Shedding New Light on Age-Old Issues

Market misconduct, underwriting transparency, brokers’ E&O exposure in the wake of auto reforms and auto insurance fraud took centre stage at the Insurance Brokers Association of Ontario (IBAO)’s 90th Annual Convention in Niagara Falls.

MARKET MISCONDUCT

Ontario’s insurance regulator needs to get tougher on market misconduct, insurance company CEOs told brokers at the IBAO convention.

Suggestions at the IBAO’s CEO panel discussion included:

• more transparency in making brokers and the public aware of which companies are not in compliance with Ontario’s Unfair and Deceptive Acts or Practices (UDAP) regulations; and

• a new regime for imposing administrative penalties (such as fines) without the need for complicated, quasi-criminal proceedings.

Without naming names, the CEOs alleged not all companies were playing on a “level playing field” in terms of compliance with UDAP regulations.

Recent changes to UDAP regulations include, among other things, clarifying the ban against the use of credit scoring for underwriting auto insurance lines and requiring group insurers to provide similar rates between each of their companies (affiliates and otherwise).

Panel moderator and CBC journalist Evan Solomon asked CEOs on the panel if they thought the UDAP changes had gone far enough.

George Cooke, president and CEO of the Dominion of Canada General Insurance Company, noted compliance to UDAP was inconsistent between companies.

“There are a number of companies that are adhering to the new rules,” he observed. “There are a number of companies that are not adhering to the new rules. The regulator, for whatever reason, is choosing to keep those private and confidential, so those of us in the marketplace don’t know who is supposedly to be onside, who isn’t, who’s got permission to be offside, and who’s in transition.”

Kevin McNeil, president and CEO of Gore Mutual, said the Financial Services Commission of Ontario (FSCO) needed to be more transparent with the industry and the public about who was in compliance with UDAP and who was not.

“The core issue here is that you get a lot of he said/she said,” said McNeil. “On such issues as transparency, let’s…provide clarity to the issue so that we don’t have some who are fined, some are not fined, but some kind of transparency as to who is complying and who is not complying, so that it’s there for the public [to see].”

When companies are not compliant, CEOs agreed FSCO was labouring under 80-year-old legislation that made it hard for the regulator to respond without going through a cumbersome quasi-criminal process. It was suggested years ago that FSCO have a more nimble system of administrative penalties. “Absolutely nothing has happened with it,” Cooke said of the suggestion.

‘BLACK BOX’ UNDERWRITING

One consequence of companies using predictive models for underwriting is that it may be more difficult for the public to understand how their premiums are derived, and more difficult for brokers to explain the rating process to consumers.

CEOs of insurance companies discussed the issue, which was raised by brokers, during the IBAO convention.

Referred to within the industry as the “black box” phenomenon, insurance companies are using more sophisticated modeling techniques and individualized ratings variables to price premium more accurately. But as insurers input rating variables into their proprietary algorithms to price their products, it has been more difficult for brokers to explain to consumers how the final output — the consumer’s premium calculation — is derived.

“How does a broker deal with this in the field?” IBAO CEO Randy Carroll asked the CEO panel. “You’ve got these tools, you’ve got the algorithms, so you’re working on your back end. But you haven’t taken into consideration the workers in the front end….

“I don’t think the issue is what you’re trying to accomplish, more than it is the issue of how you’ve accomplished it, because you forgot about [the brokers].”

Carroll’s comment came on the heels of a debate about whether the rating variables themselves needed to be more transparent, or whether more transparency could even be achieved given the fact that companies’ algorithms are proprietary and confidential.

“The transparency part of this is absolutely critical,” said George Cooke, CEO and president of The Dominion of Canada General Insurance Company. “Not the transparency of the algorithms … but the transparency of what exactly is being manipulated inside the algorithm.”

Jean-Francois Blais, president and CEO of Axa Canada, said the variables insurers are using are already well-known and “intuitive.” He noted insurers still most commonly use factors such as the age of the driver, how many kilometers a car is driven, the make of the car, etc. — all of which are easily understood by consumers.

Louis Gagnon, president of Intact Insurance Company, suggested brokers in some way stood to gain by the choice created by the complexity of the premium calculations.

“Those algorithms make life complicated, I agree, because they are different [between companies],” Gagnon said. “So when you are talking to a customer, they have different possibilities. It’s difficult to explain all of those things… As a broker, I think that’s the most important thing, to have different choices for people, having different companies and different ways of looking at things.”

BROKERS’ E&O EXPOSURE

The higher standard of care owed by brokers to consumers as a result of the auto reforms will result in trial lawyers suing brokers “big-time” for failing to properly explain optional benefits to their clients, according to Richard Halpern, partner at Thomson Rogers LLP.

“You have a problem,” Halpern, a board member of the Ontario Trial Lawyers Association, told brokers at the convention. “You have got to make sure that your consumers are told about the optional coverages [available under the new auto product]. You have to document this properly. You have to encourage people to purchase the optional coverage. And if you don’t, it will come back to bite you. People like me can’t wait to sue brokers over this. It’s going to happen, and it’s going to happen big-time because the bar for the standard of care owed by brokers is higher than it’s ever been before, in my view.”

Halpern suggested that to avoid E&O claims being brought against them, brokers should be “pushing” the optional coverages on their clientele.

AUTO INSURANCE FRAUD

Tim Hudak, leader of the Ontario Progressive Conservative Party, vowed to crack down on fraudsters working in the auto insurance system should he become premier.

“I believe if you want to achieve real savings with auto insurance premiums, you need to first start cracking down on the cheaters and clean up our system,” Hudak told the IBAO conference on Oct. 21. “If the Dalton McGuinty government won’t do it, the PC government will.”

Ontario personal auto premiums are the highest in the country — 34% higher than Alberta’s (the second most expensive province in the country) and 91% higher than Prince Edward Island, Hudak noted. Yet, the average cost per claim in Alberta is $4,000 and the average cost per claim in Ontario is $53,000, a figure that has ballooned from $30,000 only five years ago, he continued.

In spite of the increased premium, Ontario auto insurers lost a total $390 million in 2009, the only province to not turn a profit in the line.

“I don’t think there’s anything wrong with Ontario’s drivers,” Hudak told delegates. “I don’t think it’s the condition of our roads. I just think it’s a problem with our system.”

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As insurers input rating variables into their proprietary algorithms to price their products, it has been more difficult for brokers to explain to consumers how the final output — the consumer’s prem ium calculation — is derived.