Squaring the Circle

No one who knows anything about the current state of Ontario’s auto insurance product is envying the position right now of the province’s finance minister or the government’s insurance regulator, the Financial Services Commission of Ontario (FSCO).

FSCO is entering the twilight stages of its mandatory five-year auto insurance review, a review that insurers hope will result in significant reforms to the auto product.

The financial situation of Ontario’s auto insurance product is, in the words of many in the industry, “a mess.” It also just happens to be the chief driver of the nation’s auto insurance industry as a whole. Ontario auto insurers wrote Cdn$9.5 billion in premiums in 2007, account- ing for just less than half of the country’s auto premiums last year. Industry representatives have long observed that as Ontario auto goes, so goes auto insurance in the rest of the country. So where exactly is Ontario’s auto product going?

The national picture provides a glimpse. Data available from the country’s solvency regulator show claims ratios for the nation’s auto insurance product hovered in the mid-60% range two years ago. Those same ratios for the first nine months of 2008 now stand between 73% and 85%, depending upon whether you are a Canadian or foreign insurer. Under the ‘personal accident’ category, reflecting the accident benefits side of the equation, claims ratios are more in the ballpark of between 98% and 125%. So one might conclude from the national figures that Ontario auto is going nowhere at all — if not travelling in reverse.

The road to reform unfurls when FSCO delivers its final report to Dwight Duncan, the province’s minister of finance and minister of revenue. Duncan’s office, not FSCO, will have the ultimate say on the fate of auto reform in the province. There is no formal deadline or timetable for FSCO’s final report to the minister, although sources suggest it will likely be delivered sometime during the first six weeks to two months after the holiday break ends in early January 2009.

AB COSTS ON THE RISE

For Duncan and FSCO, squaring the circle might be an easier task. The province’s system is a curious hybrid. On the one hand, it is a no-fault system designed to get accident benefits (AB) payments to consumers quickly in order to facilitate treatment and a quick recovery. On the other hand, it’s a tort system, giving claimants the ability to recover damages for bodily injury through the court system.

“We have the worst of both worlds,” observes Don Forgeron, IBC’s vice president of Ontario. “We don’t have a nofault system and we don’t have a full tort system: We have both systems, whereas other jurisdictions tend to have one or the other.”

There is a push-pull dynamic inherent in a hybrid system. Insurers see their costs mounting on the no-fault/accident benefits side of the equation. They are therefore concerned about Ontario trial lawyers’ current efforts to increase tort access to consumers. Such tort reform, insurers say, would increase claims costs and frequency for insurers, resulting in increased premiums for consumers.

Industry representatives say auto insurance is broken not because of limited tort access, but because of the personal accident/AB side. On the tort side, industry data show that as of the end of the 2008 third quarter, claims ratios for liability in the auto insurance product for federally regulated insurers (both Canadian and foreign) outpaced the rate of inflation. Tort liability claims ratios increased from 67.5% during the first nine months of 2006 to 71.2% by the end of the 2008 third quarter.

In contrast, in the ‘personal accident’ category (encompassing AB claims), the overall increase is much more dramatic: After nine months’ end in 2006, the claims ratio in personal accident stood at about 75%. This year, during the same period in 2008, the figure stands at 103.8%.

Forgeron says a different set of statistics suggests the urgency of dealing with AB claims immediately. “When we compare Ontario to Alberta and Atlantic Canada, we compare them in terms of cost-per-vehicle so this is an apples-to-apples comparison,” says Forgeron. “When we compare them on the bodily injury (BI) side, on the tort side, they compare relatively favourably. They are within 10% of each other in terms of the cost-per-vehicle. But when we compare them on the AB side, in Alberta the cost per vehicle in 2007 was Cdn$37. In Atlantic Canada, it was Cdn$57. And in Ontario, it was Cdn$385.

“If there’s a visual that describes how the product in Ontario is completely out of sync with other jurisdictions and why the costs are high, that’s it. That’s the graphic right there.”

Based on this and other observations, the IBC has made no fewer than 25 recommendations for reform in one of 90 submissions made to FSCO during last year’s version of the auto insurance product review. At least 10 of those recommendations are proposals for reform in the accident benefits part of the product. In total, 17 individual insurance industry representatives made submissions to FSCO; many of them echoed the IBC’s recommendations calling for a scaling down of what are perceived to be excesses in the accident benefits area. [A sampling of recommendations are contained in the article on Page 32.]

TORT REFORM

Although insurers are looking to trim the fat existing on the AB side of the system, on the tort side, trial lawyers are focused on expanding access to justice for claimants seeking bodily injury damages in court. Specifically, the trial lawyers’ recommendations to FSCO seek to eliminate the courts’ verbal threshold designed to distinguish serious, permanent bodily injuries from other, less serious injuries. In addition, they are recommending the current Cdn$30,000 deductible applied to Ontario court awards under Cdn$100,000 should either be eliminated outright or scaled down to Cdn$15,000 (where it was prior to reforms to the auto product in 2003).

The trial lawyers’ submissions follow the path laid by former Ontario chief justice Coulter Osborne, whose November 2007 report on civil justice reform in Ontario led him to conclude that the province should consider whether or not the threshold and the deductible were redundant for the purpose of keeping smaller claims out of the court system.

