Auto Reform: All The King’s Horses…

The auto insurance battlefield lies pockmarked by smoldering wreckage with the public’s view of insurers currently at what many regard as being at an all-time low. Skyrocketing rate adjustments introduced by insurers in response to the dramatic upward spiral in loss costs of recent years invoked a broad outcry from consumer groups and politicians which has subsequently seen an increase in regulation of the mandatory portion of the auto product.

Included in the wreckage is the possibility of government-run auto insurance systems being introduced as a final pricing solution in three of the troubled provinces (although such outcomes are seen as unlikely). Insurers also have to contend with an “open wound” in terms of the Facility Association – the industry’s pool for high-risk drivers – which produced close to a half billion dollar loss for last year on a combined ratio of 166%, while the association’s premium volume jumped three-fold to over $1 billion (representing nearly a 5% stake of the overall public auto market).

And, in the end, insurers remain wary over whether the “watered down” reforms to control claims costs that have, or are in the process of, being introduced by the various provincial regulators will be adequate in compensating for the rate freezes and rate “rollbacks” applied by the governments. Notably, during 2003, four of the provincial governments had introduced premium rollbacks or rate freezes, observes Jane Voll, chief economist at the Insurance Bureau of Canada (IBC).

Although the regional offices of the IBC for Ontario, Atlantic Canada and the prairies seem confident that the auto product reforms underway in their jurisdictions will ultimately produce some cost benefits for insurers, the jury appears to be still “very much out” on the extent thereof as well as the length of time for them to become effective. Voll points out that the loss ratio of the mandatory liability auto insurance product remains a concern, with insurers having finished 2003 with an average 89.6% ratio, which shows only moderate improvement on the 96.6% ratio reported for 2002 – despite the rate hikes applied by companies. Specifically, Ontario’s auto market – which accounts for more than 50% of total auto premiums – delivered a combined ratio of 117% for 2003. “Ontario auto remains very unstable posting a combined ratio of 117% [for 2003] only slightly below the 119.6% last year [2002],” Voll says.

While insurers frustrate silently over the rate freezes and rollbacks, waiting for government political noise to translate into defined plans of action, the industry has to contend with a damaged public image. An independent survey conducted nationwide by NFO CFgroup toward the end of last year confirms broad negative consumer sentiment toward auto insurers, as well as a misconception regarding the reasons why auto rates have risen so dramatically. Over 70% of the survey respondents believe insurers brought in higher rates to increase profits, with three-quarters of those surveyed supporting government imposition in price setting.

Insurers, however, believe that government interference with pricing and cumbersome product regulation have been the longstanding reasons resulting in the cost pressures now confronting the auto market. The two loss-producing issues mostly responsible are escalating medical treatment costs and rising minor bodily injury claims and tort costs, insurers observe. As such, the problem is that the governments have been quick to regulate auto insurance pricing and avoid addressing the cost side of the equation, they add glumly.

ONTARIO REFORM

“I think we have been through a long and deliberate [auto] reform process, and the result is beginning to bear fruit,” says Mark Yakabuski, the vice president of the Ontario region at the IBC. As such, he expects to see a more “stable marketplace” in coming months, although thus far insurers have been shy to boost underwriting capacity. “It’s still early [in the reformed product environment].” However, Yakabuski admits that the “generally positive attitude” adopted by insurers toward the reform process, as well as the rate reductions filed by companies in the beginning of the year when the rate freeze applied by the government expired, have been largely committed out of a sense of “good faith” rather than bottom-line improvement in results. That said, he does believe that insurers have seen a reduction in combined ratio for the first quarter of this year from 2003’s 117%.

Auto product reform in Ontario was initiated by the previous Progressive Conservative government under Bill-198 before losing office to the current Liberal government in October of last year. The Liberals immediately implemented a rate freeze and promised voters an across-the-board 10% cut in auto premiums. Insurers were expected to file for lower rates this past January when the rate freeze ended. Included in the PC and Liberal auto product reforms are a higher standard collision deductible, capping of tow-truck and storage fees, a doubling of the “pain and suffering” deductible, a prohibition requiring 52 weeks before cash settlements can be made, increased regulation of paralegals and set pricing for medical treatments.

The new government also called for insurers to provide policyholders with an alternative “stripped down” auto product, and proposed that a replacement be found to the current Designated Assessment Centers (DACs) injury claim settlement system. Ontario’s financial services watchdog, the Financial Services Commission of Ontario (FSCO), subsequently issued a consultation paper outlining a replacement system for DACs under what it calls the “expert assessor network” that is expected to streamline the assessment process and reduce user costs. Insurers, brokers, government and the various service providers involved remain in consultation regarding further reform measures.

One provision introduced by the government in its auto reform process which has left insurers decidedly unhappy is extended tort for excessive healthcare costs. While the other reform initiatives brought in will assist insurers greatly in reducing minor bodily injury claims costs, and tightening against fraudulent claim activity, the extended tort provision may bring about a surge of litigation as a means of getting around the other claims restriction measures, Yakabuski says. We are advocating the government to monitor tort costs closely.”

