Canadian Underwriter

Ontario consumers “likely overpaid” $702 million for auto insurance, concludes study

October 19, 2015   by Canadian Underwriter

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Despite a six-point increase, from 2013 to 2014, in the Ontario auto accident benefits claims ratio, a new study commissioned by the Ontario Trial Lawyers Association still concludes consumers “likely overpaid” by $702 million for auto insurance in 2014.

A study commissioned by the Ontario Trial Lawyers Association concludes Ontario consumers overpaid for auto insurance

Last April, OTLA released a study it commissioned – titled Returns on Equity for Automobile Insurance Companies in Ontario – written by two professors at York University’s Toronto-based Schulich School of Business.

That study concluded that Ontario consumers “may have overpaid” $3 to $4 billion for auto insurance between 2001 and 2013.

Then on Oct. 14, OTLA released an updated study that concluded consumers “likely overpaid by $840 million and $702 million in 2013 and 2014 respectively.”

The updated study was criticized by Insurance Bureau of Canada, which suggested the authors omitted 25% of the province’s auto insurers with negative returns on equity.

 In Ontario, insurers writing private passenger auto must submit proposed rate changes, along with supporting actuarial data, to the Financial Services Commission of Ontario. FSCO then reviews those filings to ensure that proposed rates are not excessive but are also not going to impair a company’s long-term solvency.

From 1996 through 2013, FSCO used an ROE benchmark of 12%, according to the study, written by economics professor Fred Lazar and finance professor Eli Prisman.

That benchmark was lowered to 11%. In October 14, FSCO announced it implemented a “return on premium” approach to replace the ROE approach.

“The new measure is 6% return on premium,” Lazar and Prisman wrote. “The 6% return on premium benchmark is out of line with current financial market realities. Our recommended 5.7% ROE benchmark for 2014 is equivalent to a return on premium cap of only 1.8%. The 6% return on premium translates into at least a 12% ROE.”

The study includes a table listing industry-wide ROEs for Ontario auto insurers. They were negative 1.1% for the period 2001 through 2011, 4.2% in 2012, 2.4% in 2013 and 10.6% in 2014.

The industry-wide ROE, for those companies with positive ROEs, was 18.9% in 2014.

“It is reasonable to focus only on the profitable companies and ignore those with consistent negative ROEs – the chronically unprofitable companies,” Lazar and Prisman wrote.

“For a company with negative ROEs to remain in the industry, either the accounting rules employed understate its profitability from an economic perspective, or the business unit with a negative ROE generate value for one or more other business units in the company,” they wrote.

Companies with positive ROEs accounted for 77.5% of all earned premiums in the province in 2014, Lazar and Prisman noted.

“The authors provide Ontario consumers with a sliver of a story: In their ‘findings’ on profitability – they omit 25% of the province’s auto insurers,” IBC stated Oct. 15 in a press release. “Conveniently, it’s the 25% of the market that have lost money.”

Lazar and Prisman included a table of after tax ROE, by company. For example, Fairfax Financial Corp. (the corporate parent of Northbridge Insurance), Echelon General, AIG and Chubb had ROEs in 2014 of 67.9%, 37%, 24.6% and 20% respectively. Other insurers had negative ROEs. Zurich, TD Bank Group, ACE INA and The Guarantee had negative ROEs of 84.4%, 30.8%, 24.8% and 18.9% respectively, according to a table provided in the study. Those figures were derived using individual company earned premiums and claims for auto insurance in Ontario, FSCO’s 25% operating cost assumption, FSCO’s premium-to-equity assumptions and a 26.5% tax rate.

However the study also indicates the industry-wide auto claims ratio increased from 2013 to 2014. It includes a table listing claims ratios for 2001, 2010, 2012, 2013 and 2014. For all coverages, the claims ratio was 99% in 2001, 87% in 2010, 62% in 2012, 67% in 2013 and 70% in 2014.

The claims ratio for mandatory coverages was 68% in 2014, up from 65% in 2013.

Currently, Ontario auto policyholders must purchase insurance covering, among other things, $50,000 for medical and rehabilitation benefits, and $36,000 for attendant care, for non-catastrophic injuries

For accident benefits, the claims ratio increased six points, from 65% in 2013 to 71% in 2014. For third-party liability, the claims ratio was 65% in 2013 and 2014. For bodily injury, the claims ratio was 66% in 2013 and 64% in 2014. For property damage, the claims ratio was 51% in 2014, unchanged from 2013. For direct compensation, the claims ratio increased five points, from 64% in 2013 to 69% in 2014.

In a press release Oct. 15, IBC spokesman Ralph Palumbo noted there are a “number of factors contributing to the cost of auto insurance,” including distracted driving, fraud and plaintiffs’ legal fees.

“We are committed to bringing down the cost of premiums for Ontario’s drivers,” Palumbo stated. “The insurance industry is working closely with the Ontario government to implement their latest reforms, which will help return more money to Ontario consumers.”

But accident victims “are being seriously hurt and it’s about to get even worse when further reductions are implemented,” OTLA president Maia Bent stated in a release.

Currently, Ontario auto policyholders must purchase insurance covering, among other things, $50,000 for medical and rehabilitation benefits, and $36,000 for attendant care, for non-catastrophic injuries. This is half the mandatory coverage that was in place before 2010.

The limits for catastrophic impairments are currently $1 million each for attendant care, and for medical and rehab.

This will change for accidents occurring on or after June 1, 2016.

The changes were originally announced by Liberal Finance Minister Charles Sousa in April, and FSCO released more details in August. The changes are part of an effort to reduce premiums, Sousa suggested when he tabled the 2015-16 provincial budget last April.

Instead of having separate $1-million limits – for attendant care and medical-rehabilitation – for catastrophic injuries, the new standard auto policy will have one $1-million limit for attendant care, medical and rehab benefits.

For non-catastrophic injuries, the mandatory coverage will be reduced to a $65,000 limit for medical, rehabilitation and attendant care expenses.

Also effective next June, the criteria for catastrophic impairment will change, for traumatic brain injuries, amputations, ambulatory mobility, loss of vision and mental and behavioural impairments.

For example, under the new criteria, in order to have a mental or behavioural impairment that qualifies as a catastrophic impairment, a claimant would have to have a Class 4 (marked) impairment in three or more areas of functioning, or a Class 5 (extreme) impairment in at least one functional area.

Currently, accident victims could be considered catastrophically impaired by having a Class 4 impairment in only one functional area.

And while accident victims today could qualify for catastrophically impaired if the accident caused paraplegia or quadriplegia, under the new criteria, claimants with paraplegia or quadriplegia will now have to meet specific conditions in the American Spinal Injury Association (ASIA)’s classification for spinal cord injury.