Deck Chairs on the Titanic

Underwriting auto insurance accident benefits in Ontario is now officially a money-losing venture, according to almost all relevant sources, including the insurers’ trade organization, the Insurance Bureau of Canada (IBC), MSA Research and the federal solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI).

This is a major concern for the property and casualty industry, because no less than a quarter of all of the premium in the country comes from underwriting Ontario auto insurance.

Many insurers had high hopes that Ontario’s provincial regulator, the Financial Services Commission of Ontario (FSCO), would “fix” the Ontario auto product during the most recent round of its mandatory five-year review.

The review took a little less than a year to complete. In the meantime, insurers’ loss ratios in auto insurance — particularly on the accident benefits side — took a beating. An insurers’ loss ratio is calculated using a simple formula: what insurers pay out in claims costs divided by the premium they collect. Figures more than 100% mean insurers are paying more in claims than they are collecting in premium (i. e. they are taking a loss).

So how bad was 2007-08? On the accident benefits side (leaving out auto liability claims), between the last quarter of 2007 and the last quarter of 2008, auto insurers reported loss ratios of anywhere between 103% and 179%. Imagine your business paying out almost twice as much as it makes: it would quickly be seeking a federal bailout.

So what kind of bone did FSCO toss to insurers in its final recommendations to the province’s Minister of Finance? Well, it’s clear the regulator took a “balanced” approach to change, addressing many of the system’s key irritants to insurers, trial lawyers, health care professionals and consumers alike.

The problem is, the system itself is flawed, and so re-calibrating it at this point is somewhat like re-shuffling deck chairs on the Titanic.

At first glance, FSCO addressed many of the changes insurers sought on the accident benefits side of the equation. For example, the recommendations would:

• cap out-of-control medical assessment costs (a $200 cap for filling out medical assessment forms, and a $2,000 cap on all other assessment costs);

• limit the number of health care professionals in charge of a claimant’s treatment;

• limit the availability of in-home assessment to seriously injured claimants only; and

• convert mandatory benefits such as housekeeping, home maintenance and caregiving expenses to optional benefits.

But what FSCO gave to insurers on the accident benefits side, they took away from insurers on the tort/auto liability side.

Ontario has two regulating mechanisms designed to limit insurers’ tort — read: court — costs. They are deductibles on court awards and the verbal threshold. The deductibles in Ontario are currently $15,000 and $30,000; they apply to all claims awards in court up to $100,000. For example, if a court awards $80,000 to a consumer in a claim against an insurer, a deductible would automatically be subtracted from the award. If the $30,000 deductible applied in the example above, the consumer’s award would be reduced to $50,000.

The verbal threshold determines whether a case meets the definition of a serious and permanent impairment. Claims meeting this definition are not subject to the deductibles noted above.

FSCO has recommended eliminating important language in the verbal threshold and lowering the deductibles to $10,000 and $20,000. Trial lawyers hail the move because it means their clients will get better “access to justice.” In other words, it will be easier to squeeze more money out of insurers on the tort side. But what it really means is that lawyers, their clients and every single driver in Canada who doesn’t need to make a claim will be paying higher auto insurance premiums. That’s because the reforms do nothing to take a dent out of insurers’ claims costs overall.

FSCO did indeed “balance” the system. But from the insurers’ point of view, the system didn’t need balance — it needed major reform. That didn’t happen, so if these recommendations come to pass, consumers can expect to see their auto insurance rates increase (perhaps substantially) when insurers take their own road towards making the Ontario auto insurance system profitable again.