Auto Product Reform: Plugging Bi Losses

After a year and a half since the Insurance Bureau of Canada (IBC) began a nationwide political lobby campaign for auto insurance product reform, there appears to be a few cracks developing in the resistive walls of provincial government bureaucracy. Specifically, two private-member bills have been presented in Ontario which could see dramatic change within the province’s auto insurance market before the end of this year. However, while the one bill proposes a package of healthcare cost containments and a more flexible rate filing system, the other presents curtailment of the existing “preferred vendor program” applied by insurers to auto repairs. Will either bill survive legislative approval in the fall, many within the industry remain skeptical. But, commentators in this article note, the latest developments suggest that the Ontario government is aware of the claim abuse problems inherent in the existing system and is willing to react. There is also hope that, should Ontario move ahead with auto insurance product reform, similar movement will occur across the problem provinces, with Atlantic Canada on center-stage.

When Bill-59, the Automobile Insurance Rate Stability Act, was introduced in Ontario five years ago, many within the property and casualty insurance industry dealing with the country’s largest market and biggest single class of cover being auto insurance, could not have imagined the current financial mess. The then “radical” legislation was supposed to stabilize insurance rates as well as underwriting costs. In fact, rates fell by more than 13% after the introduction of Bill-59 while claims costs spiraled year after year to new heights, primarily on the back of personal bodily injury (BI) rehabilitation expenses and catastrophic benefit settlements. The Ontario government fell short on its promise to regulate healthcare vendors dealing in auto injuries, while the regulatory rate filing and approval system became a “political tool” encumbered by red-tape delays, industry spokespeople say.

Subsequently, several major players in Ontario’s auto insurance market have indicated that they will withdraw from certain classes of cover this year, or the market altogether should they not gain timely rate approvals from the Financial Services Commission of Ontario (FSCO). Notably, one major player in the Ontario auto market, Markham General, has been placed under court receivership after the company indicated that it could not continue to serve existing policies valued at about $80 million. Similarly, some insurers operating in the Atlantic region have “capped” new business until product reform and/or rate adjustments are approved relative to the local loss experience. While there is little hope for immediate reform on the east-coast with several of the provinces facing elections, there is now a sense of optimism for change in Ontario. The recent presentation of Bill-166, the Insurance Statute Law Amendment Act, by M.M.P. Rob Sampson has caught the industry’s attention. The bills’ salient features are:

A “file and use” rate approval system;

Additional access to tort for excess healthcare claims;

A reduction in the “take all comers rule”;

Payment classification of healthcare services;

Elimination of the deductible on pain and suffering awards above $100,000;

The right of the Workers’ Safety Insurance Board (WSIB) to subrogate auto insurance tort claims; and

Enabling insurers to introduce “preferred healthcare vendor” policy endorsements.

It is expected that Sampson and Ted Chudleigh, the parliamentary assistant to the Minister of Finance for Ontario, will begin a series of consultative discussions with the various stakeholders during the course of August and September, with the view that final legislation will be approved before the end of the year.

M.M.P. Frank Klees also recently tabled a private-member bill, the Collision Repair Standards Act (Bill-165), which calls for an accreditation system for auto bodyshops. This move would essentially abolish the current “preferred vendor” endorsement program applied by many insurers in auto policies. Needless to say, the bill has not received applause from the insurance industry. Notably, the Klees bill calls for the establishment of an advisory committee to the government, comprising of four members from the auto repair industry, three from the insurance industry, and two non-partisan members. Insurers believe that Bill-165 is being driven by a political agenda, with the “cards stacked against them”, in an attempt to break the partnership agreements that exist under the preferred shop system.

IBC position

“I think the [Sampson] bill is an extremely good starting point in addressing many of the cost abuses within Ontario’s current auto insurance system,” says Mark Yakabuski, vice president Ontario region at the IBC. Many of Bill-166’s provisions reflect issues which had been put forward by the IBC last year in its cost-containment proposal, he adds. These changes have been on the table for over two years, Yakabuski remarks, while cautioning that, “remember private-member bills don’t always get passed”.

But, Yakabuski observes, the Sampson bill has put auto product reform out in the open, with further consultations expected to fill out some gray areas within the provisions. “The discussions will be intense in the weeks to come. While we’ve indicated to the government that further consultation is needed, we’ve also expressed the fact that there’s a need for action. I’m hoping this can be wrapped up by the late fall,” he adds.

