Ontario NDP urges government to release details on auto insurance industry profits

Ontario’s New Democratic Party is calling on the provincial government to provide more details on what the Financial Services Commission of Ontario (FSCO) is doing to address the issue of insurance industry profits and driver premiums.

“Ontario drivers are paying the highest auto insurance premiums in Canada,” Jagmeet Singh, consumer services critic for the NDP, noted in a statement Monday.

Singh said the issue of insurance industry profits and driver premiums was raised in the auditor general’s 2011 Annual Report, released in December 2011. “When are we going to get some answers?” he charged.

Following the release of the 2011 report, the auditor general’s office noted in a prepared statement, “FSCO had not routinely obtained assurances from insurance companies that they had paid the proper amounts for claims. Without such assurances, there is an increased risk of unnecessarily high payouts, which could help insurers get FSCO approval for higher premium increases.”

Ontario auditor general Jim McCarter said at the time the government “has taken some recent initiatives to address the high cost of auto insurance claims in the province, but still faces a number of challenges to ensure that premiums remain affordable and accident benefits are reasonable.”

In approving premium rates for individual insurance companies, “FSCO allows insurers a reasonable rate of return, which was originally set at 12.5% in 1988, based on the benchmark long-term bond rate of 10%, and revised to 12% in 1996,” the report noted. “We were advised that FSCO has not since conducted a comprehensive review of what it considers a reasonable profit for insurance companies operating in Ontario,” the annual report stated.

“Given that long-term Canada Bond interest rates were substantially lower at the time of our audit, standing at about 3%, have been low for some time, and are forecasted to stay low for some time, the current 12% (return on equity) could be higher than appropriate, assuming that FSCO still considers the long-term bond rate to be an appropriate benchmark. In any case, given that it has been 15 years since the 12% ROE was established, we believe that a reassessment is long overdue,” the annual report added.

“As a general practice, the Office of the Auditor General of Ontario (OAGO) follows up on issues raised and recommendations made in its annual report to the assembly and reports on their status two years later,” Sonia Taurasi, acting senior manager of public affairs for FSCO, notes in an email to Canadian Underwriter.

“Accordingly, in its 2013 Annual Report, the OAGO will report on the status of actions taken to address the issues raised and recommendations made in the OAGO’s 2011 Annual Report, including those on auto insurance regulatory oversight,” Taurasi writes.

In the 2011 Annual Report, FSCO’s response noted the regulator has “identified the need to complete a review of an appropriate profit provision. It will finalize the process and retain a consultant to provide expert analysis on this issue.”

Taurasi says last October, FSCO retained two finance experts, Dr. Fred Lazar and Dr. Eli Prisman of York University, through a Request for Proposal process to conduct a review of the profit provision benchmark in auto insurance rate changes approvals. Stakeholders provided written submissions in December and in-person meetings were held this past January.

“The consultants are currently reviewing these submissions and are drafting the report. The final report, along with a recommendation from the consultants, is expected in spring 2013,” Taurasi notes.

Scott Blodgett, senior media relations advisor for Ontario’s Ministry of Finance, says that in Ontario’s 2012 provincial budget, the government asked the superintendent of FSCO to work up the report.

Under the section, Modern Insurance Regulation, the budget says the government has welcomed the recommendations of the provincial auditor general, which will strengthen the oversight of the auto insurance system. The province will further enhance the effectiveness of FSCO regulation of the insurance sector by proposing, among other things, the following:

• engage in a review of the automobile insurance dispute resolution system;
• clarify the superintendent’s authority regarding rate and risk classification approvals; and
• support a superintendent’s review of the profit provision benchmark in auto insurance rate change approvals.

“We hope to get it soon,” Blodgett says of the report.

In releasing his 2011 Annual Report, McCarter characterized auto insurance fraud as a big problem. “Industry estimates put its value at 10% to 15% of all premiums paid in Ontario during 2010 – as much as $1.3 billion,” he said.

The Ontario government has since received the recommendations of the Auto Insurance Anti-Fraud Task Force and put forward several regulatory changes, including requiring insurers to provide claimants all reasons for denying a claim, and increasing the role of claimants in fraud prevention. Changes are scheduled to come into force June 1.

To a question from Singh in the Ontario legislature last week, finance minister Charles Sousa said, “We recognize that we need to do better than the status quo, but let’s be realistic with what we’re dealing with here. The costs of claims in Ontario are 10 times higher than the costs of claims in other provinces. That relates to the cost of premiums. We’ve taken steps in the past to try to minimize that price increase. That’s why the price only increased by 0.26% since 2006.”

Singh pressed for a government commitment to reduce auto insurance rates by 15% over the next year. Sousa responded, “We do want to reduce rates. We do want to do better in Ontario because in relative terms to the other provinces, we are paying too much.”