Tightrope and Tradewinds

For a tightrope walker, perfect balance is the key to success. Many things contribute to that balance. Even a light breeze can throw things off kilter. Similarly with auto insurance, multiple factors combine to create the balance required for a sustainable system.

Over the past decade, the Nova Scotia auto insurance system has seen its fair share of breezes and gales. Through it all, industry has maintained its balance, adapting to changing conditions as best it can. Along the way, a great deal has been learned by all concerned, including the wisdom of a collaborative approach between industry, government and other stakeholders in achieving sustainable market stability.

You may recall that in the early 2000s, claims pressure was intensifying and auto insurance premiums were skyrocketing in Nova Scotia as well as in other provinces. To curb this trend, the Nova Scotia government introduced a package of reforms in 2003, including a $2,500 cap on pain and suffering awards for minor injuries. Alberta, New Brunswick and Prince Edward Island each took a similar approach. In all four jurisdictions, the minor injury cap has since brought down claims costs associated with minor injuries, in part by reducing the incentive for litigation. And now with constitutional challenges to the cap all but gone, the legal uncertainty created has begun to abate.

In Nova Scotia, the cap has resulted in improved availability of coverage and a 26% decline in average auto insurance premiums. Frustrated letters to the editor and complaints to elected officials have slowed to a trickle. Recent public opinion polling indicates consumers are largely satisfied with the auto insurance system. These are all good indicators that the Nova Scotia auto reforms have worked.

But there is always room for improvement.

Update on Nova Scotia’s Insurance Review

All government legislation and regulations need to be focused on outcomes that are desirable from the standpoint of the public interest. It is prudent, therefore, to review them at appropriate intervals against intended consequences to evaluate their effectiveness, as well as to determine what, if any, improvements should be made.

Six years following auto insurance reforms, in late 2009, the Nova Scotia government launched a two-stage evaluation of the province’s auto insurance system. The purpose of the review is to ensure the system continues to strike an appropriate balance between all consumers who need affordable insurance and people injured in collisions.

In the first stage of its evaluation, the government reviewed the minor injury cap. It announced changes in April 2010 that increased the threshold to $7,500 from $2,500, indexed the cap to inflation and clarified the definition of a “minor injury” to mean strains, sprains, and whiplash-associated disorders, mirroring the definition that has been used in Alberta for the past seven years.

In the second stage, the government undertook a broader review of the entire auto insurance system, a process that included stakeholder input to a final report that was released earlier this year. Key recommendations of the report call for a doubling of Section B benefits (accident benefits), adoption of minor injury diagnostic and treatment protocols and the potential removal of gender as a rating factor.

The Nova Scotia Utility and Review Board (NSUARB) is currently reviewing the cost implications of the above recommendations. The board is expected to issue a final report to government by the end of September. Although the government has yet to decide which of the recommendations it will implement, it is evident that further changes are coming.

Clearly the winds of change are in the air. And when those winds change, the potential for instability increases – particularly for an industry as highly regulated as auto insurance, in which pricing is calculated before insurers can know the true cost of claims (the industry’s single largest cost centre).

In Nova Scotia, the industry still does not know the full cost implications of the 2010 changes to the minor injury cap. This is why the NSUARB agreed to review the claims trend data at regular intervals and to hold a formal hearing in the fall of 2012 – one year from now.

Now, layered on top of that uncertainty, comes a new source of potential instability: the anticipated changes to the auto insurance system the government is currently considering.

To its credit, the Nova Scotia government has proceeded with its two-stage auto insurance review in a measured and prudent fashion, cognizant of the need for meaningful stakeholder engagement to fully explore all potential changes before making any final decision. It appears committed to maintaining the stability and affordability Nova Scotians have enjoyed in recent years.

Few would argue against the value of reviewing the auto insurance product, the minor injury cap included, from time to time. No business operates effectively without being evaluated and introducing changes to make the business operate better. But given the complexity of calculating accurate auto insurance rates, it is vital that any changes consider the broad potential implications on market stability and certainty.

Industry leaders remain cautiously optimistic that the government’s review will conclude with solutions that continue to provide Nova Scotia drivers with a good balance between robust benefits and one of the lowest average insurance premiums in the country.

Market stability characterized by a predictable cost environment allows insurers the best opportunity to assess risk accurately and price their products accordingly. With continued prudence through the final stage of auto reform in Nova Scotia, an opportunity exists in the years ahead for a predictable auto insurance environment the likes of which has not been seen in the province for at least a decade.

When it comes to walking the auto insurance tightrope, predictable winds, so to speak, help to keep us on balance.