Stuck in Neutral

Canada’s auto insurance industry and the Alberta Automobile Insurance Rate Board (AIRB) seemingly agree to disagree on what interim financial measures should be taken pending a court appeal that will decide whether Alberta’s $4,000 cap on minor auto injury claims will remain rescinded or be restored.

At its Eighth Annual Regulatory Affairs Panel in November, the Insurance Bureau of Canada (IBC) took the opportunity to go public with its concerns that the AIRB hasn’t required the province’s insurers to squirrel away enough premium money in the event the cap remains rescinded.

Perhaps surprisingly, AIRB’s chairman A. F. (Alf) Savage, a speaker at the IBC conference, agreed with the IBC’s point. “This year, of course, we gave [insurers] a 5% increase, which was inadequate — I won’t argue with anybody that it was inadequate — but we were faced with the fact that our actuaries [said] a 20% increase would be necessary if the cap wasn’t on,” Savage said. “We said,’Okay, we don’t know if the cap is going to come or go, so we’ll split the difference [between a 20% increase and no increase] and we’ll go 10%,'” Savage said, explaining the board’s logic.

Savage noted the AIRB raised rates in 2008 by a total of 10%.The starting point was a 5% rate reduction (since the AIRB’s actuaries recommended a 5% rate reduction if the cap was back on), and so the application of a 10% increase to that starting point amounted to an overall rate increase of 5%.

As of press time, arguments have already been made in the Alberta Appeal Court about whether or not to restore the cap. A decision is due at any time.

Most legal observers note the issue is likely to be resolved at the level of the Supreme Court, regardless of how the Alberta Court of Appeal resolves the matter. “It may go to the federal court [i. e. the Supreme Court of Canada],” Savage said in his presentation. “I’ve been asked many times by the industry:’Will we appeal to the [Supreme] Court?’ and I think the best I can say on that is we’re not going to flog a dead horse, but we’ll see what comes down in the provincial court.”

That begs the question: What are the province’s auto insurers supposed to do with rates in the meantime, pending the courts’ resolution of the matter?

“The problem with the AIRB’s logic is that, following [Alberta Court of Queen’s Bench Justice Neil] Wittmann’s decision striking down the tort cap, the Alberta industry is accumulating an estimated [Cdn]$400 million per year in unfunded liability,” IBC vice president of policy Barb Sulzenko-Laurie said in a speech at the symposium. “If the appeal is ultimately lost, say at the Supreme Court in 2009, the industry could potentially have hundreds of millions of dollars in unfunded liability, with no way of recovering those losses. In light of this possibility, the board’s decision to split the difference on future costs could well end up hurting the interests of the very people it seeks to protect.”

In contrast to the AIRB’s actuarial estimate of 20%, in its submission to the AIRB earlier this year, the IBC’s actuaries called for a 37% rate increase to take into account what would be needed in the event the province’s appeal failed and the cap remained off.

A member of the audience asked panelists to comment on the retroactive nature of the Alberta Court of Queen’s Bench decision. In other words, if the cap remains unconstitutional, would the province’s insurers be exposed for claims dating all the way back to 2004 (when the province first introduced reforms including the cap)?

“It’s certainly a reason why we bloody well want to win that appeal, because ultimately we don’t actually want to incur those backward costs,” Sulzenko-Laurie said. “It’s a matter of enormous concern to us.”

“We understand the concern,” Savage said in response to Sulzenko-Laurie’s comment. “The industry asked for a 37% increase. This was beyond anything we could comprehend. Our actuaries said 20% and we split the difference [between 0 and 20].We understand a lot of the companies are now paying $4,000 [for a minor injury claim] and signing an agreement to change that if the court case changes. We have a number of companies that have told us that.”

Savage said he wasn’t sure how to advise companies how to adjust to the uncertainty in rate-setting as a result of the court case currently being in limbo. As for the AIRB’s decision, he said, “I don’t know how to do it any differently than what we have done.”

In the end, Savage said, the provincial government would likely step in if the cap challenge were to fail. “If the cap is struck, my prediction is the province will probably change the law, so we’ll wonder what it was all about,” he said.

Savage nevertheless expressed optimism about winning the challenge at the Alberta Court of Appeal level. He said the lawyers arguing the case on behalf of the provincial government and the insurance industry had a better feeling about making their case this time around.

“I might say our lawyers tell us we had a very good reception this time,” Savage observed. “The last time, our reception was not very positive in the first part of the case. In this case [the appeal],we had a panel of three judges and the questions were very relevant. In the first hearings, the questions left a lot to be desired.”

In court, government and industry lawyers have argued that minor auto injury victims do not suffer from discrimination that is constitutionally protected, because the Charter of Rights protects against people being discriminated against for having “immutable” characteristics. Minor auto injuries are not “immutable” injuries (i. e. they go away), industry lawyers have argued, and thus they do not benefit from constitutional protection. Serious, catastrophic injuries leading to “immutable” impairments, they add, would not be subject to the cap even if the cap were to be reinstated.