Benefits Reduction

Changes to Ontario auto insurance, which take effect this June, could well reduce claims costs.

But insurance professionals who welcome the changes should be careful what they wish for.

In order to examine the impact of the reforms on the auto insurance industry, one should consider the fact that insurance is intended to cover economic loss if it is sudden and unforeseen.

If an economic loss is not covered by an insurance policy, one way of looking at it is that an insurance company avoided a loss. Another way of looking at is that many people could have coverage gaps and are, therefore, not paying premiums that they otherwise might be paying.

The average person may not be cognizant of all risks, but will be looking for help in the event of a catastrophic loss – whether it is from a flood, earthquake or vehicle accident.

This year – for the second time since 2010 – the Ontario government will be reducing the mandatory first-party accident benefits coverage that vehicle owners must buy. Currently, the standard auto policy has a $50,000 limit for medical and rehabilitation benefits and $36,000 for attendant care. Those limits were twice as high before 2010.

For collisions occurring on or after June 1, the standard accident benefit limit will be $65,000 and will include attendant care – meaning the total limit will be reduced by $21,000.

For catastrophic impairments there will be one $1 million limit that includes attendant care, instead of two separate $1-million limits for attendant care and medical.

What the Ontario government did was to reduce the amount of accident benefits (AB) coverage that vehicle owners must purchase. There was essentially only one policy objective: reduce the premiums that vehicle owners have to pay their insurance providers. To put it another way, the primary public policy objective was to reduce the top-line revenue (per vehicle) flowing into Ontario auto insurance – a major product line for Canada’s property and casualty industry. Reducing mandatory coverage does nothing to reduce the economic losses from vehicle collisions. It only reduces the economic loss that is covered by the p&c insurance industry, unless consumers purchase optional additional coverage.

Some might characterize coverage reduction as an anti-fraud measure. Reducing AB coverage could well reduce fraudulent claims, in the same way that excluding fire coverage from home insurance could reduce fraud by arson.

One can only hope that there is a better answer to fraud than selling less insurance.

Ontario’s auto reforms might be good news both for the life and health insurance industry and for advocates of big government. Life insurance agents could tout the coverage gaps in auto to sell coverage in medical and rehabilitation expenses. After all, do most consumers really care who pays the medical care expenses arising from vehicle collisions?

Some advocates would push to ensure the Ontario Health Insurance Plan (OHIP) provides more coverage for auto accidents, even if this necessitates tax increases.

The major weakness in the Ontario auto insurance system is the fact that risk reduction is not the top policy objective.

For example, another change that takes effect this June is a prohibition on changing an insured’s rate – or deciding whether to renew, cancel or issue a policy – in the event of a “minor” accident. An accident would be considered “minor” if no personal injuries are sustained, the cost of property damage does not exceed $2,000, the cost of all such damages is paid by the at-fault party and no payment is made by any insurer for property damage.

However, minor accidents are usually indicative of risky behaviour, even if no one was hurt.

Auto insurance should cover events that are truly accidental in nature. If coverage is reduced, then certainly claims costs can be reduced. However if the existing coverage does not cover the total economic loss, from events that are truly accidental, then the p&c insurance industry is probably missing out.