Canadian Underwriter

AutoRate Warning

February 1, 1999   by Linda Matthews, COO of Royal & SunAlliance

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Ontario’s auto insurance regulations under Bill 59, and the latest revisions under Bill 90, have created a unique legislative environment in the provincial governing of consumer insurance. So much so that several provincial insurance regulators have eyed the legislation as a potential basis for their own legal framework.

However, while Bill 59 was intended to stabilise Ontario’s auto rates and provide a fairer environment to consumers, latest research suggests that premium rates are likely to be as high as 12% below cost for the current year. This spells danger for property and casualty insurance companies, the legislators as well as the public. Unless insurers react appropriately, the cost will take its toll in dramatically higher rates and underwriting losses.

The introduction of Bill 59 was at the time a welcome development for an insurance industry buffeted by unfocused political agendas and market confusion. The legislation was seen as a good start at a balanced approach to automobile insurance: supporting reasonable consumer benefits, opening up access to the courts, and providing fair compensation for pain and suffering.

Essentially, the bill delivered a stable platform for product development, and gave insurers the space to control costs, improve service and reduce premiums. Since 1996 the cost of premiums fell by an average 9.6% which, when factoring in inflation is closer to a 11.5% decline.

Bill 59 helped create a stable pricing environment for consumers. But that represents only half the issue. The system has had little effect as either a check or balance against external factors which threaten to drive up prices for consumers by compromising the cost stability for insurers.

The lack of appropriate attention on the costing side is expected to show up as early as this year. In a preliminary forward-costing of automobile insurance, Exactor Insurance Services Inc. estimates that premiums in Ontario may fall short of costs by an estimated 4.5% to 12% in 1999. So why are the warning bells sounding?

Cost appraisal

There are several reasons for the increased market concern over the cost the bill is exacting on the industry, but none so severe as to suggest that a major overhaul of Bill 59 is necessary. The legislation is only two years old, having just gone through fine tuning. However, in order to determine the true effectiveness of the legislation, additional pieces of the puzzle still need to be slotted into the picture.

We do not know, for example, the full impact this environment will have on claims, since costs usually take up to four years to move through the courts. The Ontario Court of Appeals recently ruled that CPP disability benefits are not payments for loss of income and, therefore, are not deductible in an action.

Cash-strapped municipalities struggling to balance budgets are considering by-laws that will pass the cost of fire and other emergency services responding to an auto accident onto auto insurance policyholders. This was tried on a provincial level in the 1980s, and failed. Now it appears that some municipalities are attempting to pursue the same strategy.

In isolated cases, those examples do not add up to much, especially when measured against the hundreds of millions the industry returned to the economy in payouts last year. But they do point to a disturbing trend toward authorities heaping additional costs on the policyholders because the final invoice will be back-stopped by the insurer. Perhaps it is time to re-enforce the message that policyholders and taxpayers are one and the same.

Upward pressure on costs can also come from within. Such as the case with lifecos attempt to transfer death benefits and other liabilities associated with vehicle-related death to the automotive sector. The recent ruling that suicide arising out of the use and operation of a vehicle being covered by the standard automobile policy, compounds this issue.

Handling the short fall

Ontario’s 100 automobile insurers are already leaner today following two years of steady belt tightening and cost cutting. At the same time, volatility in the financial markets has compounded the revenue squeeze by dampening returns on investment income. There is no room left to manoeuvre, and a healthy automobile insurance industry cannot be sustained if it must spend up to $1.12 for every dollar earned.

Clearly all stakeholders must become more diligent in controlling costs. The government has suggested reviewing the industry’s commission structure. Last year’s Task Force on the Canadian Financial Services Sector (The MacKay Report) may have indirectly underestimated the value of brokers when it recommended selling insurance products over the bank counter. In the federal government’s case, it is implied broker commissions are a reducible cost. But cutting the broker out would be a rather interesting position for a free enterprise, pro-consumer government to take.

Insurance brokers are part of the small business culture in communities across the province. Opposite to driving up costs, most brokers are instrumental in ensuring the right product and best rate for consumers. Variable commission continues to be discussed by the Financial Services Commission of Ontario and the industry is supportive of any proposal which provides the consumer with a fair and sustainable product/price model.

Rather than streamline the process however, the Commission may potentially add to the cost burden. For example, the Registered Insurance Brokers of Ontario (RIBO) is an efficient and effective self-regulatory organisation.

The Commission is now proposing to establish a parallel agency — the Insurance Distribution Regulatory Board (IDRB) — to oversee the functions of RIBO and all financial services transactions in the province. This layer of duplication will deliver nothing in the way of added value to the automobile insurance consumer.

Belt-tightening needed

If the Ontario government is sincere about reducing insurance industry costs, it may want to accelerate the current review of its own procedures. Every year, Ontario’s automobile insurance companies write a $20-million cheque to the government. This is to cover the cost of regulation and enforcement, and is in addition to the premium taxes the industry pays, and the hidden cost of complying with regulatory requests for detailed information.

It is not only Ontario consumers who will be affected. Ontario accounts for 33% of the Canadian automobile insurance market. What happens here will have a ripple effect across the country.

There is a need for self-adjustment or correction. The industry must resist pressure to sell premium products at bargain-basement prices in the name of market share. That strategy nearly clipped the wings of Canada’s airline industry. Prolonged discounting will place automobile insurers on a similar course.

In an appropriately regulated environment, automobile insurers will deliver a good product at a competitive price, rather than allowing discounting to exceed the pace of cost reduction. Conversely, the industry must be encouraged to pursue pricing strategies that cover rising costs. While the stakeholders in Ontario’s automobile insurance market continue to test the waters of Bill 59, insurers are finding out that already wafer-thin profit margins are steadily drying up. Clearly, the Ontario automobile insurance industry must balance government intervention and customer expectations with its own market dynamics of supply, demand and price.

And, the industry has a history of using aggressive discounting as a lever to grab market share. Added to the mix is the fact that the cost of claims has also increased. Clearly, the stream of premium cuts that has greeted Ontario motorists over the last two years is about to end.

Looking ahead

Nobody is predicting a backward slide to the late 1980s when double-digit rate increases — fuelled by rising costs and shrinking margins — squeezed too many household budgets. Nevertheless, future pricing does hinge on how committed the Ontario government a
nd the insurance industry are in firming up the soft edges of Bill 59.