional benefits through a “bundle” approach. Mandatory benefits include medical and rehabilitation, attendant care, case manager services, funeral and transportation expenses. The optional buy-up and buy-down benefits are structured into three bundles – “income replacement”, “no dependents” and “no minor losses”.

In the first two, the buy-up options that currently exist are continued, along with an optional index benefit. The main changes are the buy-down bundles, which seek to eliminate redundancy or unnecessary coverage for those who have alternative disability plans or have no dependents.

Colle says the Ontario government is “running through various scenarios right now, such as if a senior chooses the buy-down income replacement option and gets a discount, how would it be harmonized if the insurer already offers a senior’s discount”. He estimates the first quarter of next year for the launch of the new policy, which will be rolled out over a one-year period at each policyholder’s renewal date.

STEPPING STONE

Mark Yakabuski, vice president, Ontario region for the IBC is encouraged that the government is pursuing choice and customization, a first move he calls a “stepping stone”. The real questions are about premium savings and reductions in overall loss costs – issues that the IBC addressed in its September response to the government’s proposal, entitled “Giving Drivers a Choice”.

The Ontario government’s early estimates for the customized options peg premium discounts at anywhere from 3%-8%. “The savings we see with the first-phase are not huge, ” Colle concedes. “It will depend to some extent on how many people choose the option and take advantage of the choices.”

The IBC points out that a strong pick-up of the government’s buy-down options would mean that coverage for some claims would simply be spread over a smaller number of policyholders. This would actually result in premium hikes for certain customers and a “win/lose” scenario for segments of the population – winners being those with no dependents and good group disability benefits and losers being largely the self-employed, contract workers and service industry employees.

An actuarial study of the government proposal from Baron Insurance Services Inc. showed that, depending on the percentage of eligible people who opt for the various bundles, the rate increases based on average accident benefits premiums for others could be as high as 12%. “This also doesn’t take into account that some of the costs in the buy-down bundles (no minor loss coverage) may simply switch from accident benefits to third-party liability (tort), so you don’t actually take the costs out of the system,” says Barb Addie, president of Baron and author of the study.

“If you don’t address overall loss costs, then all you’re really doing is redistributing premiums,” observes Yakabuski. “You may be reducing the subsidization that is inherent in any auto insurance system, but you have to go beyond that and achieve real loss costs reductions that apply to wider groups of policyholders.”

BUY DOWN

As such, the IBC is proposing a new basic policy “that more realistically provides for the needs of all drivers”, while giving customers the chance to buy-up for certain customized coverages. On the topic of a buy-up customization design, the IBC has many industry allies. The IBAO does not want to see buy-down become a reality in auto insurance, says the association’s chief executive officer, Bob Carter.

“If, as a broker, you go to a consumer and say, ‘we can take away this and this and you save $120,’ all the consumer hears is the $120 part,” notes Carter. “That doesn’t serve the interests of the consumer. A far better option is to have your basic policy and then list the options for buying up. That gives everyone the base policy, and the option to pay more money for certain coverages.”

Ron Noiles, senior vice president of personal lines for Aviva Canada, says the main issue comes down to what a “basic policy” should look like. “One of the problems right now in Ontario is that we have an enriched product,” he comments. “It is very generous in terms of accident benefits, and it doesn’t really resemble a base product. It is very difficult for insurers to add anything on to that product and remain competitive – the base is way too high.”

In addition to accident benefits, tort costs in Ontario are under pressure, rising to $1.54 billion in 2003. The fear the IBC has is “slippage” in third-party liability. It would be tort responding to a situation in which people who have opted out of income replacement benefits may, due to a change in circumstances, find themselves without any protection. There is also the issue of a “growing number of extended health plans using various ways to avoid paying their share of expenses related to auto collisions,” the IBC notes. “These areas – med/rehab and tort – are major cost drivers,” says Yakabuski. “We know they [the government] can’t do anything overnight, but a full customization program should have much more scope.”

In particular, Yakabuski says that “super-generous” benefits,” namely the requirement for every driver to purchase $100,000 in basic med/rehab benefits, provides more protection than most people need. According to the IBC, the average claim for medical rehabilitation benefits, including catastrophic coverage, was $22,530 in 2003. “It is difficult to justify the current $100,000 limit…there is ample room for the government to offer options to consumers with respect to medical rehabilitation benefits,” the IBC argues in its report. “I think if you can bring the ‘Mercedes-Benz’ of Ontario’s accident benefit system down to a ‘Chevy,’ and then give people the option of buying up, it would make sense,” Addie notes.

