Control of the Wheel

In the Ontario government’s fall economic statement, the Progressive Conservative (PC) party promised to change how auto insurance is regulated – a welcome step towards reform. So why are members of the insurance industry feeling conflicted?

The good news contained in the economic outlook follows on the heels of the recent introduction of a private member’s bill by PC MPP Parm Gill. Carried at first reading, Bill 42 would ban insurers from using territorial rating factors such as postal or telephone area codes as primary rating factors to set drivers’ auto insurance premiums.

And so, while some are optimistic about the province’s overdue attention to fixing a broken product, others believe Bill 42’s focus on removing territorial ratings is too narrow a scope to inspire real, permanent change.

 

“I think it’s well beyond time [for reform],” says Traci Boland, partner and broker at Ontario West Insurance Brokers in London, Ont. “This product is so outdated. It came out in the ‘90s and has had over 90 Band-Aids placed on it. A bill moving with a majority government will bring the necessary spotlight onto this product. But I don’t think anybody can answer what this bill will end up being.”

Colin Simpson, president of the Insurance Brokers’ Association of Ontario (IBAO), says the IBAO and other industry bodies – including the Insurance Bureau of Canada (IBC) and many large insurance companies – have been meeting regularly with the Minister of Finance’s office to advocate for auto reform and help MPPs better understand the insurance landscape.

“It’s pleasing to hear that [Ontario Premier] Doug Ford’s government is actually addressing the issue [of auto reform],” says Simpson. “They’re consulting with the industry on how to go about it, as opposed to just jamming in a solution like a short-term Band-Aid. They’re eager to deal with auto rates, but it’s not a simple subject.”

Industry professionals are regularly visiting the Minister of Finance’s office to offer guidance and help the government find a solution. All major stakeholders – insurers, brokers, and consumers alike – are united on the endgame, which is to make auto insurance more affordable.

“Everyone knows [auto insurance is] broken,” says Joseph Carnevale, partner and director of sales at Brokers Trust Insurance Group Inc. in Concord, Ont. “A lot of people think it’s broken for different reasons, and they may not be in agreement as to what those reasons are, but the point is we know that it’s not sustainable.”

Boland thinks the PC party has worked quickly to bring auto reform because of how vocal Ontarians are about rising costs. Every day, she says, brokers hear from their customers that auto premiums are too high. The problem remains that claims are expensive for insurers, and over the past couple of years, their only solution to stay afloat has been to raise rates.

“We were forced three years ago to have a mandated [auto rate] reduction in our province when the product couldn’t afford that,” Boland says. “So, what we’ve seen over the last two years is a steady increase of premiums again, surpassing where we were before. Consumers are tired of their vehicles getting older every year, and yet they are paying more insurance when they’ve never had a claim.”

The formula has been the same for some time: When insurers pay too much in claims, consumers pay too much in premiums. But government reforms seem to continually chip away at the premium side of the ledger, without doing much to reduce claims costs. In 2013, the minority Liberal government agreed to the opposition NDP’s call for a mandated 15% auto rate reduction to assure the government’s budget would pass. While rates came down on average approximately 8% across the board, the Liberals ultimately retreated, calling the 15% target “a stretch goal.” Economical is one of the few companies to reduce its rates by the full 15%. Early this year, it reported major auto insurance losses in 2017, requiring the company to file for a rate increase.

“Ultimately, what we need to bring down the cost of auto insurance is more significant product reform,” says Karin Ots, senior vice-president of regulatory and government relations at Aviva Canada. “Claims costs are the major cost in determining the amount of the premium. So, we need to reduce claims costs; once we do that, the price of auto insurance will start to come down.”

So, what do insurers count as “significant reform?” What are the wide-scale solutions for which the industry is advocating?

The Marshall Report

Lost in the cries to eliminate territorial ratings is the fate of Fair Benefits, Fairly Delivered, commissioned by the Liberal government and published in 2017. The author of the report was David Marshall, a former president and CEO of the Workplace Insurance and Safety Board (WSIB), and Ontario’s adviser on auto insurance at the time. The thorough, 103-page document made several recommendations on the regulatory environment, as well as on the auto product in Ontario. The Liberals had started to act on some of the Marshall recommendations before they were defeated by the Ontario PC Party in the 2018 provincial election.

