Ontario auto one factor in State Farm’s sale to Desjardins, industry CEO suggests

The Ontario government’s stance on auto insurance continues to inject uncertainty into the market and is one reason State Farm agreed to sell its Canadian operations to Desjardins Group, according to speakers at Thursday’s P&C Crystal Ball conference in Toronto.

Alister Campbell, chief executive officer of The Guarantee Company of North America, was back at this year’s Crystal Ball. At last year’s Crystal Ball, Campbell noted, he talked about the “de-globalization” of the Canadian insurance industry, referring to the fact that two-thirds of the P&C market in Canada is comprised of Canadian-owned firms, whereas in the mid 1980s, two-thirds of the firms were foreign-owned.

The Ontario government policies on auto are one reason this is happening, he noted during a presentation at the Crystal Ball, organized by CW Consulting (formerly known as Cookson Walker) and held at the International Plaza Hotel in Toronto.

“I feel the Desjardins deal just kind of re-affirmed exactly what I was arguing,” Campbell said Thursday, noting he has presented theories in the past “as to why foreigners were fleeing and Canadians were buying and one of those was Ontario regulation around auto and I think we all would probably agree that that theory is the largest single likely explainer of the transaction that just took place.”

Desjardins Group of Levis, Que. announced Jan. 14 it agreed to acquire the Canadian businesses of Bloomington, Ill.-based State Farm, including its P&C, life insurance, mutual fund, loan and living benefits.

Campbell has said in Jan, 2013, at the CIP Society luncheon, that the minority ruling Liberals and the New Democratic Party are “contemplating arbitrary mandated price cuts in an industry that’s in a free market and is already losing money.” That was before the Liberals, at the behest of the NDP, announced they would mandate a 15% reduction, over two years, in private passenger auto premiums.

Then this month, the Financial Services Commission of Ontario reported that  rates filed by auto carriers in the province that FSCO reviewed in the fourth quarter of 2013 declined on average by 3.98%.

“The rate reductions that we’re going to see are bearable and government can actually stand up in front of their constituents and say, ‘We have lowered the rates in the province, on average, by 4%, and we’re on our way to delivering our promise of an 8% reduction in August, and we will deliver another 7% reduction in next year, but we can’t do it unless we are re-elected,’” said Randy Carroll, chief executive officer of the Insurance Brokers Association of Ontario, at the Crystal Ball.

When the ruling Liberals tabled their budget last May, they promised they would aim to reduce premiums by 15%. This was a condition for support from the NDP, which had 20 out of 107 seats in the Legislature, while the Liberals had 50.

“They are looking to get re-elected as a majority,” Carroll said Thursday. “The risk in all that is, if they are re-elected in a majority, I think there’s a lot of wiggle room on that (15% mandated reduction) mandate. But if they get re-elected in a minority position, the wiggle room is gone and we are in deep (trouble).”

But 15% “is going to come off the rates, on average, one way or another,” said Paul Fletcher, Aviva Canada’s senior vice president of strategy, who noted “not many of us are making that much money in Ontario auto.”

Aviva has made several proposals to the government on how it could reduce claims costs, Fletcher said, adding Ontario auto “needs a new product.”

For example, Aviva proposes that the government “match the tariffs” — for medical costs in auto insurance — with those of the Workplace Safety Insurance Board and the Ontario Health Insurance Plan.

One insurer “has already made the exit,” Fletcher noted, an apparent reference to State Farm’s agreement to sell its Canadian P&C operations to Desjardins. But he added the industry “will find its way through” the mandated 15% reduction.