Coastal Disturbance

Mounting losses, poor underwriting results and a persistent lack of profitability are the storm clouds encircling Atlantic Canada’s auto insurance markets. Insurers have seen the barometer rising in terms of rate inadequacy and claims frequency for at least ten years. We are now trying to ensure premiums accurately reflect the real risks.

Consumers are clearly unhappy with recent double-digit rate increases in provinces such as Nova Scotia and New Brunswick, They have a right to be. But it is critical not to mistake the thunder for the lightning — rising premiums are a sign of underlying problems with auto insurance systems throughout Atlantic Canada. There are two main obstacles threatening the viability of auto insurance in the region: loss inflation and the slow pace of regulatory reform.

LOSS INFLATION

Loss inflation primarily refers to the spate of soft tissue injuries and claims for non-economic losses. The Insurance Bureau of Canada (IBC) has identified “sprains and strains” — and the active legal environment for these claims — as the principal reason behind growing loss costs.

In Nova Scotia, an IBC closed claim study on auto insurance showed that soft tissue injury claims represent 70% of injury claims. For all claims studied, 67% of the amount paid was for pain and suffering — not economic loss. A similar study in New Brunswick revealed that sprains and strains accounted for 61% of injury claims, with nearly two-thirds of payouts for all claims going to pain and suffering. The Newfoundland government itself predicted $42 million could be shaved off third-party liability costs by restricting claims for non-economic loss to a deductible of $15,000.

While there are other reasons for the poor performance of Atlantic auto insurance markets, high-frequency soft tissue injury claims for pain and suffering is the major factor behind stagnant profits. Claims costs throughout Atlantic Canada rose by between 36% and 52% from 1996 to 2000.

In 2000, companies in the four Atlantic provinces posted losses of more than $188 million on auto insurance. An auto loss ratio that hovered above 100% for most of 2001 signals that last year was one of the worst on record. And many insurers still face rate inadequacy in the order of 10% to 30%.

As a result, the IBC is calling for a thorough public examination of the systems in various provinces, demonstrating that the only option under current auto regimes is increasing premiums to reflect loss experience.

ENOUGH IS ENOUGH

There is a sense among IBC member insurers that we have gone as far as we can within the current framework. It is time for reform. While the industry’s lobby has not fallen on deaf ears, it has hardly resulted in constructive change — at least not yet.

Newfoundland is the most active province, releasing a package of 51 proposals last October to amend its auto insurance system. Of these, the most contentious is tort reform, limiting claims for non-economic loss involving less serious injuries. Some trial lawyers in the province have responded in recent months with an advertising campaign against so-called “no-fault” insurance.

This one proposal garnered the most public attention, even though the government is on record stating that its changes are not no-fault insurance. The damage is likely done. Newfoundland Minister of Government Services and Lands, Walter Noel, says that due to public opposition, he will not take key recommendations, such as tort reform or mandatory accident benefits coverage, to cabinet. He notes that caucus will consider other proposals, but legislation is not expected until the fall session of the Legislative Assembly.

It is these “other” proposals that disappoint insurers. Included in the Newfoundland reform package is a range of “consumer protection measures” allowing regulators to impose underwriting guidelines, oversee operations of the Facility Association and increase funding levels for unearned premiums through the Property and Casualty Insurance Compensation Corporation.

It could be a double-whammy — insurers fail to get much-needed product reform for rising claims costs, and also face restrictions on legitimate business practices. This is especially true of underwriting guidelines. There are only three levers in the insurance business: rate, underwriting and claims. Sound underwriting ensures that the premium adequately reflects both the risk and loss experience. Without appropriate risk selection, it is difficult to control pricing and curb costs for the majority of drivers.

New Brunswick is the only other province in the region to form a select committee looking into auto insurance. The report of that committee is expected in July. PEI, with a population of 135,000 and a relatively small market, has no formal plans for auto insurance reform. Nova Scotia began a rate review process in March, 2002 through the provincial Utility and Review Board. They will undoubtedly find that rates are inadequate.

SYSTEM “RETHINK”

Perhaps a better approach is to scrutinize the system itself. Many insurers want to dispel the notion that the industry is set on one type of product reform. We do not favor a tort system, a no-fault system or some blend of the two. We can live with any system, but there are consequences to each.

Some government officials have stated that “insurers want product reform to increase their profits”. Our response is simple — we want reform so we can provide an affordable, predictable product to consumers. The implications of the status quo are clear:

Rate increases will accelerate as claims costs continue to rise,

A greater number of uninsured drivers, especially low-income earners and seniors could hit the roads,

International and regional carriers may exit certain markets due to scarce capital and lack of profitability.

Private insurers are keen to offer competitive, fairly priced products in a stable marketplace. This is not the current situation in any Atlantic province. It is time to seek out constructive reform guided by principles of affordability, accountability, availability, fairness and stability. The response from all stakeholders could spell the difference between continuing storms — or a glimpse of better weather.