And, a successful outcome to auto insurance product reform in Ontario could well signal to the other provinces that it is time to take action, Yakabuski says. “Many of the provinces point to Ontario and say that the auto insurance system doesn’t work, so why go down the same road. But, if we move in a successful direction here [on product reform], other [provinces] will take note.”

File and use rate approval system. The “file and use” rate proposal contained in Bill-166 is “critical to the industry” Yakabuski says. This will enable insurers to file rates which FSCO will have to approve or disallow within a 30-day period. Currently, the rate approval system takes anywhere from six to nine months to gain action. And, Yakabuski notes, the impact is not only on rates, but risk classifications as well. The existing situation has created a rigid system with little room for product innovation and competition, he adds. “I think the natural forces within the market will determine pricing, competitive pressure should be the driver.”

“Take all comers rule”. Bill-166 will not require insurers to take all policyholders on irrespective of the risk profile of the insured. The proposal will enable companies to broaden their existing underwriting guidelines relative to the risk exposure, thereby creating a more “flexible” process in pricing, Yakabuski notes.

Increased tort availability. Sampson has suggested that increased tort access should be granted to insureds specifically for excess healthcare claims. This measure should reduce the claim burden on auto insurers who under the current system are the target of catastrophic medical care claims.

Healthcare vendor pricing. Bill-166 proposes that FSCO should be empowered to set price limits and service guidelines for healthcare practitioners. Insurers have attempted to negotiate pricing standards with healthcare groups in the past, Yakabuski observes, but without any legislative pull these attempts have not had much success. “There’s still a lot of work that would have to go into setting up a service/pricing guideline, but I do think that this provision is an important tool,” he adds.

Preferred healthcare vendor endorsements. Insurers would be able to offer insureds premium discounts if they accept healthcare treatment under claim from a list of preferred healthcare vendors. “This is similar to the preferred bodyshop concept, which has never before been in healthcare coverage,” says Yakabuski. The IBC is currently reviewing this provision, the prime concern being that it enables insureds to legally contest the preferred vendor endorsement. “This creates a lot of uncertainty, and opens the door to increased litigation expenses and potential class-actions.”

Eliminated deductible on $100,000-plus general damage awards. Bill-166 proposes that policy deductibles applicable to “pain and suffering” claims should be removed on awards of above $100,000. The industry’s concern in this regard is that the courts may be tempted to raise award limits above the deductible threshold, says Yakabuski.

WSIB subrogation. This provision would enable the Workers’ Safety Insurance Board to subrogate tort claims resulting from auto accidents. While this item, if legislated, would cost the industry “something”, Yakabuski says the real concern is it could legally open the door for other parties to engage in subrogation actions against auto insurers. “This is something that we are still reviewing, if it is just restricted to the WSIB, then it won’t be a large cost to the industry.”

With regard to the Klees collision repair standards bill, Yakabuski says, “there’s no way we can support the bill as it currently stands”. While insurers support the concept of accrediting repair bodyshops, any attempt to do so at the expense of the preferred shop system would have a significant cost impact on insurance, as well as the quality of repairs, he adds.

Furthermore, while the Sampson bill shows depth in its preparation, Yakabuski describes Bill-165 as “having more holes in it than a Swiss cheese”. It would seem that the Klees bill is a direct attempt to derail the current preferred shop system used by many insurers, he notes. The Competition Bureau has already reviewed the preferred shop program and concluded that the process is cost-effective for consumers as well as ensuring quality of repairs, Yakabuski points out. He does not believe that Bill-165 has much support from within the government, “and that there are a lot of areas within the bill that require further extensive thought”.

Insurer perspectives

The prime objective of Bill-166 is to curtail low-end personal injury claim abuse, observes George Cooke, president of The Dominion of Canada General Insurance Co. Most of the provisions contained in the bill are based on proposals submitted by auto insurers to control costs after Bill-59 was introduced. “Most of these changes are issues which should have been dealt with in 1998.”

From a practical standpoint, Cooke is skeptical that Bill-166 will make it in full entity into legislation. The bill’s provisions will likely be toned down, he believes, although the Ontario government can no longer ignore the abusive cost issues that currently plague the province’s auto insurance system. “We haven’t got a full picture of what this [Bill-166] will ultimately look like in terms of final legislation.”

Cooke expects the “file and use” rate approval system will make it through into final legislation. “This system works extremely well in Alberta, and it’s just really Ontario that is an anomaly in this respect compared with the other private-sector insurance provinces.” He notes that the main benefit of a file and use system is that competition is allowed to set in. “When you’re having to wait 10 months for [rate and class] approval, then you’re restricting competition as there’s no room for change.”

