High Impact Ahead

With the growth of property and casualty insurance industry earnings having plummeted to almost a 20-year low on the back of poor investment returns and intense rate competition — which saw last year’s annual rate of premium growth clock in at a level last seen in 1983 — most company CEOs agree that the time has come to take strong action on underwriting. Specifically, focus is being turned to the personal auto markets where heavy losses are emerging due to the recent years of intense rate cutting. The alternative of not taking action on the personal auto side of the business could ultimately see several insurers numbering among the road fatalities, commentators warn.

Property and casualty insurers closed the 1999 financial year at an average combined ratio of 106.8%. Although the ratio shows almost a full percentage point improvement on that posted for the previous year — largely on the back of improved underwriting rather than expense reduction — the dark side to 1999’s results is the significant decline shown in realized investment gains which fell by over 54% year-on-year. With the investment environment remaining volatile, realization is finally dawning in many senior boardroom meetings for the need to improve the core business of the industry: underwriting.

While the rate bloodletting of the past decade has been spread across the various lines of business, most CEOs are planning to target the personal auto market this year in terms of rate increases and cost-reduction initiatives. The Ontario auto market, due to the fact that it represents approximately 35% of overall net premiums in Canada, is expected to receive the most attention in the year ahead. In addition, Ontario auto has seen some disturbing new cost trends emerge through tort awards on the bodily injury side. And, with Ontario auto insurance being a relatively new product under Bill 59, many insurers believe that the higher claim losses emerging may require a revision of the legislation.

In the fourth quarter of the 1999 edition of the insurance Bureau of Canada’s (IBC) financial newsletter “Perspective”, the association’s senior economist Paul Kovacs points out that bodily injury claims under auto have superceded that of physical damage claims. This shift in trend, which first showed signs in 1991, appears to be continuing into 2000, he adds. “The composition of automobile insurance claim costs is changing. In the 1990s, the cost of claims associated with repairing vehicles decreased in real terms, while the compensation for injuries has been on the rise.”

To illustrate the point, Kovacs highlights the following figures: roughly 42% of claim costs in 1991 were paid toward bodily injury in Ontario, Alberta and the Atlantic provinces. By the end of 1998, bodily injury costs accounted for 54% of auto claim costs while physical vehicle damage costs had dropped from 1991’s 37% to close 1998 at 25% of total auto claims. Of particular concern is the rise in frequency of bodily injury claims over the same period, which soared from 75 per every thousand collision claims to a ratio of 163 per every thousand. “The combination of rising costs of healthcare services and increased severity of injuries are to blame.”

Another factor revealed by Kovacs’ research is that the rise in bodily injury claims is not restricted to markets/provinces with a tort system of injury compensation. The Ontario market, which applies a threshold tort system with no-fault benefits, has seen the cost of injury compensation rise by 47% in real terms over the past 10 years to an average cost of $27,488. “With increases in both the cost and frequency of medical cost claims, effective management of these claims is becoming an increasingly important factor in maintaining company profits in today’s competitive automobile insurance market.”

Across the provinces

In terms of the overall Canadian auto market, Kovacs confirms a tougher position being taken by insurers on underwriting. “It look’s like the fall in prices has stopped, but there is still no sign of rate increases.”

Although the Alberta personal lines market produced modest improvement last year, every other province produced worsening auto results, Kovacs says. The West Coast, which is showing moderate improvement, still has a long way to go with regard to reducing vehicle accident incidence through safety awareness initiatives, he adds. In contrast, the Atlantic provinces and Quebec market have definitely slipped back with higher accident incidence and rising claim costs on auto. The Atlantic markets are currently drawing attention from insurers in terms of a correction, and toward the end of last year companies had already begun adopting a firmer position on rates in Quebec, he observes.

The real problem-child remains Ontario, Kovacs notes, with the concern being the significant rise in bodily injury related claims. “Physical damage has been well behaved, although vehicle theft remains way too high. The issue at stake is fraud and bodily injury, there is definitely a concerted effort being taken by the industry to raise awareness of the problem.”

As such, Kovacs says that, in terms of rating priorities, Ontario auto is without question number–one on the industry’s list. Most of the company spokespeople consulted in this article believe that Ontario’s personal lines auto rates are currently undervalued by about 10%. Linda Mathews, chief operating officer of Royal & SunAlliance Canada, believes an overall rate correction may not, however, be that severe, “Ontario rates probably need to go up by an average of 5% to return to profitability, but it really depends on where you’re starting from, some companies are looking for double-digit increases”.

Mathews firmly believes that this is the year when insurers will have to react by lifting auto rates virtually across all of the markets. “Nearly every company I’m aware of is filing for modest increases,” she adds. The Quebec and Ontario markets are definitely seeing the most attention with the concern in the latter being primarily the rise in bodily injury claims, she says. “Factors like the graduated licensing program [in Ontario] did produce an improvement in the claims experience, and as a result, rates dropped by 10% — now we’re at the bottom of the cycle. The industry simply cannot sustain these rates at a 107% combined ratio and in this kind of an investment environment.”

