Flights of Fancy

We live in a mythical land, where politicians tell fantastical tales to people eager to believe that they will get money for nothing and their insurance for free.

Which brings us to the land of New Brunswick, where politicians want to triple the province’s minor injury cap from $2,500 to $7,500, and change the definition of minor and serious injuries so that 10% fewer claimants would fall under the minor injury cap. The government says its proposed reforms won’t result in higher premium. But we all know this is a fairy tale politicians tell policyholders to make them sleep better at night.

These fairy tales are fortified by actuarial data that make the stories seem credible. But the bean-counting is based on assumptions, which, like unicorns, are fantastical creatures and are more fun when they are not real.

The government’s recommendations are currently the subject of a public consultation. They appear to go above and beyond those contained in an auto insurance working group report to the province in November 2011.

In proposing its changes, the government assumes that increasing the cap on minor injuries and re-defining both minor and serious injuries will not lead to increased claims frequencies. This is based on a further assumption that the government’s proposed definition of minor injuries is unassailable in court, which appears not to give trial lawyers in the province enough credit.

Certainly the government’s proposed definition of minor injuries is tighter in some ways than the working group’s definition. But in other areas, it seems incomplete. For example, where do “concussions” fall? Are they minor or serious injuries?

The government notes its assumptions are based on unwavering post-reform claims frequencies witnessed thus far in Nova Scotia. New Brunswick points out that Nova Scotia raised its cap to $7,500 last November and the first six months of its claims experience has been flat.

Well, recall that Ontario’s accident benefits claims experience looked pretty flat – if it didn’t decrease – for the first six months after the province’s 2010 reforms. Alas, tort figures have subsequently started to climb. And in Ontario, a gigantic case backlog is partly the reason for the suppressed claims experience, not necessarily the reforms.

The point is, various factors are at play in claims frequency patterns, and perhaps New Brunswick has simply not waited long enough to gauge the true impact of the reforms in neighbouring Nova Scotia.

The real magic carpet ride happens when New Brunswick crunches the numbers in support of its contention that premiums will stay the same even after proposed reforms roll out.

The province calculates that insurers currently require an average policyholder premium of $691 to cover expected claim costs and loss adjustment expenses, operating expenses and after-tax Return on Equity. The government argues the average amount insurers are currently charging – the “street premium” – is $782.

The province figures that its proposals would lead to a maximum average required premium of $768. Since this falls under the street premium currently charged, no premium increases are required.

Nice story. Alas, it seems a fantasy to suggest no correlation exists between required premium and street premium. Does it seem reasonable to assume that street premiums would not increase in accordance with an expected hike in required premium? Required premium, after all, is based on the government’s expectations of a reasonable return on investment, for example, rather than those of the company’s shareholders. And frankly, when have the claims experiences projected by politicians ever fallen in line with the actual claims experiences of insurers?

The numbers supporting the government’s case seem real enough, but the assumptions on which they are based are somewhat more fantastical – like unicorns. Who knows? Maybe unicorns are real, although I wouldn’t want to bet the house on it.