Ontario auditor general calls for review of insurers’ 12% rate of return, mediation backlogs and asset shortfall in Motor Vehicle Accident Claims Fund

Ontario’s insurance regulator should update its 12% reasonable rate of return for insurers, review mediation backlogs of up to a year and address a $109-million asset deficiency in the Motor Vehicle Accident Claims Fund, the Office of the Auditor General of Ontario says in its 2011 Annual Report.
A 23-page chapter of the report identifies many challenges related to the regulatory oversight of the province’s auto insurance sector. Several of the auditor general’s observations relate to auto insurance fraud and the escalating claims costs of insurers.
The auditor general’s report lists several potential areas of focus for the Financial Services Commission of Ontario (FSCO) in the future. Among them, it suggests that FSCO should be reviewing whether its current allowance of a 12% rate of return for insurers, established in 1996, is still “reasonable” in light of the recent economic environment.
“In approving premium rates for individual insurance companies, FSCO allows insurers a reasonable rate of return, which was origin¬ally set at 12.5% in 1988, based on the bench¬mark long-term bond rate of 10%, and revised to 12% in 1996,” the auditor general says in his report. “However, that profit margin has not been adjusted downward since that time, even though the long-term bond rate has been about 3% for the last couple of years and is projected to remain at a relatively low level for some time.
“Furthermore, FSCO needs to improve its documentation supporting its premium-rate-change decisions and approvals to ensure that it can demonstrate that it treats all insurers’ requests consistently and that premium-rate changes approved are just and reasonable.”
Furthermore, the auditor general said FSCO needs to capture information that would explain significant and escalating mediation backlogs in Ontario.
“Increasing demand and restraints on resour¬ces have caused significant backlogs in FSCO’s mediation services for claimants in dispute with insurers, with resolutions taking 10 to 12 months rather than the legislated 60 days,” the auditor general’s report says. “It also did not capture information that would allow it to assess the reasons why the number of applications for mediation has sharply risen – by 135% over the last five years, with about half of all injury claims ending up in mediation.
“Demand for mediation is high¬est in the GTA, where 80% of all mediation applications originate, even though the GTA accounts for just 45% of automobile accidents involving injuries.”
In addition, the auditor general observed that the Motor Vehicle Accident Claims Fund had $109 million less in assets as of Mar. 31, 2011 than it needed to satisfy the estimated lifetime costs of all claims currently in the system.
“This unfunded liability is expected to triple by the 2021-22 fiscal year unless the revenues are significantly increased,” the auditor general states. “For instance, the government would have to double the $15 fee currently added to every driver’s licence renewal to eliminate the unfunded liability.”
These and other observations and recommendations are contained in the annual report. The insurance portion of the report can be found at:
http://www.auditor.on.ca/en/reports_en/en11/301en11.pdf