How would Ontario auto rates change if they were not regulated?

The debate about whether Ontario’s auto insurance regulator is letting carriers charge too much raises a separate but related question. What would happen if there was no pricing regulation at all?

“If [Ontario auto insurance pricing] was an unregulated industry, would premiums be lower? I don’t know. Maybe,” said Fred Lazar, author of a recent report commissioned by the Ontario Trial Lawyers Association on auto insurance price regulation in Ontario. “Competition might drive them lower,” Lazar told Canadian Underwriter in a recent interview. “Maybe they would stay at the same level. I can’t predict because we haven’t had that experiment either in this province or elsewhere across the country.”

But the overall loss ratio in Ontario auto was 76% in 2018, notes Mary Kelly, chair of insurance at the Wilfrid Laurier University school of business and economics in Waterloo, quoting the General Insurance Statistical Agency. GISA reports the industry-wide loss ratio in Ontario auto was 67% in 2014. Today’s loss ratio is not sustainable, Kelly told Canadian Underwriter Monday.

“Rates aren’t going to go down with the loss ratios where they are at,” said Kelly, who is not criticizing other academics’ papers. Putting it into perspective, Kelly observers that there are dozens of carriers writing Ontario auto insurance – giving consumers more choice than they have with other products and services. Kelly cites banking, telecommunications,  air travel within Canada and supermarkets as examples of industries with far fewer players (and more concentration of market share) than Ontario auto insurance.

Lazar’s report, released Feb. 13,  was an update to a 2018 OTLA-commissioned report, which was itself an update to the first OTLA-commissioned report released in 2015.

The Insurance Bureau of Canada takes issue with his reports. For example in Lazar’s original report he calculated the industry-wide profitability using only the insurers that made a profit in Ontario auto – leaving major insurers that lost money in Ontario auto out of the equation.

“That’s like saying the Toronto Maple Leafs are having a great season because we are only counting the wins and ignoring the losses,” said Pete Karageorgos, IBC’s director of consumer and industry relations for Ontario, in an interview Monday.

Lazar, an economics professor at York University’s Schulich School of Business, ultimately concluded in his 2020 report that Ontario private passenger auto clients may have collectively “overpaid” by between $556 million and $1.4 billion in 2018.

But he does not take a position on whether the government should actually be regulating auto rates, he told Canadian Underwriter in a recent interview. Instead, he is taking issue with how the Financial Services Regulatory Authority determines the return on equity.

“Whether it’s regulated or not, that’s an entirely separate issue,” Lazar said. “The insurance industry has their position and I am probably more sympathetic to their position on whether it should be regulated, but I take issue with the way the industry is regulated.”

As for the insurers’ point of view, “it’s not for me to comment on what that might or might not look like,” said Karageorgos, alluding to what may or may not happen if rates were re-regulated.

“My view is, if [auto insurance] is not a regulated industry, I don’t really care,” said Lazar. If it’s going to be regulated, and the regulator is [approving] premiums, then let’s adopt reasonable rules in finance and see what the resulting premiums would be. Because it’s regulated, I can make a conclusion that the regulators are simply setting too high a level of profit and, as a result, consumers in the province are overpaying.”

GISA reports the overall return on equity in Ontario auto was about 3.3% – with industry-wide net income of $319.7 million on allocated equity of $9.6 billion. The underwriting loss was $68.7 million on premiums of about $10 billion.