IBC’s proposal to prevent carriers from exiting this province’s auto market

Insurers in Newfoundland and Labrador are calling on politicians to make structural changes to the province’s auto insurance system, saying their recommendations would better align the province’s auto premiums with those elsewhere in the Atlantic region.

Specifically, insurers are calling for:

• a $5,000 cap on minor injury awards;
• enhancing – and making mandatory – accident benefits payments to bring the province in line with other Atlantic provinces;
• a Direct Compensation Property Damage (DCPD) model, which would make it quicker for insurers to pay for auto repairs; and
• a more responsive and cost-effective rate regulation process.

The insurers made their pitch this week as the provincial insurance regulator, the Board of Commissioners of Public Utilities (PUB), resumes its hearings on auto insurance in St. John’s, Nfld. This is the first comprehensive review of the auto insurance product undertaken by the government in 14 years.

The government called for the hearings to address the province’s high auto premiums, a fact highlighted in figures released earlier this year by the General Insurance Statistical Agency (GISA), Canada’s statistical agency for insurance regulators. Newfoundland drivers paid an average annual auto insurance premium of $1,132 in 2017 – the highest premium for auto insurance among all of the Atlantic provinces. By comparison, Nova Scotia drivers paid an average annual auto insurance premium of $842, New Brunswick drivers paid $819, and P.E.I. drivers paid $796 for car insurance.

Premiums are up in Newfoundland because of high claims costs, says the Insurance Bureau of Canada (IBC).

“Auto insurance claims are too high relative to the premiums that are taken in,” says a letter by IBC vice president of the Atlantic region, Amanda Dean, to Members of the House of Assembly (MHAs). “Once insurers pay provincial and municipal taxes; broker fees or agent salaries; building costs; and other operational fees, auto insurance is a losing proposition.”

IBC says Newfoundland insurers of private passenger vehicles have had an average return on equity (ROE) of negative-6.8% over the past five years, the worst in Canada. The negative return on equity is the main driver behind auto insurers exiting the market in Newfoundland, Dean told Canadian Underwriter Tuesday.

”If an insurance company can’t be in the black in a given jurisdiction over a period of years, they are going to have to make some pretty tough decisions, and that’s going to have to be either increased premiums to cover claims, or consider exiting the market.”

In Newfoundland, four insurance companies control 87% of the market. “That’s incredibly concentrated,” Dean noted. “They need some massive reforms in order to stay there and service their customers.”

IBC’s letter to MHAs makes the following additional comments related to its proposed reforms.

$5,000 cap on minor injury awards

Implemented elsewhere in Canada, the cap would include annual inflation adjustments, as well as a definition of minor injury that reflects prevailing medical literature. It would apply to injuries that resolve within days, weeks, or months; in addition, it would be over and above lost wages and medical bills.

Enhanced accident benefits

IBC suggests making accident benefits mandatory in Newfoundland, and increasing the benefit amounts to match neighbouring Atlantic Provinces. Accident benefits in Newfoundland are currently optional, and the med-rehab limit is only $25,000 compared to $50,000 elsewhere. IBC also suggests establishing pre-approved evidence-based treatment protocols for minor injuries, which would see people begin treatment quickly.

Direct Compensation Property Damage (DCPD) model

All other Atlantic Canada provinces except for Newfoundland operate under a Direct Compensation Property Damage (DCPD) model. Under the DCPD model, a driver deals with his or her own insurer for a claim regardless of who is at fault for the accident. The claim is processed without waiting for a third-party decision. In some provinces, this covers damage to your vehicle and/or its contents if another person was fully or partly at fault for the accident.

Improved rate regulation process

Currently, Newfoundland’s insurance regulator changes rates once annually, and the cost to prepare a rate filing for provincial insurers is among the highest in the country. The combination of the high filing cost and the infrequency of regulatory rate adjustments makes it more difficult for insurers to file for timely premium changes (whether increases or decreases).

To illustrate the point, Dean gives the example of an insurer having to pay $500,000 to prepare for an annual filing. “If it costs $500,000 to prepare a filing, and an insurer needs $200,000 worth of premium, they are going to wait until they need $500,00 or more to cover the cost of the filing,” she says. “It will create a bubble, and that’s not fair to consumers. It’s also a disincentive when insurers see that they could reduce premiums.”