2006 Claims Trends: Severity Up, Frequency Down

The stormy seasons of 2004 and 2005 brought grim outlooks for 2006. Insurers held their collective breath and battened down the hatches, bracing for the next set of storms that Mother Nature was going to hurl their way. But calm seas, for the most part, prevailed throughout the year. Other than a few blips – torrential rains and a boil water advisory in the Greater Vancouver Region, for example, as well as snow squalls to the east – Canadians were lucky this year, claims experts report.

But even in calm seas, there are small waves. When asked about 2006 claims numbers, insurers reported fluctuations in volumes, frequencies and severities. The driving factors behind these fluctuations varied: some suggested a cultural shift towards a population more willing to file claims, while others talked about the effects of a hot economy, more stringent underwriting practices, and weather- and climate-related events.

Some claims managers say changes in litigation trends are beginning to creep onto the companies’ radars. In some cases, these trends are driven by relatively new legislation such as Ontario’s Bill 198 in 2003 and British Columbia’s Rule 68 in September 2005. Others contend that Canadians are slowly but surely filing an increasing number of class-action lawsuits, a pattern of behaviour typically associated with our southern neighbours in the United States.

One thing all of these factors have in common is that they are all affecting the way business is conducted, pushing the insurer towards a “customer-centric” approach.

THE CREEP FACTOR

Irene Bianchi, the vice president of claims at Royal & SunAlliance, says both the frequency and severity of her company’s claims have been sitting on a plateau since mid-May. But, she adds, volume has begun a gradual climb. “In Ontario alone, we have seen an increase in property volumes, an increase in bodily injury and accident benefits,” she notes. “Overall, when you add it all up, it’s about a 4% increase across the board.”

Bianchi explains the 4% increase is on top of the claims volume projections for 2006. In other words, she said: “What we thought was going to happen increased about 4%. [It’s] not a huge increase, but it’s a beginning.”

Derek Vettese, the vice president of claims at the Insurance Corporation of British Columbia (ICBC), has also seen an increase in claims volume in 2006. He notes bodily injury claims rose by approximately 1.7%, property damage increased by about 3%, accident benefits claims are up 2% and collisions are up by just under 5%. But whereas Royal & SunAlliance’s severity has plateaued, Vettese sees the opposite happening in his province. He attributes the rise in severity to a hot economy and larger court awards.

But one real area of concern, he continues, is with the cost of bodily injury claims. “What we have seen is fewer small injury claims and more expensive, more serious injury claims that cost us more money,” he says. “The total number of injury claims we have had this year has gone up, the frequency for the number of policies we’ve sold has gone down. But there’s been a shift towards the higher-end claims, the more expensive claims.”

Just how much more expensive is difficult to quantify, Vettese says. But since 2001, “I can tell you that the claims [costs] have escalated over the last five years at about 11%.”

ICBC has done some research to try and pinpoint the cause of the upward shift, but no simple reason presents itself. Vettese suggests it may be a case of smaller claims not presenting themselves because of B.C.’s low-velocity impact program (LVIP). Essentially, with the LVIP, if a person is involved in a very minor automobile accident – in which there is minimal damage to the vehicle but the person claims to have an injury – the ICBC may not compensate the person for that injury. “That has eliminated a lot of the smaller claims, we believe, but we’re seeing a shift in the value of the claims moving upwards,” Vettese says.

Susan Watts, the vice president and Canadian-zone claims manager at Chubb Insurance Company of Canada, reports a similar decrease in volume and increase in severity. While specific figures were unavailable at press time, Watts says that throughout “2006, what we observed at Chubb was that new claims volume was down a bit.” Anticipating projected claims volume in December 2006, “we’re looking at being down 6% or 7% in 2006 compared to 2005.”

Watts attributes the decreasing volume to a milder climate this year. She says 2005 was “all about the weather-related cats,” but similar-scale natural catastrophes “didn’t occur in 2006.”

Severity, on the other hand, is up, Watts notes. She attributed the increase in severity to “the litigious nature” of the consumer. “I do agree there is a trend where consumers are filing more and more class-action lawsuits, where typically you would see individual actions,” she says. “We do tend to see more of it. One of the positive things is that we can resist certification [of class actions] at times in various provinces, which appears [easier to do] in Canada than it is in the United States.”

Louis Heroux, the senior vice president of claims at ING Canada, agrees with Watts and Bianchi that severity is starting to climb while volume is on a slight decline. ING saw a “slight decrease” in claims volume over the year, demonstrating a mini-trend of sorts, Heroux suggested.

