Devil In The Details

Ontario finally announced its proposed changes to the auto reform product in November 2009. Overall, insurers are cautiously optimistic about what they see. Alas, much remains up in the air in terms of knowing how the package will be implemented in the summer of 2010. For this reason, almost every insurer interviewed for this story said “the devil is in the details” when it comes to assessing whether these reforms will help stem their rapidly expanding claims costs.

The comments of Barbara Sulzenko-Laurie, vice president of policy at the Insurance Bureau of Canada (IBC), generally sum up the mood and remarks of many of the province’s biggest auto insurers. “This is an enormous reform,” she said. “A key area of excessive leakage of policyholders’ premiums to non-productive expenditure [in the area of minor injuries] has probably been ad- dressed effectively. We’ll have to see when we get the regulations.”

And so once again the insurance industry is in a position of wait-and-see. Meanwhile, as the reform process lingers on, insurers’ auto-personal accident claims costs continue to rise. Third-quarter results in 2009, as reported to the Office of the Superintendent of Financial Institutions (OSFI), show claims ratios of between 120% and 185% for Canadian insurers and foreign insurers, respectively, in the area of auto personal accidents. As a result, Ontario’s regulator allowed insurers to increase their rates by 6.2% in 2009 (when weighted by market share).

For David Crozier, vice president of commercial insurance at The Economical Insurance Group, it’s a recipe for sustained negative press.

“The public…does not fundamentally understand how long it takes for changes to work through our system — 12, 18, 24 months and potentially longer,” he said at a CEO panel arranged by the Conestoga Chapter of the Insurance Institute of Ontario. “So they are going to be met with continuing rate increases despite the fact [that they will say to themselves]:’Wait a minute. Didn’t I just read in the paper this has been solved?

“That’s going to be a challenge for all of us. If you marry this lack of awareness with a fundamental distrust or dislike that many have for us…you can understand that we have a recipe for sustained negative press.”

BACKGROUND

Ontario announced its reform package, including 41 recommendations for reform, approximately half a year after the province’s insurance regulator made its own recommendations in March 2009. At that time, the Financial Services Commission of Ontario (FSCO) package followed an extensive, nine-month consultation with all of the province’s major players in the auto insurance system, including insurers, trial lawyers, health care providers and consumers.

For the most part, the government’s reforms closely follow FSCO’s recommendations. However, the government did throw in a few wrinkles that weren’t part of the original FSCO reforms. For the most part, insurers feel the new wrinkles represent an improvement over FSCO’s initial recommendations. Generally, insurers highlighted four key aspects of the reform, including:

• a proposed interim cap of Cdn $3,500 on accident benefits related to minor injuries;

• more consumer choice, by converting mandatory benefits into optional benefits;

• a proposal to work out a new definition of catastrophic impairment; and

• the need to make the government’s five-year review process more timely and responsive to insurer’s financial situations.

$3,500 CAP ON MINOR INJURIES

First and foremost, insurers applauded the Ontario government for proposing a Cdn$3,500 cap on treatment costs related to minor injuries.

“As an interim measure, those who suffer minor injuries in car accidents would receive Cdn$3,500 worth of treatment and assessments,” the government said in its announcement of the reforms. “This would be included as part of a person’s medical and rehabilitation accident benefits, whether they opt for the basic level or additional coverage. It would be focused on treatment outcomes and provide health care providers with numerous milestones that could be used to measure progress.”

Elsewhere in its announcement, the province said it understands minor injuries to include “whiplash, sprains and strains,” although a more comprehensive guideline would be discussed with stakeholders in the future.

Many insurers are cautiously optimistic about this aspect of the reform. Martin Beaulieu, senior vice president of personal lines for Intact Insurance, says he is encouraged by the proposal for the $3,500 limit. “What we are optimistic about in this package is that it will help contain costs on a going-forward basis,” he said. “It’s likely to reduce inflation in accident benefits costs. The cap on whiplash and minor strains and sprains, the $3,500 cap, is a strong signal that there’s a limit on the amount of resources to bring those people back to these activities if they are not [seriously] injured.”

But the province says it plans to discuss with stakeholders the future contours of a ‘minor injury.’That leaves many insurers guessing about what might happen to the cap in the future.

“When you strip away all of the changes that the reform entails, there are going to be two key aspects that will determine whether it will be successful or not,” said Rocco Neglia, vice president of claims at The Economical Insurance Company. “One is, are we going to have a significant hard cap on the Cdn$3,500 costs for minor injuries? They’re calling it an interim [solution] until a more [permanent] solution is found. But whether it’s interim or final, the same issue applies: if we are able to limit minor injuries, which by definition, are strains and sprains, very minor stuff — there are no fractures involved, there are no organ issues involved — that will be a huge costing aspect of the legislation that will serve claims well. There’s no point in over-treating and over-assessing minor injuries. That’s to nobody’s benefit, really.”

Sulzenko-Laurie says the point of the reform is to ensure that an injury receives an appropriate amount of treatment. “What you want is an injury that requires $1,500 of treatment, assessment and therapy to get the $1,500 and not require $7,500,” she said. “I think that this was a very positive step that they took in this final version of the reform.”

MORE CONSUMER CHOICE

For the government, the proposed reform package is intended to “provide consumers with more choice.” This would be done through “reducing the minimum coverage for medical and rehabilitation benefits, attendant care, deductibles on court awarded compensation and a direct compensation-property damage deductible. Consumers would have an option to increase any of these coverages.”

