Insurers and Auto Makers – Put To The Test

“The consumer is the tie that binds our industry together and should be the catalyst for cooperation,” says Terri MacLean, executive vice president of information and investigations at the Insurance Bureau of Canada (IBC). In welcoming attendees of the recent Auto Insurers and Manufacturers (AIM) Forum in Toronto, she pointed to the obvious need of all participants in the system to deal with increasing consumer demands.

Auto insurers nationwide are facing the wrath of consumers as premium increases make front-page news. This is particularly true in New Brunswick, where the recent election vaulted auto insurance to the top of voter priorities.

Insurers face the “unholy trinity” of media, consumer and government, notes Mary Lou O’Reilly, vice-president, public affairs, IBC. “When it becomes a headline, it impacts the way governments make policy decisions. These are very complex issues and we have to deal with them in a context of intense media attention.” She refers to rising claims costs and the pressure on insurers to raise rates to stem the losses being sustained in most jurisdictions on the auto product.

Ignorance has marked much of the public debate. For example, “very few people understand that government has anything to do with rate setting”. Insurers’ inability to get their message across to consumers has manifested in recent results of the Pollara InsurPoll, which shows the public image of insurance companies has dropped across Canada (see Chart 1). It has also dropped for every age group. While the decline, often of one or two points, may seem small, O’Reilly notes, “history will bear me out that it is a very big deal”.

How do insurers fight this negative image? One way, suggests Brian O’Neill, president of the U.S. Insurance Institute for Highway Safety (IIHS), is to highlight the work being done by the industry to address safety issues. A 2001 U.S. survey shows 85% of consumers rank safety as a very high priority. Crash test videos shown on national television programs are one of the most visible, high-impact means of showing the work insurers are doing to promote safer driving. “This can produce a lot of good media attention.” Rating systems, such as the CLEAR system in Canada, are also powerful tools for showing the service the industry provides to the public, he adds.

It is not just insurers suffering the harsh glare of public scrutiny. Auto body repair shops have been the subject of some media attention, something that industry is working to change. “In some urban areas we have a few illicit, we call them ‘overnight shops’, who exploit tragedy,” admits John Norris, executive director of the Collision Industry Action Group (CIAG). The majority of bodyshops, which are well run and legitimate, have a stake in shutting down these shops that pop up overnight and do not follow standards on training and environmental impact. “We want to highlight those shops that win awards, who have high consumer satisfaction.” The industry also worked on the Collision Repair Standards Act of 2002 as a way to formally control quality in the industry and protect consumers.

INJURY COSTS

Certainly it is the cost of injuries that are the fastest growing component of auto insurance claims. Insurers do have some contention with vehicle repair costs, specifically with the right to use aftermarket crash parts rather than more costly OEM (original equipment manufacturer) parts. CIAG supports the use of CAPA-approved parts to address concerns over quality and fit of aftermarket parts, but, “our disappointment is that we can’t always find CAPA parts in Canada, they are difficult to obtain”, says Norris.

This issue is far outstripped, however, by concerns over rising healthcare costs, specifically associated with soft tissue injuries. These costs have made the auto product unprofitable for insurers in most private auto jurisdictions. Comparing loss costs to earned premium, “the difference is not adequate to cover the operational costs of the company, let alone any return on equity”, observes Henning Norup, vice president, information research and analysis, IBC.

Another issue is government pressure on rates, including holding down the rates of the Facility Association, the pool for high-risk drivers. This has caused the Facility population to grow, along with its losses. “We’ve created a situation where companies can’t find the means to insure everyone. We’d like to find a price for everyone but under the current system we can’t do that,” says Michael Donoghue, president and CEO, Allstate Insurance Company.

HEADS UP

Soft tissue injuries, and specifically whiplash, make up 60% of the 200,000 injuries suffered in car accidents in Canada every year, notes IBC president Stan Griffin. On a bright note, studies suggest this number could be reduced by 40% through proper head restraints.

The IBC has taken on proper head restraint adjustment as its banner safety issue for the next three years, and is asking auto makers to get on board. “Our joint effort would bring about the day when drivers and passengers check the position of their head restraint with the same consistency that they now ‘buckle up’,” Griffin notes.

He speculates that cars could be equipped with special stickers showing the proper setting for headrests and to see all vehicle manuals contain instructions on head restraint adjustment. Testing by the IBC across the country shows that only 14% of drivers and passengers had head restraints set in a “good” position, although about 75% of cars are equipped with adjustable headrests (see Chart 2). Good means the headrest is raised to between the top of the ear and the top of the head, with an ear’s width or less distance between the head and the restraint. More than half of the nearly 8,700 motorists observed in the test had restraints set “poorly” or “very poorly”.

Active head restraints, where the seat moves up and forward in the event of a rear-end crash to provide more support behind the head, got the highest marks in IIHS testing and are becoming more common. Other car makers are making head restraints that can be more easily adjusted, notes Griffin, and some are working on new seats that would yield in rear-end collisions to reduce the motorist’s forward momentum. The number-one audience IBC wants to reach is the public. It is launching a national public awareness campaign centered on the “Headrest up! Save Your Neck” theme.

OTHER PRIORITIES

Insurers, manufacturers and the government have a number of priority items when it comes to driver safety. For the IBC, encouraging the installation of theft deterrent systems, OEM or aftermarket, has long been a goal.

OEM installation has grown since 1996, with Norup saying he hopes this number will rise even higher (see Chart 3). And in recent news, Manitoba’s public insurer is now buying aftermarket anti-theft devices for cars. IBC is also piloting “AutoVu”, an electronic license plate reader to help ID stolen vehicles on the street. Toronto police recovered 138 vehicles with a value of $1.4 million, 50% of which were recovered within 15 days. “That means insurers in most cases have not yet paid out, so it’s going straight to the bottom-line,” notes Richard Dubin, vice president, investigative services, IBC.

The problem is even worse when cross-border theft is considered, notes Michael Kelso, director, vehicle investigations, National Insurance Crime Bureau. A Canada/U.S. Conveyance Anti-Theft Coalition is now looking at information sharing on the issue.

To address fraud and theft, the IBC is pushing for a dedicated prosecutor, as in New Jersey and New York. “This would aid in reducing the number of charges that are plea bargained away,” notes MacLean. Insurers also want to see fraud and auto theft as specific criminal code offenses.

And, more than $750 million is paid on fraudulent claims each year, notes Mark Yakabuski, Ontario vice president for IBC. “We’re not talking about small time players here, we’re talking about people who are basing most if not all of their livelihood on fraud.” Insurers have made headway with Bi ll-198 in Ontario, specifically in dealing with dishonest paralegals. “These measures are long overdue and we’ve got to work hard to make sure they’re pursued.”

The government is also looking hard at cell phone use while driving, with Newfoundland recently becoming the first province to ban it. Banning cell phone use while driving is supported by 78% of people, says Peter Burns, chief of Transport Canada’s ergonomic division. There is also concern over “telematics” and “infotainment systems” that force drivers to take their eyes off the road, and can have multiple displays and controls. The government, in consultation with manufacturers, is set to release a memorandum of understanding potentially leading to regulations on such devices.