Instead of handling big catastrophes with a rush of claims, as witnessed in 2005, Heroux says he has seen a tendency in 2006 for a flurry of claims to be filed at once, creating small spikes rather than large peaks. This is a different phenomenon than what may have happened 10 years ago, he says. So while the industry holds its collective breath and waits for a big storm to hit, individual insurers are busy handling smaller, weather-related events, Heroux explains. “So, I would say the extent of the cat has changed.”

Heroux predicted the milder climate seen in 2006 will provide only temporary relief, but nevertheless it is a welcome respite.

Bianchi agrees, noting the August 2005 rainstorm in Toronto caused more than Cdn$400 million in damage; even the devastating 2006 rainstorms in the Vancouver area of B.C. will not approach the 2005 damage losses in Toronto, she notes. “We did have some activity in British Columbia with the rain storms, but it wasn’t massive like the rainstorms in 2005 were,” she says. The Insurance Bureau of Canada estimates there will be more than Cdn$40 million in damages as a result of the 2006 B.C. storm – a relative drop in the bucket compared to the Ontario rainstorms in 2005, which caused more than Cdn$400 million in damages.

The relative lack of large-scale catastrophes in 2006 has contributed to the reporting of a significant decrease in claims volumes by the Guarantee Company of North America (GCNA). Richard Pouilot, the vice president of claims at the GCNA, says his company has experienced roughly 16% fewer residential claims and roughly 10% fewer automotive claims in 2006. “At the end of 2005, everyone was bracing for the next big storm,” Pouilot says. But as other claims managers have noted, Pouliot believes “the Aug. 19, 2005 storm explains a portion of [the decrease].”

And while the storm season eased, some suggest that insureds’ reluctance to file claims is also relaxing. Bianchi agrees the so-called ‘fear factor’ is a consideration, but its relevance is on the wane. “I think the industry as a whole has seen an absolute downturn in frequency,” she notes. “People are much more reluctant to make a claim because they fear ramifications if they do. But now insurers are starting to see things turn a little bit. I think the fear factor really seems to be going out of insurance rates. But again, it’s a very, very delicate balance there.”

Heroux disagrees. In his experience, the insureds “are not filing small claims. I think they feel the insurance is there for when they get hit big-time. When they are, they are expecting full service: preferred b
ody shops, preferred contractors with commitment on the quality of the workmanship and quickness. I think that’s what they’re expecting more than they have ever been asking for.”

LEGAL MATTERS

Like other claims managers, Watts believes “it’s not necessarily [claims] frequency, [but rather claims] severity and complexity that are changing.” As noted earlier, she attributes this to current litigation trends. “I would say we observe that people are quicker to move to litigation than in years gone by,” she says.

Bianchi takes it a step further. She predicts insurers will be faced with an increasing number of class-action lawsuits. Although mammoth suits, like those experienced with the automotive aftermarket parts industry, don’t seem to be on the horizon, “we are seeing more class action-activity on things [on which] normally we would be seeing individual activity,” she warns.

Alleged food poisonings, contaminated food, issues stemming from the 2004 blackout are all examples of civil legal actions that might normally be brought by one or two claimants. But now these kinds of cases are being filed in court as class action lawsuits.

Heroux agrees. “There is definitely a trend there,” he says, noting how Canada may be following in the footsteps of U.S. litigation patterns. “I guess in Canada we are just following how the [people in the] states are living, and have been living for a number of years,” he comments. “We are getting more cases than we used to and it will probably keep on increasing over the next couple of years.” But, while the Canadian litigation trend may be similar to that of the U.S., it’s not the same, he noted.

Bianchi acknowledges that class-action lawsuits are not as prevalent in the Canadian courts as they are within the U.S. legal system. Nevertheless, she says, the phenomenon has Canadian insurers thinking about a whole new way of defending claims. “Whereas before you could deal with individuals in a one-off basis, now you’re having to deal with an organized class of individuals,” Bianchi notes. “And the plaintiff lawyer has a great deal of control of the entire picture.” This process-driven form of litigation hits the bottom line, she continues, “because there are a lot more steps that you have to take and it all adds up.”

If there’s any silver lining to the class-action cloud, Watts says, it’s that Canadian judges have generally been more reticent to certify class actions than their counterparts in the United States.

IMPACT OF REGULATION AND LEGISLATION

Claims managers say 2006 claims patterns have also been affected by procedural regulations and legislation instituted two or three years ago.

For example, the B.C. Supreme Court implemented Rule 68 in 2005 to fast-track litigation. Rule 68 is a pilot project that began on Sept. 1, 2005, and applies to four B.C. Supreme Court registries – Vancouver, Victoria, Prince George and Nelson. Under the rule, pre-trial procedures and evidence allowed to be called to the trial is limited for claim amounts of less than Cdn$100,000.