CONFUSION CONCERN

Colle says there is little inclination to tamper with Ontario’s current medical rehabilitation benefits. “We have reviewed the IBC’s approach to reducing med/rehab benefits and it is not one we want to go with, ” he says. “We have tried to maintain levels of benefits that Ontarians expect. What is the point of saving $100 in premiums and getting an inferior product?”

The pivotal issue with Ontario’s choice auto insurance plan may not lie with arcane arguments about “tort slippage” or median medical rehabilitation benefits, but rather with transparency and clarity for consumers. On this criterion, many sources give the government’s buy-up/buy-down option a failing grade. “The biggest problem I have is that many consumers don’t really know what they are buying today,” says Addie. “Adding another layer of complexity won’t help them understand the product.”

This is a point echoed by Noiles. “Auto insurance is already a heavily regulated product,” he says. “It seems the more regulation we get, the more we go the opposite way in terms of choice and innovation. Beyond the base product, why can’t companies tailor coverage options to their individual clients’ situations? Instead of telling the consumer what he or she has to buy, perhaps policyholders will become more motivated to find out about their insurance if they can find specific options that work for them.”

The IBC notes that “having two conflicting optional benefit designs within the same policy is sure to create confusion among consumers and complicate the communication of the government’s customization plan to drivers.” In response, Colle points out that the government’s proposed customization plan is just the first in a series of changes. “We have stated quite clearly that this should not be seen as a panacea,” he comments. “This is the first step towards creating more consumer awareness and understanding of the choices they make in insurance – not just auto insurance, but also the multiple policies they may have with life insurers, group insurers. We are trying to get consumers away from thinking about the discounts and rather look at an inventory of their insurance coverage.”

The issue of complexity comes into play for brokers as well, particularly in terms of potential liability in an advisory capacity. “This is something that should be on brokers’ radar screens, but not on their panic buttons,” says Rod Finlayson, executive vice president with CG&B Group, and an expert in professional liability. “From an errors and omissions standpoint, whether the customization is a buy-up or buy-down option it won’t make a huge difference. But brokers will have to pay close attention to how the actual product is structured.” Furthermore, Finlayson observes that, “we always counsel broker to go back to the basics – train your staff in all aspects of the insurance product and document all correspondence carefully, especially when it comes to direct communication with the client about coverage”.

Carter says training on any new Ontario auto insurance product will be coordinated at a senior level through the provincial association. In terms of liability, he acknowledges there “is always that risk. If the government brings in the buy-down option, we will have to get the consumer to sign-off on a document. This will impede the process of buying insurance. The whole point is to make it easier for the consumer to buy insurance and this will just add another step.”

The IBC recognizes the need for clarity and calls on the government to introduce a “comprehensive consumer information sheet” for use by brokers and agents, which would explain the options available to motorists. It also recommends that government should prescribe in legislation what information should be disclosed to consumers and even protect insurers and intermediaries from lawsuits “in order to allow them to sell the new customized options to consumers”.

While Colle would not confirm if the Ontario government would consider or pursue this form of “legal immunity,” legislative protection has been extended to insurance “issuers” in at least one other province. In Saskatchewan, consumers were given the option to choose between tort and no-fault personal injury coverage in January, 2003. In 2003, the provincial government made a legislative amendment to protect “issuers only”, including some brokers, for any loss or damage suffered by any person by reason of acting in good faith. It was primarily designed to strengthen legal immunity and protect issuers from frivolous lawsuits, according to a Saskatchewan Government Insurance (SGI) spokesperson.

Earl Cameron , vice president of claims for SGI, says just over 4,800 Saskatchewan residents have taken the tort option – a relatively small fraction of the province’s population of just under one million. “We didn’t expect a huge amount of people choosing tort,,” he says. “But we are committed to giving our customers the option. If we can offer choice in property insurance and other coverages, why can’t we do it in auto insurance?”

Ontario is picking up on that theme and tentatively trying out some new options for consumers. The big question may be: will Ontarians actually take them up on the offer? Colle says, “from our discussions with consumer groups, I think that initially there will be a modest approach to the changes. But, we are giving them the option as a starting point. It is all about managing risk on an individual level and we hope that message gets through.”

Yakabuski says that “getting started” on choice and customization in auto insurance may be just as important as arguing about an ideal system. “The government is leaning more to start out with a fairly modest policy and letting consumers digest it,” he says. “We support this approach, “but he quickly adds, “there needs to be a process by which choice gradually expands”.