Marshall offers 35 recommendations to make the auto insurance product more sustainable. Generally, the report has industry support since “the fundamentals are there,” says Simpson. “We need to change the product to get the costs out, if you want the pricing down.”

One of Marshall’s suggestions is a new regulatory body that doesn’t micromanage insurers. This idea has gained traction, and Ontario’s existing regulator, the Financial Services Commission of Ontario (FSCO), will soon be making way for the Financial Services Regulatory Authority of Ontario (FSRA). The industry’s hope is that FSRA better matches Marshall’s recommendation for an agile, forward-thinking regulator.

“FSRA will have the ability to effectively change the rules of how the insurance marketplace works, at least with respect to how rates are set, and they’ll be able to do that fundamentally more quickly,” explains David McGown, senior vice president of strategic initiatives at IBC. FSRA, which takes over from FSCO in April 2019, will also respond more quickly to transportation trends that can impact the cost of claims for insurers, says Ots. “Modernizing the regulatory environment is important when you look at the evolution of transportation. We see different ridership models, ownership models, Uber, Lyft. The Insurance Act was written decades ago – it didn’t anticipate any of that. Insurers that want to [respond with product] innovations generally bump into problems with regulation, because it’s just not flexible enough to allow for that.” While the industry seems to support a new, more flexible regulator such as FSRA, it’s unclear if the PC government plans to do anything more with the Marshall report. The Minister of Finance’s office was contacted for comment but didn’t respond before the deadline for publication.

Stakeholder Support of the Marshall Report Attempting to keep the Marshall report recommendations on the government’s radar, IBAO and IBC have both submitted recommendations that streamline many of David Marshall’s insights into digestible action items. “We have three recommendations,” Simpson says. “One is to keep geographical rating. The second one is to move carefully when implementing FSRA. And the third one is, make sure you’ve got a broad perspective on the auto product – don’t just take on one topic.” IBAO’s first recommendation hints at an undercurrent of concern in the industry that the provincial government is focusing too narrowly on eliminating territorial ratings. “When they say they’re taking away postal codes and area codes on the whole, I don’t think that is a good thing, because where you live has a place in insurance,” says Boland. “Rates are made on the risk. The risk is higher when there’s a higher population and more cars are on the road. It’s not the same for me to make a four-minute drive to work in London, Ont. [pop: 383,000 in a 2016 census] than it is for somebody to drive in Toronto [The City of Toronto had a population of 2.9 million in 2016].” That said, the 55 territories that insurers use to set rates are out of date, says Simpson. “We think geographical rating should continue to exist, but we understand the fact that the current 55 territories isn’t working very well. They’re too broad. We would lobby [politicians] to keep geographical rating but change what they have today.” One misconception about Bill 42 is that the government is eliminating territorial rating altogether, says Simpson. This isn’t the case: geography simply can’t be the primary rating variable. This leaves room for innovation, which is a major focus of the IBAO’s advocacy. Simpson believes by encouraging innovation, the government can achieve one critical aspect to reducing the cost of auto insurance: competition. “Competition and diversity are good things for consumers because consumers will be able to find different price points,” Ots agrees. “Today we have a fair amount of healthy competition in terms of number of insurers. Where we don’t have competition is on the product: each one of us sells the exact same product, right down to the semi-colon.” Insurers are looking for more freedom to come up with innovative policies, so they can compete on something other than price. For example, says Ots, “if you have life insurance, you probably have coverage for funeral expenses. But you still have to buy [coverage for funeral expenses] in the auto insurance product today, even if you don’t need it. What I’m talking about is giving customers more freedom to pick the coverages they want or need.” By allowing insurers to use tactics like incentives and more customizable auto policies, “you could affect your price point like you do with a cell phone,” Ots says. By reducing the number of coverages insurers are mandated to cover, their risk drops – and premiums decrease.