Budget reforms a good first step, but more changes needed to hit Ontario auto premium cut

It may be necessary to contemplate additional reforms if the Ontario government expects to be able to soon fulfill its promise to cut insurance premiums by an average of 15%, one industry leader suggests.

Ralph Palumbo, vice president for Ontario at the Insurance Bureau of Canada discussed the hot button issue during a presentation in downtown Toronto on Tuesday.

Reforms spelled out in Ontario’s recent budget “are all helpful – but as I have stated several times – they are not enough to bring costs and rates down now to meet the government’s own premium target reductions,” Palumbo said during the At the Forefront Breakfast, presented by the Insurance Institute of Canada.

Still, he emphasized the budget offers some encouraging elements. Although the Liberal government agreed to the NDP’s demand to cut auto insurance premiums by an average of 15%, it did not commit to a specific timeframe for that reduction to be achieved, and the budget includes numerous measures to lower costs.

“What was positive is that government recognized that rate cuts and cost reductions are linked,” Palumbo said. These cost-cutting efforts include anti-fraud measures, changes to the Financial Services Commission of Ontario that would expand and modernize its investigative and enforcement authority in the area of fraud prevention, review of the dispute resolution system, consideration of amending the definition of catastrophic impairment, incorporating the Superintendent’s guidelines in the Statutory Accident Benefits Schedule so they are binding on arbitrators and the courts, and reducing the return on equity (ROE) benchmark used in FSCO rate filings from 12% to 9%.

This last measure, which Palumbo characterized as a surprise, is less welcome. “It’s a premature move, since FSCO already has a review process on ROE in place, and the panel currently reviewing the issue hasn’t reported its recommendations yet,” he noted at the breakfast. “Obviously, we are asking that government press pause and at least wait for FSCO’s report, and that they continue to consult with the industry before reducing the rate.”

One issue, Palumbo noted, is that “government appears to rely on fraud as a key factor to achieving the bulk of reductions called for in the budget, which isn’t realistic.”

Government must engage the insurance industry in discussing more reforms, he said. “If the government does not engage us, consumers will be disappointed as the target for premium reductions that the government has set will simply not be met.” That disappointment is unlikely to help garner support from consumers or help with efforts to explain what is already a complicated product.

There is little mystery about what is the biggest problem with Ontario auto insurance, Palumbo said. “Car insurance costs way too much,” he said simply.

Citing figures as of February 2013, he pointed out the average premium for Ontario was $1,553, several hundred dollars more than the average in Alberta or Atlantic Canada. “Combine that with a lack of understanding of how the product works, and you have lots of disgruntled consumers with very little sympathy for an industry they feel is ripping them off,” he said.
Premiums are tied to claims costs and if claims cost rise, premiums will follow, Palumbo said.

Again comparing the Ontario situation to those in Alberta and Atlantic Canada, he said that for collisions happening in 2011, the average cost to provide people with rehabilitation treatment and income replacement on a no-fault basis was $28,779. This was at least several times higher than the $3,568 in Alberta and the $7,377 in Atlantic Canada.

“Insurers could simply keep raising premiums to cover these inflated costs, but at some point, enough is enough. We’ve reached that point,” Palumbo emphasized.

“It would be great if we could give market forces and competition more leeway to dictate premiums. But those decisions aren’t ours to make. Any improvements made to the system need buy-in from the government officials who oversee the many complex aspects of our business,” he said.

“Perhaps one of the best outcomes (of the budget) is the plan to have an independent, annual review of the auto insurance system (claims costs and premiums) with a view to recommending ongoing reforms,” Palumbo suggested. “Basically, the government is acknowledging that the auto insurance system can’t be tweaked and forgotten about; it needs regular maintenance.”