This position is supported by Saskia Mathison, vice president of auto underwriting and development at Zurich Canada. Looking back over the years at the Ontario market, insurers were making very reasonable returns on the business, she observes. However, subsequent competition in the market has drained all of the profit and there is no other room but to bring about higher rates. Zurich “took a risk” last year, she notes, and filed for a modest rate hike. According to Mathison, Zurich’s Ontario book of business is currently in the black, and she does not see the need to raise rates further this year. Other insurers will not have this luxury, she predicts, expecting to see a broad rise in market premiums later this year. “This would be for the best, if the industry brings in a series of modest increases rather than being forced to bring about a major correction.

Mathison also identifies the steep rise in medical treatment costs associated with Ontario bodily injury claims as being the top area of concern for the industry. And, she adds, the vehicle theft problem in Quebec, which looks like it may spread into Ontario, is something definitely worth keeping a close eye on.

Political pressures

One of the biggest problems personal lines insurers are experiencing in terms of applying rate increases to auto insurance is political interference by the provincial insurance commissions, says Bill Star, president of high-risk auto insurer Kingsway Financial Services.

The insurance commissions, particularly that of Ontario, have been encouraging insurers to reduce rates, Star comments. The alternative of filing higher rates immediately draws a response of a threatened inqu iry, he adds. As an example, Star says Kingsway was forced to back down last year on a higher rate filing. “As a result, last year Kingsway produced an underwriting loss for the first time in 10 years. This year we’ve applied for a rate increase.”

Star confirms earlier commentary by Mathews that most insurers seem determined to bring about higher rates on auto this year. He believes rates in the Ontario market need to rise on average by at least 10%. “Rates have been reduced in Ontario for the last 10 quarters, that’s why we’re seeing the losses beginning to emerge.”

Star focuses on the political, legal and regulatory circumstances of the Ontario market as being the biggest challenge facing insurers in applying a broad correction. Under Bill 59, bodily injury claims are definitely on the rise, he notes, “the problem is the number of lawyers out there looking for creative loopholes in the system to extract higher tort awards.”

Should Bill 59 be revised? Star believes the legislation is less than perfect, however, he admits that, “going back to the drawing board” after the exhaustive consultation the industry and Ontario’s provincial government went into when drafting the new insurance product, would be extremely difficult to motivate at this junction. That said, Star does believe that there should be less interference by the provincial governments in the business decisions of insurers — namely the right to file rate increases when necessary.

New cost factors

Star is not the only person in the industry concerned with the rising legal and regulatory costs associated with auto insurance. Jerry Dalla Corte, vice president of claims at the Dominion of Canada, points to two relatively new developments in the market: the aftermarket parts legal battle (see Insight of this issue for further details) and recent legislative action being taken against individual adjusters in addition to court filings against companies. The latter appears to be a pressure tactic being applied by lawyers acting on behalf of plaintiffs against insurers, he adds. “Although this is not auto specific, so far the actions apply to mainly auto accident disability claims.”

While vehicle repair costs continue to steadily rise, Dalla Corte is less concerned with this side of the auto business, observing that such cost increases are predictable and can be accounted for. The real threat lies in “new costs” such as legal actions and the rise in medical related treatment. “We don’t have cost-containment built into the system in terms of fees and protocols with health service providers on auto bodily injury. This is something that has been talked about for some time, but we’re still no closer to an industry solution.”

A rate increase across the auto market is desperately needed, Dalla Corte stresses, however, he is less than confident this year will provide much room to act. “I hope for a rate increase, but there is still too much money out there [chasing premium rates lower].”

Physical damage developments

Insurers can reduce operating costs associated with the handling of auto claims, primarily through more efficient repair procedures, some claim managers believe. Ted Doyle, vice president of property claims at Halifax Insurance, believes administrative and procedural duplication can be eliminated by insurers and bodyshops working closer together. “This can be achieved through partnership alliances and development of technology.”

Doyle points to weak communication between the repair shop industry, adjusters and insurance companies. Specifically, he refers to duplication of effort by the various parties in accessing vehicle damage estimates. “How many times does a vehicle have to be assessed? Sometimes this happens three or four times by the various parties before the repairs are finally approved. Cutting out the wasted manpower by bringing in greater efficiency to the estimate process offers meaningful savings in cost and time.”

In addition, Doyle believes smaller repair shop operators will have to increase their work production schedules to remain competitive in the current market. “Bodyshops need to develop strategic partnerships with insurers, however, with smaller shops only operating on eight-hour work schedules, it’s difficult to achieve the vehicle turnaround times demanded by customers.”

Jack Allan, vice president of claims at Lombard Canada, expects new technology application in vehicle assessment will reduce claim expenses. Although hardly a new technology, in-the-field electronic photo-imaging is becoming an invaluable tool for both insurers and adjusters, he observes. “Insurers have been slow to catch on to the benefits of the technology, but the use does seem to be increasing.”

Although the rise in physical damage costs has been moderate, at least compared with the steep rise in bodily injury claims, Allan believes a negative outcome to the aftermarket auto part legal battle could send the cost of repairs skyrocketing. “If we’re not allowed to use aftermarket parts, then the alternative will be very large premium increases to absorb the additional cost.”