The IBC is much in favor of the government’s move to reform the DAC system, which a final outline for a future system is expected to be made sometime in June this year. “I think reform of the assessment system is key to the overall reform of Ontario’s auto insurance,” Yakabuski comments. He notes that the time-consuming and expensive nature of the DAC system “has sent a message to medical providers that they can pad treatment plans because they know that an insurer won’t resort to a DAC because of the cost”.

Looking ahead, Yakabuski expects auto premiums will decrease further into the year, with applications for FA coverage having already dropped off steeply (by the end of its 2003 financial year, the FA’s stake of Ontario’s auto market had risen to 3.8%). However, Yakabuski cautions that a decline in rates will have to be matched by a reduction in loss costs. “I think that what drivers really want are stable premiums, and the politicians want auto insurance out of the public spotlight. To achieve this stability, we have to get pricing and claims costs right.” Furthermore, he stresses the need for auto insurance reform to be seen as an ongoing process. “It’s critical that government doesn’t bring in reforms and then put on their blinders for the next four years.

ATLANTIC REFORM

New Brunswick – which was the first “political hotspot” for insurers when the opposition political parties in the province accused companies of “price gouging” in terms of the premium rate hikes introduced, and thus turned auto insurance into an election platform issue – is now being heralded as the “success story” of the Atlantic Canada region. While the auto product reform me asures introduced have seen premium rates fall, and a significant number of policyholders taken out of the FA (the association’s share of N.B.’s auto market last year was 4.7%, or 17,000 drivers), uncertainty still exists in the form of a pending response by the government to the “Weir Report”.

Under political pressure, the N.B. government created the “Select Committee on Public Auto Insurance” headed by the NDP’s Elizabeth Weir to investigate the viability of a government-run auto insurance system. Thus far, N.B. and Nova Scotia have expressed interest in creating crown-owned insurance companies to provide mandatory auto coverage.

The Weir Report was released in April of this year, and not surprisingly, proposed the establishment of government-run auto insurance for N.B. at a start-up cost of about $82 million. The fact that drivers were expected to pay a “surcharge” to cover the cost of starting up a government-owned insurer, plus that the average policy premium rate presented in the report was barely less than what the current average premium rate is being offered by private insurers, has taken much of the wind out of the sails of the Weir Report. The N.B. government is expected to deliver its response to the Weir Report by the end of July, says Don Forgeron, vice president of the Atlantic region at the IBC.

The auto product reforms introduced in N.B. have proven far more successful in eliminating claims costs than anyone thought possible, observes Forgeron. As such, the insurance industry has been quick to respond by taking drivers out of the FA, he adds, with the association’s population having fallen since March of this year by 2,000 to 15,000 policyholders (representing a 3.8% stake of the market). Ultimately, the industry plans to remove a total of 7,200 drivers back into the standard auto market by August of this year, leaving the FA with a 2.5% share. In addition to depopulation of the FA, auto insurers have already lowered premium rates with further price reductions expected to come through in July when the province’s rate freeze expires, he adds.

Another successful case of product reform lies in Prince Edward Island, observes Forgeron. Similar auto reform measures to what was introduced in N.B. were adopted by P.E.I., specifically a cap of $2,500 on pain and suffering awards, which has resulted in premium rates dropping by 10%-15%, he adds.

“Nova Scotia remains a tenuous situation,” Forgeron comments, with the government having applied a 20% premium rate rollback (with rates frozen until November of this year). Some measures to control claims costs have been introduced by the government, but insurers do not believe that the product reforms taken will achieve a 20% cost saving. “Early indications suggest that the cost reforms are working,” he notes. Of greater concern to insurers are new restrictions on rating criteria preventing companies from rating a risk based on a driver’s age. Hearings are also currently taking place to determine whether gender should be allowed as a rate determiner, he adds. “If we get through the November rate filings without too much damage, then I think we can put all this behind us.”

Newfoundland recently unveiled plans for reform of its auto insurance system. The government hopes to bring about an average 15% reduction in rates, which an actuarial study compiled by the province’s Public Utilities Board (PUB) suggests is achievable based on the reforms put on the table. In announcing the reform package, the government moved to freeze auto rates for a year. Among the reforms is a $2,500 deductible on claims for “pain and suffering”. However, the government also moved to eliminate rating criteria in terms of age, gender and marital status. Forgeron says the IBC is currently engaged in discussions with the government. The important issue, he adds, “is that the government realizes it needs to do something”.

ALBERTA REFORM

“Intent” rather than “action” appears to be the driving force behind Alberta’s auto insurance reform process. The Tory government began working on auto product reform in the spring of last year, and enabled legislation, Bill-53, in December to facilitate amendments made to the provincial Insurance Act, observes Jim Rivait, vice president of the prairies at the IBC. Subsequent to the government’s first attempt at tackling the problem, “politics entered the picture, and now it’s difficult to say where the process is going,” he notes.

Speaking at the recently held Independent Insurance Brokers Association of Alberta (IIBAA) AGM, Dennis Gartner, assistant deputy minister at the provincial Ministry of Finance, concedes that the government did not anticipate the auto reform process to have become as “difficult, large and political” as it has. The “political factor” partly involves the opposition parties who have called for an investigation into a government-run auto insurance system.