“I would urge the [FSCO] Superintendent [Bob Christie] to include in his deliberations what net benefit accrues from the existence of the verbal threshold in circumstances given the existence of the $30,000 deductible,” Osborne wrote. “If there are claims excluded by the verbal threshold that would not have been excluded by the deductible, is it in the public interest that such claims be excluded? If, for example, claims of children or the unemployed elderly are excluded, considerable thought might be given to the integrity of that exclusion.”

Picking up on Osborne’s remarks in the report, trial lawyers’ organizations have called for FSCO to eliminate at least one of the threshold or the deductible, if not both. The Advocates Society argues that getting rid of the verbal threshold will decrease insurers’ transactions costs substantially, since medical assessments — among the problematic AB claims costs targeted by insurers — will no longer be necessary to prove the severity of an impairment. The deductible, on the other hand, is “a simple arithmetic calculation” and thus minimizes transactional costs, Osborne notes.

The submissions of the Ontario Bar Association (OBA) and The Advocates’ Society to FSCO for the five-year review read like a carbon copy of Osborne’s reasoning on the matter. “It is unnecessary to have a verbal threshold and a deductible given that they both serve the same purpose — eliminate smaller ‘nuisance’ claims,” The Advocates’ Society submission reads. “The interests of the public are not served by a verbal threshold that excludes claims [that] otherwise exceed the monetary deductible.

“We also support the observations of the Honourab le Coulter Osborne regarding the discriminatory effect of the regulation defining the verbal threshold, the exclusion of the claims of children, the elderly and the unemployed. These exclusions are inappropriate, in our view, and fall within our Society’s mandate as it relates to the promotion of access to justice.”

PUBLIC INTEREST

Part of FSCO’s dilemma in preparing its report is that both insurers and lawyers have a legitimate claim to acting on behalf of the consumer’s best interests, albeit in different ways.

Eliminating unnecessary AB costs in the system, particularly when economic times are tough, would result is a stable product that doesn’t need to undergo perpetual or radical price restructuring, the insurers argue. Ontarians already spend about 5% of their disposable income on auto insurance, the IBC notes, and insurers are loathe to raise Ontarians’ auto insurance rates any higher, even if they need to for the purpose of ensuring profitability.

“Issue Number 1 for the industry in returning to profitability,” Forgeron says. “Within the product itself, there’s claims inflation that is running as well in the double digits. If we catch up with double digit rate increases, we’ll be repeating this over the next several years…We are entirely focused on trying to create savings within the product so that we can bridge these gaps and give consumers in Ontario a product that they’ve told us they want, which is a stable and affordable product. And currently the product is neither.”

Trial lawyers, on the other hand, are focused on giving the public access to justice, which, in effect, will make it easier for consumers to make tort claims against insurers. Richard Halperin is the head of the Ontario Bar Association (OBA)’s insurance section and represents the OBA at FSCO’s five-year review. He says he agrees with insurers that there is a lot of waste in the AB side of the system, which encompasses medical assessments, housekeeping and caregiving expenses, as well as future care costs. But Halperin characterizes the insurers’ proposals to reduce AB costs as “no proposal at all, because their proposal to FSCO is what I call a random attack on sore points for the industry geared entirely towards profit.”

Halperin juxtaposes this against “a broader approach to auto insurance reform that deals with all of the shortcomings of the auto product,” making it more consumer-friendly.

To this end, “if you reduce accident benefits, you need a corresponding increase in tort rights,” Halperin says. “You can’t simply take away and take away from accident victims until everything disappears. If we don’t have access to appropriate levels of compensation [in court] for innocent accident victims who did not cause their own loss, then what kind of protection are we buying for our [insurance] policies? None.”

LET THE GAMES BEGIN

Here’s where FSCO’s role can be likened to that of a referee.

Insurers say opening up tort rights to consumers at this point, without substantially cutting AB costs, will simply add to insurers’ costs. Ultimately these costs will be borne by consumers in the form of substantial rate increases.

“Why should the government entertain measures that are simply going to add to [the insurers’ costs] burden, whether it’s on the AB side or the tort side?” Forgeron says. “Our sense is that it would be as irresponsible for us to call for an enhancement of AB benefits at this particular time as it is to call for an enhancement of tort benefits. That’s really what the lawyers are doing:They’re calling for an enhancement of tort rights, to increase benefits there, whereas we would be ridiculed if we came out and said, ‘Let’s enhance AB benefits’ at a time when they’re going up by 10% a year.”

Forgeron says rising costs in the auto product are not of the industry’s own making. Trying to keep insurers’ costs down — and thus consumers’ auto insurance rates at reasonable levels — is an ordinary part of offering the auto insurance product in a private, competitive market, he notes.

Halperin disagrees, arguing that insurers’ rising costs are self-inflicted. “If we continue to adopt underwriting practices that are appropriate to a soft market at a time when we allegedly see profitability disappearing for the industry, why is it that the industry hasn’t responded by entering the hard market sooner and by being more responsible in their pricing?” Halperin asks. “The problem is that when [insurers] allow the soft market to continue beyond the point where profitability disappears, then the industry starts to look to the government, saying: ‘Change the rules to enhance our profitability, so that we in the industry don’t have to adapt to market changes on our own.’Well, there’s something wrong with that. That shouldn’t be happening. Eventually the innocent accident victim and the public pay the price for that.”

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“We have the worst of both worlds. We don’t have a no-fault system and we don’t have a full tort system: We have both systems.”