Canadian Underwriter

Explaining auto insurance rates to clients

July 18, 2018   by Brooke Smith

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Many Ontarians drive carefree on the province’s roads and highways. However, that freedom comes with a price: auto insurance rates. Just recently, the Financial Services Commission of Ontario (FSCO) reported that the average increase in insurance rates in the first quarter of 2018 was 2.23% across the whole market. That’s up from the fourth quarter of 2017, in which rates increased by an average of 1.03%.

While insurers and brokers are, in part, in business to make a profit, one recent—and controversial— study has shown that the profit has been excessive. In an April 2018 report prepared for the Ontario Trial Lawyers Association (OTLA), Dr. Fred Lazar, associate professor in economics at York University’s Schulich School of Business, indicated that auto insurers made $1.5 billion in pre-tax profits in 2016. That’s a 57% increase (or $534 million) since 2012. As Lazar wrote, “The automobile insurance companies in Ontario that have been profitable have been very profitable during the past years. Their average ROEs [return on equity] have been 14.9% in 2012, 17.5% in 2013, 18.9% in 2014, 16.8% in 2015 and 16.3% in 2016.”

If the numbers are accurate—and a number in the insurance industry vehemently deny these soaring profits, most notably the Insurance Bureau of Canada—then how do brokers explain increasing rates to their clients without having them feel they’re being overcharged?

Tom Reikman, chief distribution officer with Economical Insurance, says it’s up to insurers and brokers to educate clients on why rates increase, and they can do this in a number of ways: through social media, news articles and policy renewal mailings. “We also try to give as much information to our customer service representatives in brokers’ offices so they’re armed to respond to those questions,” he says. Even the broker associations, he continues, “spend a considerable amount of time and effort making sure brokers are up to speed—not only lobbying what they deem to be the necessary changes to make the product more affordable, but also making sure their members are aware of what’s going on.”

of drivers admit to using their phone behind the wheel.

Source: Travelers Canada

Claims related to distracted driving increased by 23% in the past two years.

Source: Aviva Canada

$547 million
The amount that auto insurance fraud costs Ontarians annually.

Source: Aviva Canada

But what, exactly, is going on? Rates are really driven through two areas, says Reikman. While he notes that insurers need to create a less expensive product for consumers, “a lot of that’s tied into the escalating costs on the accident benefits side, and they just seem to go up and up.”

Then there’s the physical damage side. There are costs to indemnify the same type of claim, inflation, and the rising cost of repairs to damaged automobiles. “Newer vehicles are significantly more expensive to repair,” Reikman says—take windshields, for instance. “Windshields have sensors in them now, so it’s no longer putting in a new windshield. You have to put the new windshield in and then reprogram it so those sensors are accurate. There’s additional cost related to that.”

Henry Hamm, director of personal insurance at RSA Canada, agrees, adding that cars also have many more safety features. “While this integration makes manufacturing more efficient and cost-effective, it has the inverse impact on repair costs. As a result, physical damage coverage is showing an industry-wide deteriorating loss ratio trend,” he says.

Vehicle repair times take longer, too, thus increasing the cost of a rental car while the insured’s vehicle is being repaired. And, Hamm continues, more vehicles are being written off due to the time/cost needed to repair them.

But it’s not just technological advances in car parts that are driving up costs. Driver use of technology is becoming increasingly costly to insurers—namely, distracted driving. “Right now, we’re definitely seeing rates impacted by technology—people using their phones in their cars,” says James Clarkson, agent/ owner of State Farm in Hamilton, Ont.

Fraud also plays a role, as money is leaked from the system by malevolent individuals. According to the Insurance Bureau of Canada, auto insurance fraud costs drivers in Ontario an estimated $1.6 billion per year. That means $236 of a driver’s auto insurance premium pays for fraudsters’ illegal actions.

Aviva Canada did its own study of fraud throughout 2017. It studied 10 different auto claims and found that nine involved fraud, and that an average of 57% of total repair costs invoiced to Aviva were fraudulent.

“Windshields have sensors in them now, so it’s no longer putting in a new windshield. You have to put the new windshield in and then reprogram it so those sensors are accurate.There’s additional cost related to that.”

About three years after Clarkson opened State Farm 11 years ago, the office was targeted by fraud. “We saw it first-hand. I don’t know to what extent it’s happening now because we don’t actually experience it in our office any longer,” he says. But the money doled out because of fake accidents, repairs and assessments adds to increasing rates.