“It’s supposed to fast-track the litigation, but in the process it restricts our ability to get information,” Vettese says of Rule 68. “It restricts our ability to do examinations for discovery, because when people are making allegations we are not able to verify them. That’s a bit of a concern.”

Vettese predicts issues will eventually arise as a result of the rule, but “we don’t have enough data to confirm that one way or another.”

In Ontario, Pouliot notes, changes in legislation – specifically Bill 198 – “helped tremendously” to decrease the number of accident benefit and bodily injury claims. On the plus side, Bill 198 increased statutory deductibles for accident benefits and bodily injury claims, according to Rocco Neglia, the vice president of claims at the Economical Insurance Group. In addition, it “brought with it some renewed claims confidence in the threshold defence,” Neglia mentions in an internal document prepared for staff use.

The “threshold defence” refers in part to injury thresholds identified in Bill 59, the predecessor of Bill 198. Under Bill 59, the Insurance Act basically states that the owner or occupant of a vehicle [and by extension, insurers responsible for defending them] cannot be held liable for non-pecuniary damages unless certain injury “thresholds” are met, including death, permanent serious disfigurement, or permanent impairment of physical, mental or physiological functions.

Despite the virtues of Bill 198, Neglia remains skeptical. “There are other parts of Bill 198 that offset gains,” he writes in his paper. For example, when all is said and done, Bill 198 may result in even larger paid claims than experienced under the Bill 59 regime it replaced, Neglia writes. “While statutory deductibles were doubled, they now disappear completely at specified monetary thresholds,” he notes. “Deductibles will not be applied to large claims, and settlement demands in negotiations on moderate injuries can be expected to exceed the monetary thresholds.”

This change, he continues, has huge potential to bring about inflationary pressure on pain and suffering awards. “Claims for medical and rehabilitation costs, regardless of the availability of collateral or accident benefits, are now fully recoverable in tort for non-catastrophic injuries once [the] threshold is breached,” Neglia writes. “This new exposure potentially dwarfs the cost reduction provisions of Bill 198.”

Heroux believes Bill 198 creates tighter time pressures, putting the insurer under the gun. “The delays for the medical assessors and the medical assessment and the response that is anticipated for both the insurer and the insured is very tight,” he says. With regard to accident benefits in Ontario, the bill has forced ING to “review our workflow in this field” because they are under a lot of pressure.

PRESSURE TO PERFORM

In order to cope with financial pressures created by legislation/regulation, higher customer expectations, and shifts in claims trends, insurers say they need to understand the customer and the risks being underwritten, Watts says. Getting to know the customer, coupled with good underwriting helps the insurer to understand more fully the risk they are taking on and allows them to price accordingly. This can have positive impact on severity and the cost of litigation, she suggests.

Service continues to be a decision-making factor for customers, Watts says. “We, all insurers, are continually under pressure to deliver quality service at the right cost which enables us to keep the premium in line,” she says.

Heroux agrees, saying developing trends have caused ING to focus on the “customer-centric” skills. A decade ago, he says, “the insurer was deciding when people would be serviced,” but that’s no longer the case. Now the consumer expects that “we’ll be answering the phones when they decide to call, and we have to be there to service them.” This requires change, he continues, to better business systems.

“Because you have to be available at all hours, obviously it is not necessarily the same person that the people will be talking to,” he observes. “So the person receiving the phone call has to be able to gather the file’s information quickly, to make sure that nothing is missing and the client isn’t having to answer the same questions for the third or fourth time.”

Particularly in auto and residential, Pouliot says, “our big challenge will be to continue to deliver service beyond our clients’ expectations.”

2007: READING THE TEA LEAVES

Insurers were hesitant to predict claims trends for 2007. Pouliot’s crystal ball says the same, provided the milder weather conditions continue to hold. Watts is reluctant to make a prediction in terms of volume because “there are so many factors that can swing what happens.” For Vettese’s part, he believes frequencies will begin to creep upwards.

But while all appears to be quiet, even on the Western fro
nt, Bianchi seemed to speak for everyone when she said of the 2006 claims season: “Right now, it appears numbers are stable across the country. If the weather holds, we should be in good shape.” If not, she adds, “then we’re going to start to see a lot of volume.”

At the end of the day, insurers can decide to move away from underwriting riskier lines in an effort to keep costs down. They might also make service improvements to help streamline and boost customer service to draw more insurers. But most agree Mother Nature will likely decide just how hard the industry will be hit – or not hit.