The government is expected to deliver an outline of its proposed auto reforms within June, Rivait says, although what to expect is much of a mystery. “A lot [of the discussions] held by the government have been done under confidentiality agreements, so we haven’t been able to do an actuarial cost study [of the proposed changes].” Wryly, Rivait points out, “the premium side is simple for them [the government] in that they simply reduce rates to make consumers happy. But, addressing the claims cost side, things become more complex. The government has to realize that there are two sides to the equation.”

Auto insurers are currently operating in a rate freeze environment in Alberta. Kingsway General Insurance Co. initiated a legal proceeding against the Alberta government in the beginning of this year looking for compensation against losses it incurred due to the province’s rate freeze (pegged at $12.6 million). Kingsway lost the challenge. However, for Kingsway Financial Services Inc.’s president Bill Star, the attempt was more about “taking on” the regulators and governments for their lack of decision making and what he calls the “disarray of the auto markets in Canada” (see article on page-22 of this issue of CU for further details).

The biggest auto claims cost factor in Alberta is “pain and suffering”, Rivait says. It is expected the government will introduce a cap of $4,000 on “pain and suffering” awards, while certain other minor cost-containment measures have already been slowly brought into the system, he notes. The new system is also expected to contain a “premium grid” which insurers will have to apply in their ratings. But, Rivait points out that “there’s a lot of pressure from injury lawyers [on the pain and suffering limitation] on the government concerning its proposals”. Another factor unlikely to make insurers happy is that the government may look at restricting application of age and gender rating criteria. “Uncertainty is really the toughest issue. If we knew where we were going, then companies could decide. I hope that the conclusion will be something the [insurance] industry can live with,” Rivait says.

INSURER OUTLOOKS

“It’s still to early” to judge the cost-saving effectiveness of the auto product reforms introduced in Ontario, says George Cooke president of The Dominion of Canada General Insurance Co. “It takes between four to five years to determine where a product is going.” However, Cooke believes that Ontario is on the right track, “I’m encouraged by the dialogue with FSCO [and the insurance industry] and the government.”

Cooke sees the Ontario government’s proposal of offering consumers a choice of auto insurance products as an opportunity for the industry to become innovative. He also regards the FSCO proposal to replace the DAC system as a positive development, and believes that the discussions that have taken place between insurers and the regulator in this regard have been constructive.

“I hope the [N.B.] government will consider the insurance industry’s proposal of a ‘no frills’ auto product,” Cooke says ruefully. However, overall, he notes that N.B. is now delivering the desired claims cost savings. The two unknown factors in the east are Newfoundl and and N.S., which in the first instance insurers are still waiting for direction from the government, and with the latter there remain too many unknown variables to predict the outcome. “The cost side is going as planned, but the changes to the rating variables, the gender issue, that is a problem.” The real “wild card” as Cooke describes it, is the situation in Alberta, “at this point, it’s a very fluid environment”.

Ernst Notz, president of The Citadel General Assurance Co., points out that auto product reform in Atlantic Canada is ahead of the other provinces on a progressive scale. He regards Alberta and Ontario as being the two “big unknowns” to whether the reform processes will deliver the desired results. The Citadel currently only writes auto business in Quebec, which Notz believes has the right approach. However, he adds, “I think if insurers are patient enough, then [auto reform countrywide] we are heading in the right direction. The basic problem is that the governments have too much to say [in influencing auto pricing and coverage]. It has become highly political.”

Steve Smith, president of Farm Mutual Reinsurance Plan Inc., concurs that the underlying problem with the auto insurance product is over regulation. “They [the governments] should let market competition and choice determine the most effective product. The problem is that they [the governments] try to fix only parts of the equation. They want to regulate pricing and not cost.”

Overall, Smith is pessimistic that the general auto product in Canada can work. “In my opinion, until the regulators back off, the auto product overall cannot work. You can’t just fix the pricing.”

Smith remains concerned regarding Ontario’s DAC system, which he describes as a “complete mess” but in that respect is cautious of any new system proposed by the same regulators who created the mess to begin with. He also believes that the FA “has serious flaws”. One of the biggest problems is that a company’s losses through the FA can not be used for rate filing purposes, which hides the true cost of the auto product, he adds. “Over the years, the industry has tried different approaches like ‘assigned risk’, but there is always something that does not work out. I really don’t know what the solution is [to an alternative to the FA].”

But, the weakest link in Ontario’s auto reform package lies in tort costs, Smith says. Tort thresholds were not addressed under Bill-198, and he sees such costs relating to soft tissue injuries as something of a “gun at insurers’ heads”. He adds, “this causes me great concern”. However, Smith concedes that several of the auto reform moves made by the Ontario government have helped to slow claims costs down, particularly relating to the new limits placed on paralegals and the positive impact this has had in reducing fraud-related expenses. “Reports from independent adjusters suggest at positive feedback. However, you’re looking at least at 18 months before you see any real benefits [stemming] from reform [measures].”