Industry must make it clear to consumers that 15% auto premium reduction is an average, CEO says

IBAO Convention 2013 – It is essential to remember the 15% auto insurance rate reduction recently mandated by the Ontario government is an average – meaning not all consumers, regions or companies will be affected in precisely the same way.

That was among the many messages offered Thursday during the CEO Panel at the Insurance Brokers Association of Ontario’s 93^rd annual convention in downtown Toronto.

The Ontario government recently outlined a targeted reduction of 8% on average by August 15, 2014 and a further 7% further by Aug. 15, 2015.

“Where we are today with this minus 15 is we’ve created a perception that everybody will get minus 15, which is not the case,” Jean-Francois Blais, president of Intact Insurance, said during the panel discussion.

“What I’m concerned with is that someone in Timmins or Thunder Bay or Sarnia is expecting a big rate decrease because of the cost-saving measures,” said Karen Gavan, president and CEO of The Economical.

“It’s not going to reduce the costs there. They’re already getting a reasonable premium for the product they’ve got and so it’s built false expectations among consumers across the province,” Gavan argued, emphasizing the need for more education.

“You have to look at costs for each territory relative to the premium rate for each territory. It’s not an aggregate reduction across the board,” she explained. “Some areas are going to see more, some areas are going to see less.”

Among the challenges is that insurance companies are being asked for “certainty” to match precise percentages, noted Alister Campbell, CEO of The Guarantee Company of North America. “We’re in a very uncertain business,” he told attendees.

“When we go for rate filings, we can’t increase rates unless we can prove that costs have deteriorated. Yet, we’re being asked to reduce rates on a promise,” Gavan added.

The Financial Services Commission of Ontario “also operates on the basis that rates must be fair and reasonable and reflect the risk,” Brigid Murphy, president and CEO of The Dominion, pointed out.

“It’s entirely possible that we could work collaboratively with government to get to cost reductions in a product that they designed and decide upon that could get to a point where 15% would be achievable, but we don’t know if that will happen,” Campbell said.

“Setting targets in life is a great thing, but setting them responsibly is also critically important,” noted Maurice Tulloch, until recently president and CEO of Aviva Canada and now CEO of Aviva U.K. & Ireland General Insurance. Tulloch suggested that doing the following six things would help the insurance industry reach the mandated government targets.

Revising the cat definition – the definition is still fundamentally based on principles using technology from the 1970s, he said, noting that a government-commissioned report has already been completed by an independent body;

Adjusting interest rates on the Statutory Accident Benefits Schedule – the rate should be in line with others, perhaps something like 1.5% to 2% annually, rather than a rate compounded monthly;

Stablizing minor injury guideline reform – the guidelines need to be binding to help ensure that people are dealt with in a timely and efficient manner;

Reducing treatment costs – individuals in Ontario can receive treatment for 10 years, considerably longer than in some other provinces;

Reforming the arbitration process; and

Replacing the bodily injury verbal threshold – the hope is that will allow for actual settlements and, perhaps, settlements at smaller amounts.

“Some people are going to be annoyed. My point is I don’t really care who’s annoyed if Ontarians benefit. So government’s got to step up and have the courage to force these things through. Otherwise, we’re not going to get there,” Tulloch cautioned.

Gavan also had some cautions. “Some companies have more scope to reduce rates than others, but I think it’s going to cause a tightening of underwriting standards. I hope it doesn’t cause more foreign players to exit the market or other players who have not done well in Ontario auto to rethink why they’re selling the product here, because that would cause further destabilization across the industry,” she said.

Murphy noted that “if companies are pushed to the wall and forced to reduce rates below where they can tolerate, then there’s an availability issue.”

Should there be unwise regulatory intervention on rates, Campbell said, capacity withdrawal could follow. “The risk is when you try and find 7% after the 8%, and the reforms have not taken place, then the companies that were forced to take more than they should have to get to 8 wash their hands and walk away.”

Blais suggested that, so far, the 2010 auto insurance reforms have been producing the expected results. Although they have been successful, “we need more reforms to reduce rate on average in the industry,” he pointed out.

“It’s all about the courage of implementing product reform. And if you do that, you have a chance to see rate reduction,” he said.

Things cannot remain the same, Blais suggested. “We have to say to everyone that premiums are very good and this is not sustainable because you cannot keep premiums like that forever when there is three, four percent inflation in a product,” he said, citing the increase in bodily injury costs.