Specifically, the government proposes to reduce the current Cdn$100,000 cap for medical and rehabilitation benefits for non-catastrophic claims down to Cdn$50,000. In doing so, the government, would introduce a new Cdn$100,000 optional medical and rehabilitation benefit, along with the existing Cdn$1-million optional benefit.

Currently, housekeeping and home maintenance expenses are part of the mandatory accident benefits coverage provided by insurers. The government’s proposals would “make housekeeping and home maintenance expenses and caregiver benefits optional.”

Ontario’s proposed reform package would also “provide an option to reduce the tort deductibles to $20,000 (not-at-fault accident victims) and $10,000 (family members under the Family Law Act), provided that the deductibles do not apply in the case of fatalities.”

Theoretically, all of the above moves would give consumers flexibility in defining an auto insurance package that meets their budgets and needs, insurers say. It would also help control insurers’ claims costs.

For example, people who did not require housekeeping or caregiving benefits would not be required to pay premiums to receive such coverage, as they do now. “We’re v ery happy to see benefits such as housekeeping and the caregiver allowance are now made optional, because these have been areas that have been subject to significant growth,” said Sulzenko-Laurie. “In housekeeping, the total claim amount in 2004 was Cdn$73 million. In 2008, it was Cdn$212 million. That was up 190% over the course of four years, so that was a big, big increase….

“Why should you have to buy caregiver benefits if you have no children that might require care, or an invalid or elderly person at home that requires care? If you aren’t in those circumstances, why should you be required to buy benefits to cover you in that eventuality? So it’s an opportunity to have people design their insurance policy to conform to their needs.”

However, it isn’t clear yet to what degree insurers will be given flexibility to design packages that are specific to consumers’ needs. Insurers and brokers alike are wondering, for example, whether the government will mandate a standard $50,000 package beyond which consumers can “buy up” and add optional benefits as they see fit. Or will policyholders start with a version of a “Cadillac” package, from which consumers can opt out of benefits they don’t want or need (and presumably reduce their premium in doing so)?

Ironically, in offering choice, the government might have further complicated -as opposed to simplified -the province’s auto insurance product, insurers note. A likely consequence is that insurers will be working very closely with their broker force as a result.

“For consumers, they’re going to have to keep a sharper eye on this,” says Irene Bianchi, vice president of claims and corporate services for RSA. “If their circumstances change, they are going to have to change their insurance to meet their circumstances.

“For brokers, I think there is going to be a bigger onus in terms of being sure that their customers are aware [of the options], and they are actually getting the coverage that these people need. We’re going to be working very closely with our brokers. We will be including them in our training that we are giving our accident benefit handlers, so that they know all the nuances and are very well-equipped at the end of the day to be allowed to find the right product for the customers.”

CATASTROPHIC IMPAIRMENT DEFINITION

All of the aforementioned gains could be immediately erased depending on what the ultimate definition of a “catastrophic impairment” turns out to be, insurers note.

The government says no more than it plans to “consult with the medical community to amend the definition of ‘catastrophic impairment’ and redefine the threshold for catastrophic brain injuries.” This would include expanding the definition of “catastrophic impairment” to include single-limb amputees, the release says further.

The outcome of this consultation is of critical interest to insurers. “The definition of catastrophic is a huge one,” says Leonard Sharman ofThe Co-operators. “While it’s great to lower the medical and rehab benefits for the non-catastrophic impairments, if the definition [of a catastrophic impairment] is loosened, and more and more folks fall into the catastrophic category, that’s going to wipe out any savings from the limit change in a hurry. So a few of these areas that are yet to be determined are pretty big ones.”

Lacking a clear sense of what the future definition might entail, actuaries will have a tough time crunching the numbers to determine the potential savings generated by the current reforms, said Bianchi.

“I think until we have absolute clarity — say, with something they have in Quebec, where you basically have a ‘meat chart’ that says ‘this injury is worth this’ — we will continue to have those [costing] challenges,” she said. Bianchi adds that in those jurisdictions that do have such clear definitions — Quebec, the United States and Ireland, for example -“they do seem to be having a very stable insurance environment with very stable pricing.”

THE FIVE-YEAR REVIEW

Sharman tactfully gives voice to the industry’s overall frustration with the glacial pace of the reforms.

“There’s a lot of talk around further consultation… which is okay, but it is a bit surprising that they didn’t [do that already],” he said. “There’s [been] plenty of time for consultation already. I’m not quite sure these things were left to carry on.”

Karin Ots, senior vice president of injury and casualty claims at Aviva Canada, has no problem with the government reviewing the auto product every five years. But this past process “didn’t start until the end of the five-year mark, despite the fact that some of these issues were noticeable 12 to 18 months into Bill 198 [introduced in 2003],” said Ots. “Costs were starting to escalate like crazy and…the situation became very dire, with insurers having to start taking rate and that sort of thing. I suspect that’s what the whole five-year review was supposed to avoid. I think there are likely better ways the government can set it up.”

Like Ots, Beaulieu agrees in principle with the idea of a five-year review. But “if we want to avoid situations where we are reacting to a crisis, I think there will be a need to monitor the system on a more continuous basis and make adjustments as needed,” he said.

To this end, Neglia said he would like to see an annual government “state of the union” report on the auto insurance product in Ontario.

“We’re in a crisis, and if the regulator controls both the product and the price, you have to say to yourself: How did we get into this situation?” he says. “By mandating FSCO to provide an annual report that will outline the state of the union of the P&C private passenger auto industry, that report can be an impetus to take whatever action is necessary on an ongoing basis.”

As Neglia conceives it, such a report might address crucial questions such as: How does the price of auto insurance compare to other staples in society? How are the costs associated with the auto insurance product manifesting themselves?