Jockeying for Position

Ontario’s auto insurance reforms suggested an odd visual when the province’s regulator posted its first reform-related insurance rates in 2010 Q2.

Picture a horse race, with the horses all lined up behind the gates. At the finish line, an enthusiastic banner reads: “Race to Rate Reductions.”

A gun sounds. And they’re off…

Only the horses don’t go anywhere. Most stay waiting at the stalls, paralyzed. A few wander out and graze on some nearby grass.

The crowd of consumers waits impatiently. A few unruly spectators start to get ugly, disappointed by the frustrated expectation of a thrilling photo finish.

That’s the metaphor, here’s the reality: The government is building up public expectations about the auto reforms that cannot be met. When Ontario announced the first reform-related auto insurance rates in July 2010, it did so with great fanfare, proud of an overall average decrease of about 1% across the entire market. So proud, in fact, it leaked the average rate decrease to the mainstream press just before posting the specifics.

But the fact of the matter is, when the gates were opened, eight out of the Top 10 insurers in the Ontario auto insurance market (ranked by market share) didn’t move their rates at all. Those that did offer decreases moved their rates only marginally downward. Only two insurers received rate decreases of more than 5%. No doubt the vast majority of the big players in the province’s auto insurance market were spooked by the prospect of lowering their rates and potentially getting burned if the reforms turn out to be ineffective in lowering their claims costs.

No doubt, the consumers will grouse — and already are grousing, as of press time — about the much-ballyhooed reforms that resulted in a microscopic rate decrease. But there is more to this scene than meets the eye.

To even the casual industry observer, it appears there may have been a lot of jockeying going on behind the scenes. Of course one will never know what really goes on behind the closed doors of a regulator, but here’s an educated guess as to what may have happened.

First of all, some basic assumptions need to be kept in mind.

First, insurers generally like the reforms because they have the potential to reduce their claims costs. No one knows for sure whether this potential will actually be realized.

Second, some recent private statements by the regulator suggest the potential won’t be realized. For example, the regulator has recently told members of the defence bar that, in order for insurers to make a profit under the reforms, more than half of all minor injury cases must fit within the new Minor Injury Guidelines (MIG). Given that less than 10% of all minor injuries fit within the former Pre-Approved Framework (PAF) model (the model the MIG replaced), the 55- 65% MIG target seems but an otherworldly dream.

Third, as insurers wait for the reforms to kick in, the property and casualty insurance industry is losing money on the product. By rights, auto insurers should probably still be raising their rates to match the bath they are taking on accident benefits claims.

Fourth, the Ontario government likes the reforms, too. Through its new auto reform package, the government is promising to deliver more choice and lower rates to consumers, as indicated in their mandated flyers.

Given the assumptions listed above, one can easily envision the following scenario.

Ontario tells insurers behind closed doors that it will not be amenable to approving rate increases in anticipation of the reforms.

Insurers are not amenable to filing for rate decreases without knowing how the reforms will play out on their claims costs. After all, what if the reforms don’t work?

With the regulator pushing for downward rates, and with the industry not in a financial position to go in that direction just yet, the industry goes nowhere. Rates stay the same. Flat. End of horse race.

It remains to be seen whether the government will assume any responsibility for the disappointed fans going crazy, or whether they plan to throw the insurers to the hungry lions. Either way, the government bears some responsibility for building up the public’s unreasonable expectations. It built the public up for a dud of a spectacle.