Steering in a New Direction

Thirty-seven years ago, Mike Donoghue, now the president and CEO of Allstate Insurance Company of Canada, joined Allstate because the gig included the use of a company car. He’s come a long way since then; now he is the chair of the Insurance Bureau of Canada (IBC)’s board of directors.

From the bureau’s perspective, Donoghue’s top priorities include broadening and engaging the IBC’s membership, improving consumer confidence and keeping an ongoing dialogue with governments regarding rate reforms. From a personal point of view, Donoghue would like to encourage improved competition in the marketplace through reduced regulation.

Upon taking his spot on the IBC board in April 2007, Donoghue had recourse to a road map of IBC governance issues created in 2005 and 2006, known internally as the IBC Renewal Effort. Basically, at that time the IBC “underwent a very deep-dive review of how it was operating,” Donoghue says. The assessment was inspired in part by The Economical and The Co-Operators expressing dissatisfaction at the time with what they perceived to be poor representation in the association. Based on their perceptions, the insurers threatened to withdraw from the organization, Donoghue said.

“I think that caused the board to stop and ask itself what is wrong,” he says. “We identified, whether factual or not, some perceptions in the marketplace” about how the IBC was operating. One of the primary findings, he continues, was the perception that only the large powerhouse companies had a voice at the table.

Donoghue believes the time he’s spent working for “a smaller insurer” in the Canadian marketplace has allowed him to develop collaborative skills. Perhaps, he suggests, his appointment as board chair was recognition of that fact; certainly his background can’t hurt when it comes time to have negotiations about representation at the IBC membership level.

On the basis of the findings contained in the IBC Renewal Effort, Donoghue notes, the IBC formed six committees, some brand new and others pre-existing. The committees’ mandates covered the following topics: governance; consumer confidence; insurance crime; technology; regulatory affairs; and a committee set up specifically for the Ontario market.

Each committee is chaired by a board member at the national level. Committees that were already in existence prior to the review took the time to sit down and discuss what their mandates were going to be.

Donoghue believes there is no real formula to ensure perfectly equal representation. At the same time, he says it’s extremely important to ensure that there’s proper representation on the IBC committees. He points to The Economical as an example, noting that a company that was once preparing an exit strategy from the IBC is now actively engaged at the committee level.

REGULATORY AFFAIRS

The insurance industry can expect that, under Donoghue, the IBC will continue to respond to what’s occurring in the marketplace, whether the issue is national or specific to a province.

For example, Donoghue points to the role of the IBC during the recent auto insurance reforms in New Brunswick. The incoming Liberal government in 2006 had initially expressed an intention to develop a single rating territory for the entire province. The idea did not sit favourably with insurers, because a single territory fails to take into account different exposures based on different geographic conditions.

One of the IBC committees worked to develop a resolution on the issue. As Donoghue put it: “Basically, how do we open up a dialogue with government and show them what we believe is a more appropriate way to set that up?”

After the IBC had several conversations with local government officials, New Brunswick’s Department of Justice and Consumer Affairs in mid-July of 2007 announced there would be 11 territories — seven more than currently exist, and a vast improvement on the initial proposal that there be only one territory.

Out West, Donoghue noted, “in Alberta, we’re working on reforms that came about as a result of some work that was done there in 2003 and 2004. We are intent that we have not accomplished all of the outcomes that were supposed to come about as a result of those reforms.”

Alberta in 2004 established a rate grid for auto insurance that was designed in part to reduce insurance rates for inexperienced drivers. IBC contends that “the extent of that went much further than anyone intended,” Donoghue says.

“Now there’s recognition of a need to craft a better solution that is politically acceptable,” Donoghue says. “You can’t simply say: ‘Let’s take half of the people that are in the pool out of it and [then] raise their rates by some significant amount of money.'”

Finding a way to bring the system more in-line with the original vision, while at the same time protecting inexperienced drivers against a downturn in the marketplace has developed into a key challenge, he says.

Negotiations with governments on sensitive issues like auto rates are often tricky, Donoghue notes. He says the IBC is frequently at different points of agreement with government agencies’ analysts and the actuaries. Recently in Alberta, for example, an IBC committee pushed for a 2.5-point increase of auto rates, while the government actuaries proposed a two-point reduction. The government ultimately split the difference and decided no increase or no reduction would occur.

“While I would have liked to have seen us get what we needed,” Donoghue noted, “it was a solution we thought we could live with at this time.”

THE RATING GAME

According to Donoghue, one of the biggest problems for the industry at this time — and one that will undoubtedly become a bigger issue moving forward — is “this whole idea of what we were able to get from the reforms that were done earlier, and for how long that can continue.”

Ask any average Canadian when they last experienced an increase in auto insurance rates — notwithstanding the usual effects of a change of vehicle, tickets and accidents — and the likely answer will be roughly three years, Donoghue says.

At the same time, he says, “in the past three years, our claims costs have gone up, doctors are being paid more and the costs of repairs have gone up.”

Donoghue says the 2002-03 reforms were “very effective.” But, he adds, “it just comes down to at what point do you think that effectiveness has been completely used?”

Increasing rates while at the same time maintaining consumer confidence is a tricky balance, he insists. The IBC’s committee on restoring consumer confidence has done a lot of work through various initiatives and the public “feels okay about insurance,” Donoghue observes, “but if you raise rates, then we’re not popular anymore.”

The danger of not raising rates, he continues, is that problems of insurance availability are sure to emerge “because, at a certain price point, insurers can’t afford to write a particular piece of business. Where does a customer find relief in that regard?”

He says one of the jobs for the IBC over the next little while is to make sure it keeps up an ongoing dialogue with regulators to identify trends and to take action on those marketplace trends in a timely manner.

REGULATION TIME

Donoghue says it’s his personal belief that Canadian insurers are operating in an over-regulated industry in Canada, stifling competition. Trying to reduce the amount of regulation is a very broad IBC objective, he notes, “but it’s a very personal one for me that I would like to promote as IBC chair.”

Right now, he says, people just “don’t trust” the insurance industry. “And it’s not just the consumers, it’s in the bureaucratic ranks too,” he says. He quickly adds that he doesn’t believe the industry deserves the lack of trust.

Attempts in some provinces to reduce rates have resulted in lengthy approval times and a mass of bureaucratic red tape, Donoghue observes. He says the IBC’s Stan
dards of Sound Marketplace Practices is the first step in helping regulators move away from rules-based to a principles-based system that would allow for easier competition between carriers.

Rule-bound systems often fail to cover all bases and typically result in unintended consequences, Donoghue says.

“So, let’s move to a principles-based set of regulations,” he says. In such a system, the industry is given a broad principle to be followed, and only those not in compliance with the principle become the target of regulatory action.

For example, the principle might be to always serve consumer interests and be transparent in transactions with consumers. In a rule-based system, all insurers must follow rules that enforce the same principle, Donoghue said. “Don’t make a rule that says you have to do A,B,C,D and E, because A,B,C,D, and E add costs.”

Donoghue also points to the amount of legalese a regulator requires to be included in an insurance policy, which often frustrates policyholders. “We miss a lot of opportunity there,” he says. “How do we make these documents more user-friendly?”

To do so right now would take years, he contends. Likewise, introducing new products is an extremely complex process. Regulatory barriers are stifling innovation, he argues.

“So what happens is all insurance companies look alike, they price alike and that’s really not being competitive. So, why don’t we take off some of the handcuffs?”