Raising Ontario's auto insurance rates or getting insurers to lower profit targets will not solve the fundamental issues in Ontario's auto insurance system - a fraud-riddled system that has consumers paying the highest rates in Canada, wrote Barb Addie, president of Baron Insurance Services, in the MSA/Baron Outlook Report: 2011 Q3.
In its December 2011 annual report, Ontario's auditor general suggested that FSCO should reconsider its benchmark of a 12% return on equity (ROE) when reviewing insurers' rate applications. The auditor general noted that the benchmark has not been adjusted downward since it was set in 1996, even though the long-term bond rate has been about 3% for the past few years.
IBC, in response, pointed out that FSCO does not guarantee a 12% ROE when approving rates, and the industry has in fact lost $2.8 billion over the past three years in Ontario auto.
"Raising rates much further will not be politically tenable and there is pressure from both FSCO in their Statement of Priorities and the Ontario Auditor General's annual report to reduce the 12% ROE cap because of the low interest rate environment (an ROE cap that has been largely theoretical in recent years)," Addie wrote.
"Such a decrease in the cap will compel insurers to include a lower profit expectation in their rate applications and thereby cause the gap between premiums and costs to widen."
Addie recommends instead that the government:
• Fix the definition of catastrophic impairments, especially given the Court of Appeal's recent ruling that overturned Kusnierz v. Economical Mutual Insurance Company. "Combining the two injury types will cause more claimants to qualify for the much higher benefits that accrue when the CAT threshold is exceeded.
• Remedy the unwieldly mediation/arbitration system.
• Come down hard on fraud and abuse.
"A trend towards higher claims costs absent significant further cost containment reforms will likely precipitate another crisis; a crisis that both the industry and the government desperately want to avoid."