Recent Ontario auto insurance reforms could impact whole Canadian P&C market: A.M. Best

What else happens with Ontario auto insurance in the wake of recently passed reforms meant to combat fraud and protect consumers could influence the Canadian property and casualty market as a whole, as well as have very different effects on smaller and larger companies, notes a new A.M. Best briefing.

“Given the size of the Ontario auto market [Ontario auto accounts for slightly more than 25% of Canada’s overall property and casualty industry direct premiums], how events play out will have meaningful implications for the overall Canadian P/C market,” notes the briefing released Wednesday, Ontario’s Auto Insurers Content With Ongoing Uncertainty.

Overall, Ontario accounted for 48.0% of total direct insurance premiums in 2013, Alberta for 16.8%, Quebec for 16.1%, British Columbia for 8.2%, Saskatchewan and Nova Scotia, each for 2.4%, and the “remainder” for 6.1%.

“In total auto, Ontario accounted for even a greater percentage (59.6%) due to the presence of government-run auto insurers in British Columbia, Saskatchewan and Manitoba, which are excluded,” A.M. Best reports.

The briefing follows reforms passed Nov. 20 by the Ontario legislature, which among other things, seek to reduce overall costs to insurance companies to achieve the government-mandated average 15% decrease in premiums by August 2015, transform the province’s dispute resolution system and regulate the towing and vehicle storage industries.

“Despite the ongoing uncertainty in the market and somewhat volatile recent performance, the insurance companies in this space have proved resilient through more sophisticated pricing, enhanced enterprise risk management practices and strong risk-adjusted capitalization,” A.M. Best notes, adding it has not taken rating action on any individual company as a result of the reforms.

Still, the briefing notes, impacts of the recent provisions “on both the industry and each individual company are yet to be fully determined.”

The briefing suggests that the influence of recent reforms and targets may be very different for smaller companies compared to firms with significant scale.

A.M. Best “expects smaller companies with more limited business profiles and resources to find the choppy waters of the Ontario auto market difficult to navigate,” which, in turn, could “lead to changes in strategic direction and, possibly, more consolidation within the industry.”

Overall with regard to consolidation in the Ontario auto market, the Top 10 companies now account for 77.4% of the entire market based on direct premiums written in 2013, up from 74.9% in 2007. Once Desjardins Group completes its acquisition of the Canadian businesses of State Farm, expected in early 2015, the former likely will become the number two auto writer in Ontario.

Specifically, the Top 10 companies for Ontario auto, direct premiums written in 2013 are as follows:

• Intact Insurance – 16.4%
• TD Insurance, General Insurance – 10.7%
• Aviva Canada – 9.5%
• State Farm Mutual Insurance Company – 8.9%
• RSA Canada Group – 5.8%
• Allstate Insurance Company of Canada – 5.5%
• Economical Insurance – 5.5%
• Desjardins General Insurance Group – 5.3%
• Dominion of Canada General Insurance Company – 5.1%
• Co-operators General Insurance Company – 4.8%

Companies with significant scale, robust segmentation capabilities and/or a niche focus are expected to be better-positioned to absorb the impacts of the challenges from recent reforms, suggests A.M. Best.

The Financial Services Commission of Ontario notes that in the fourth quarter of 2013, 38 insurers representing almost 55% of the market had rate filings approved with an average decrease of 7.27%, resulting in a total market impact of -3.98%, the briefing states. “In the first quarter of 2014, an additional 14 insurers representing more than 20% of the market had rate filings approved with an average decrease of 5.01%, resulting in a total market impact of -1.01%.”

A.M. Best notes, however, that pace has slowed recently. “With less than one year to go, the industry has seen an average 6% decrease, short of the 8% decrease the government pledged for August 2014,” the company reports.

“Despite this recent moderating trend, the government has stated that it can still meet the August 2015 15% target as the benefits of legislation, such as those from Bill 15, are fully realized,” it adds.

As the industry awaits the full implementation of Bill 15 and additional anti-fraud measures, the briefing points out many carriers are looking to close the potential gap that may develop between the 2015 approved and indicated rate changes.

Many of these initiatives focus on pricing, including the following:

• revising or introducing discounts to promote safer driving;
• enhancing pricing and underwriting sophistication by rolling out predictive modelling;
• investing in technology and developing innovative approaches that are expected to allow better segmentation of policyholders’ risk propensity and pricing;
• pursuing key initiatives to build scale and increase efficiency;
• streamlining claim processes and increasing automation;
• pursuing anti- fraud initiatives and tools; and
• identifying dynamic management of preferred provider networks, enhanced customer care, proactive dispute resolution and clear litigation strategies.

The success of the pricing and operational strategies “likely will depend somewhat on size and scale,” A.M. Best reports. “For example, organizations that leverage ‘big data’ and have the technology and personnel to use this information likely will be better able to segment risks and absorb the potential adverse impacts of government intervention,” the briefing notes.

This is an area where size does matters, since “large organizations are in a much better position to leverage this size to execute operational initiatives designed to improve the expense ratio. Smaller companies that have developed niches also may be in a better position to withstand this period of uncertainty,” it adds.

“While A.M. Best does not expect widespread rating actions to occur, a material decline in risk-adjusted capital and/or deterioration in operating performance could trigger company-specific negative rating actions,” A.M. Best cautions.