The Disarray of Auto Insurance

In doing research for this article, I could not help but refer back to articles written in the past. One article published in CU in December 1998, was titled “The Disaster of 1999”. In this article the reference was made to the rude awakening that will come when the true results of Bill-59 are known. The article in question observes: “It is still a very young bill and is yet to be proven. The courts have not had the opportunity to rule on deductibles or thresholds and when the precedent is set in the courts, many claims that are unknown to the insurers at this time will suddenly raise their ugly heads.” The results and claims development experienced by many companies followed.

The other article I noticed is the one that was published in CU’s August 2001 issue, titled “Rate Regulation, From Bad to Worse”. A statement in the article notes: “A stable market is now in jeopardy and this situation is a direct result of over-regulation.” Over the years rate regulation has created a serious problem for insurers and the market has gone from bad to worse. During 2003 many insurers were downsizing and very few were interested in expanding the market to accommodate drivers who could not find a ready insurance coverage. As a result, we saw an explosion in the Facility Association’s (FA) ranks, which had very inadequate rates and caused a horrendous loss for the industry during that year. The result was that good drivers were subsidizing bad drivers.

WIDESPREAD DISEASE

The problems with the mandatory auto product have not been confined to Ontario, but are also evident in the Atlantic provinces as well as Alberta. Governments felt insurers were to blame for the problems whereas insurers felt the governments were the cause of the problems. After all, it is the governments who lay out the ground rules and control the rates insurers can charge. In many cases companies are not given the approval of adequate rates and are forced to sell insurance at a price lower than cost. They are not even allowed to immediately withdraw the product.

Governments failed to recognize the problem of fraud which was created by “give-a-way” programs, particularly in Ontario. They made no effort to help the industry in controlling claims but instead kept blaming insurers for higher prices and consumer complaints. There is a saying, “a man is not a failure until he blames someone else for his troubles”. It is obvious that many governments have failed because they will not accept responsibility.

We now have a situation in Nova Scotia and New Brunswick where regulators do not understand the problems. Their solution is to investigate a publicly-run automobile insurance system rather than dealing with runaway claims costs.

COST FACTORS

Courts awards and no-fault benefits are too excessive and increase the cost of auto insurance. Ontario is trying to deal with the problem but instead of addressing claims costs they have forced insurers to reduce rates. They have not considered the fact that the combined ratio on auto insurance in Ontario in 2003 was over 117% and that investment income is at an all time low. If an industry does not produce profit there will not be a stable and reliable marketplace. At the moment, we have a very unhealthy insurance industry that is using property and liability insurance premiums to subsidize auto. This will not work over a period of time.

Alberta is facing a similar situation to Ontario where they are at a point of not knowing what to do. Instead of correcting the basic problem, being claims costs, the provincial government has ordered premium rate freeze rates and limited coverage renewals at rates that were in effect a year ago. Even though subsequent rate increases have been approved, only new applicants can be charged the increased rates. As a result, contrary to most insurance acts, two identical risks are charged different rates. This form of price reduction will not work and does not relieve the situation of market shortage. Unfortunately, since many members of parliament are lawyers, they do not want to listen to the solutions of the insurance industry but instead protect their friends in the legal profession. Unfortunately, consumers suffer.

KILL FA

Another problem that has added to the difficulty is the rapid growth of the FA. The association was intended in its creation by the insurance industry as a “market of last resort” – not one of the leading markets for automobile insurance as it has become in Ontario.

As such, the FA has become a monster out of control, and the only way to deal with it is to kill it. The solution is to terminate the present system and revert back to an assigned risk plan so that insurers would be responsible for the claims that occur under those policies unlike the current system. Assigned risk plans still work very effectively in the U.S., and it is the best way to share risks. Insurers are then directly responsible and are more effective in investigating and settling claims.

QUEBEC MODEL

The insurance industry must take a strong stand against the provincial governments to resolve the cost problems associated with the auto product. While it is desirable to work with government, we must make it clear that we are also responsible to our shareholders who deserve a reasonable return on their investment. We cannot continue to offer a product that is below cost. The only way to resolve the cost problem is to control the amount being paid on claims. This must be done on no-fault coverage as well as third-party liability. Controls and limits must apply to certain types of injuries.

Although some might object, the Quebec model has worked extremely well since it was introduced many years ago. It is interesting to see that across Canada, Quebec is the only province that has an efficient, well run insurance system. The politicians are satisfied, consumers are happy and insurers made reasonable profits. Even in those provinces with public auto insurance, costs remain high, court judgments are excessive and consumers are not happy.

Notably, many of the costs associated with auto insurance are hidden. At least with the Quebec system, when a person is injured, there is one process that deals with their injury and it does not matter if it is an auto related accident, a health problem or an injury at work. Insurers become involved with vehicle damage and injury or death outside of the jurisdiction. We can all learn from this model and it can be modified to allow the insurance industry to administer the injury portion as well. It is not necessary to have government involvement provided regulations are in place to control claims cost.

TAKING DIRECTION

It is difficult to comment on the various provincial programs at this stage since there is nothing definite. The politicians do not have a solution and order refunds and price reductions without dealing with claims cost. Newfoundland, Nova Scotia and New Brunswick are still in a quandary and will be for some time. Ontario made some strides towards correcting the problems but have not arrived at a suitable answer. Alberta is similar to the Atlantic provinces but does not have a plan. They are insisting that automobile insurance rates be reduced but are not dealing with costs.

The members of the insurance industry are the experts, not government officials. It is up to us to lead the government regulators in the right direction, whether they want to follow or not. In some cases, we may have to take legal action but if that is necessary, we should be prepared to do so. We are not going to help the consumers by simply sitting back and waiting for government to come up with the answers. It is obvious they do not have a solution and the industry must take the lead.

Eliminating no-fault as they have in many U.S. states may be the answer. Since no-fault was introduced claims costs have increased, premiums have increased and profits have declined. Eliminating the deductible on direct compensation property damage would help our image. Why should people who are not at fault in accidents have to pay to have their cars repaired? These are solutions that should be considered.