Much ado about rates

Despite the factors that may increase rates, some insurers say their rates have recently decreased. Before State Farm Canada was purchased by Desjardins, Clarkson says, rates were quite high. “We were competitive,” he says. “For most of our customers, we were a very good price, but getting new customers was very difficult.” Since the purchase in 2015, however, 80% of Clarkson’s clients from his office alone have seen significant rate reductions. “I have clients who, what they’re paying today for the same policy that they’ve had with us is as much as half what they were paying.” The reason, he says, was the difference in the way the two companies rated risk. Which is yet another issue.

Rating risk now has become individualized for the major insurers, Reikman says. “There’s so much backend data supporting the rating models and how the models define each individual risk, you literally have to look at each risk on its own. There could be one risk that gets a renewal and it could go up 3%, but the next client’s renewal—because something has occurred or there’s some enhanced or new data— could go up 6% or 7%,” he says.

“We’re a heavily regulated industry in terms of oversight from the government,” Reikman continues, “but it has to balance [not only] the needs of the consumers, but also the needs of the companies to be able to make an adequate profit.”

An adequate profit—not excessive. For Claire Wilkinson, president of the OTLA, it’s about transparency. “We shouldn’t have had to hire an economist in order to understand the profit that [Ontario insurance] companies make,” she says. “Auto insurance is mandatory. It’s not like home owners’ or life insurance, which are optional. We have very little information about how these how rates are arrived at or what the profits actually are,” she says “There is a responsibility, in my view, on the part of the government to make informed decisions about understanding what the true profit levels are within the industry. But, currently, that’s not required.”

Again, whether you believe the profits are excessive or not, the rate increases are also at a time when victims’ accident benefits have been reduced. “It was great before, when you could get all the coverage [medical and rehabilitation and attendant care for catastrophic injuries was $2 million; as of June 1, 2016, it was reduced to $1 million] without having to purchase optional benefits,” says Wilkinson. “But now, that’s been taken away, so if you want to get the expanded levels of coverage, you have to purchase optional benefits.” While she knows brokers do send out information on these optional coverages, very few of her clients are aware of them. “People are looking at it and saying, ‘Oh, it’s optional; I don’t want to pay more money’ and then discard it.”

Wilkinson returns to the OTLA study. “It would suggest there’s enough money in the system that we didn’t need to erode these benefits the way they’ve been eroded in order to still provide coverage.”

Clarkson agrees that clients need to be informed about optional benefits. However, similar to Wilkinson’s experience, in the last few years he says a “very small” percentage of his clients have bought the optional coverage. “You have to provide the option, but people are so price-focused that oftentimes they’re putting their coverage at jeopardy to save money,” he says.

“There’s so much back-end data supporting the rating models and how the models define each individual risk, you literally have to look at each risk on its own.”

Brokers helping clients

Unfortunately, rates are high, and may still increase, if the latest FSCO report is anything to go on, but brokers can encourage their clients to be proactive. Clarkson encourages them to shop around. “Customers need to be in contact with their insurance company and just ask the simple question, ‘Is there anything I could do to lower my rates?’” He points to options such as changing deductibles, signing up for telematics and staying with the same insurer to get a loyalty discount.

As for vehicle repairs and damage, RSA is trying to address the growing costs in this area by leveraging its preferred repair facility network, which is particularly important during weather and catastrophic events. It also has preferred repair facilities, which reduce storage fees associated with vehicles waiting on repair. This, Hamm says, reduces claims costs and helps to maintain affordable rates for clients.

RSA also encourages drivers to consider a 48-month waiver of depreciation, rather than the standard 24-month waiver. This would ensure policyholders can get back into a new car, and reduce the need for them to pay out of pocket if there’s a claim.


Former Workplace Safety and Insurance Board CEO David Marshall wrote in his Fair Benefits Fairly Delivered: A Review of the Auto Insurance System in Ontario report that it’s the Ontario auto insurance system that’s at fault. “Claim costs continue to rise while automobile accidents continue to fall. The main cause is not inefficiency or excess profits by insurance companies or the behaviour of claimants, providers or lawyers. It is the way the system is structured.”

For Wilkinson, that structure needs to be changed. A solution, she says, needs all stakeholders at the table: victims’ rights advocates, healthcare providers, lawyers, insurance industry professionals and lawmakers. “We need everybody there to try to work out a new system that will work effectively, because what we have right now is dysfunctional.”

Copyright © 2018 Transcontinental Media G.P. This article first appeared in the June/July edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.