Commenting on Bill-165, Cooke agrees that a form of accreditation and self-regulation would benefit the auto repair industry. “The bodyshop industry needs to be cleaned up.” But, he points out, attempts to do so by scrapping the insurance preferred vendor endorsement would ultimately cost insureds more in premiums. “I’m not against self-regulation…but not if this means that I can’t provide my customers with choice, and for that matter, who I want to have as my business partners.”

The current rate approval system has cost auto insurers millions of dollars, says Steve Smith, executive vice president at Kingsway General Insurance Co. Bill-166’s provision for a file and use rate approval system will ease some of the time constraints on insurers, he notes, although the provision “doesn’t go all the way”. The bill still requires approval by the regulator of filings, although within a significantly tighter time span, he observes.

Overall, Smith says that Bill-166 lacks attention in addressing fraudulent or misrepresented claims. “Basically, there’s no incentive for an insured to not try misrepresent a claim. I think the ‘good faith ruling’ should apply across-the-board.”

He notes that the bill also does not truly address the problem of para legals abusing the system to gain “hassle” claim settlements. There is also concern that the provision allowing the WSIB to subrogate claim losses will open a new door to fraud on commercial policies, Smith says, as insurers faced with claims will have little control over fraud investigation in such circumstances.

“I think that Bill-166 pretty much reflects the industry’s position. It’s late in coming, but better late than not at all,” says Stuart Kistruck, president of Pilot Insurance Co. He is hopeful that the provisions put forward in the bill could be finalized by late August. Although, he adds, “we have to remember that this is not a magical formula, most insurers are still behind in their actuarial loss experience”. And, Kistruck notes, the proposed file and use system is “not going to be like going back to 1989”, rates are still going to be subject to government approval. For Kistruck, the greatest benefit of Bill-166 is its drive to cut through administrative costs. “So many dollars are going into the bureaucracy, this is what we need to cut into”

Kistruck is less concerned with Bill-165, and the preferred healthcare vendor endorsement provision of Bill-166. These issues will really have varying significance on a per company basis, he adds, as Pilot does not apply a preferred vendor program. “This really depends on the community that each company works in, and how well they know that community.”

Bob Tisdale, president of Pembridge Insurance Co., says that Bill-166 is “a step in the right direction”. While a file and use rate system would enhance insurer flexibility, assuming that it even makes into legislation, he believes that competition in the marketplace has already held pricing down. The regulator should place more emphasis on ensuring the financial stability of companies than looking to price restraining measures.

Tisdale believes auto insurers face a much bigger problem than just a “mechanical fix” of the system: “We haven’t been very effective in creating public awareness of the cost impacts driving premium increases, basically what has become to be known as the ‘auto lotto’.” While Bill-166 will serve to quell some of this abuse, he holds the view that true cost containment in this regard will depend on an effective industry-driven public awareness campaign.

Atlantic pressures

Auto insurers recently came under fire from a special investigation committee appointed by the New Brunswick government to look into premium rate hikes. Several of the committee members accused insurers of “profit taking” and dismissed the losses incurred by companies as being “creative number playing”.

The challenge before auto insurers in getting local governments onboard with regard to the need for product reform is particularly acute in Atlantic Canada, concedes IBC regional vice president Don Forgeron. Several public surveys conducted by the IBC suggest that there is a low perception of the impact of fraud on insurance pricing. Similar to the Ontario situation, the majority of auto claims costs arising in the Atlantic region are BI related. And, Forgeron notes, “the governments won’t be on your side without popular public opinion”.

Forgeron is not upbeat with regard to any immediate government response to auto insurance product reform within the Atlantic provinces. “On the horizon, there are concerns on the political front on what upcoming provincial elections may have on auto product reform.”

“No government is going to want to tell voters that they’re going to have to pay higher auto insurance. Let’s face it, auto insurance is not popular, and a government can’t win in trying to appease all,” observes Tisdale. Pembridge “capped” new business within the Atlantic provinces as the end of 2001, he says, with the view of “waiting to see” for signs of profit within the markets. The big issues with Atlantic Canada are a very high political relation to auto insurance, and also the fact that the region is tort-based, which has encouraged insurance abuse in terms of insureds chasing bigger payouts, he adds. “People are realizing that they can get bigger payouts. The frequency of loss hasn’t increased, but the value of claims has risen significantly.”