April 13, 2015 by Canadian Underwriter
A recent study that concludes Ontario consumers “may have overpaid” $3 to $4 billion for auto insurance between 2001 and 2013 actually excluded the carriers with negative return on equity in Ontario auto, the Insurance Bureau of Canada and the Insurance Brokers Association of Ontario (IBAO) suggest.
On April 10, the Ontario Trial Lawyers Association (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.
“At an aggregate level, (returns on equity) for Ontario auto insurance companies have been quite low – negative on average between 2001 and 2011, and positive in both 2012 and 2013,” wrote economics professor Fred Lazar and finance professor Eli Prisman. “However, when we exclude the companies with negative ROEs, the average ROEs for the remaining companies increase dramatically to 9.7% over the period 2001-11, 14.9% in 2012 and 17.5% in 2013.”
Ontario consumers “may have overpaid for auto insurance by between $3 and $4 billion for auto insurance over the period 2001 to 2013,” Lazar and Prisman added.
However, to reach that conclusion, the study “removed the 1/3 of insurance companies that were losing money from consideration,” IBAO suggested Thursday in a press release.
“The IBAO believes that (lawyers’) contingency fees should be capped at 25% as they are in New Brunswick,” IBAO stated Friday. “This would assist in rates being lowered for Ontario consumers.”
An IBC release echoed IBAO’s concerns, noting that the OLTA-commissioned study “clearly states that when including the performance of all insurers in the province, the return for the industry was -1.1% in 2001-2011, 4.2% in 2012 and 2.4% in 2013.”
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An IBC spokesperson told Canadian Underwriter that loss ratios in private passenger auto were 75.8% in 2014, 75.1% in 2013 and 77.2% in 2012.
“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. Lazar, who has a PhD from Harvard University, has written several books, including The New Protectionism: Non-tariff Barriers And Their Effects On Canada, published in 1981. Prisman has a DSc in operations research from Technion – Israel Institute of Technology. His areas of expertise include derivative securities.
“Economic theory and common business sense dictate that unless a company earns at least a risk-adjusted, competitive ROE over time, it will exit the industry,” Lazar and Prisman wrote. “Few of these companies ever left the industry, and most that remained invested even more capital into the market.”
Lazar and Prisman included tables of ROEs and claims ratios for 2001 through 2011, 2012 and 2013. Companies with negative ROEs included TD Insurance, whose ROE was -73.5% and whose claims ratio was 117.8% in 2013.
“Other than the TD Group, it does not appear as if any other auto insurance company has experienced a steady decline in its ROE in Ontario,” Lazar and Prisman noted. The losses for TD Insurance “might be tolerable” to TD Bank “because TD is able to sell other services and products to its auto insurance clients,” Lazar and Prisman suggested.
TD Bank says it is the largest direct distribution insurer and the second largest personal insurer in Canada.
In a press release announcing the study, OTLA recommended that Ontario’s Auditor General “conduct a fully independent review of auto insurance in Ontario.”
Ontario’s office of the auditor general noted, in a report in 2011, that the province has the highest claims costs per insured vehicle, of all provinces in Canada. At the time, then-Auditor General Jim McCarter recommended that the Financial Services Commission of Ontario (FSCO) “examine cost-containment strategies and benefit levels in other provinces to determine which could be applied in Ontario.”
Then in 2013, Auditor-General Bonnie Lysyk recommended that FSCO “review what constitutes a reasonable profit margin for insurance companies when approving rate changes, and periodically revise its current assessment to reflect significant changes.”
Ontario auto insurers must submit proposed rate changes, along with supporting actuarial data, to FSCO for approval. FSCO and its actuaries then review the data and insurers’ assumptions regarding claims costs, expenses and investment income 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%. That benchmark was lowered to 11%, based on a review by professors Lazar and Prisman. Then last October, FSCO announced it had implemented a “return on premium” approach to replace the ROE approach, in its Private Passenger Automobile Filing Guidelines.
“The new measure is 6% return on premium,” Lazar and Prisman wrote in their study released April 10. “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.”
Lazar and Prisman noted the average industry ROE was -1.1% from 2001 through 2011, but 4.6% if Bloomington, Ill.-based State Farm was excluded.
State Farm left the Canadian market effective Jan. 1, 2015, when it closed the sale of its Aurora, Ont.-based Canadian operations to Desjardins Group of Levis, Quebec. Desjardins continues to use the State Farm brand in Ontario, Alberta and New Brunswick but its p&c coverage is now written by Desjardins’ Certas Home and Auto Insurance Company.
In 2010, the Ontario government made several changes to auto insurance, introducing a $3,500 cap on injuries falling under the Minor Injury Guideline (MIG). Also in 2010, the province reduced the limit (to $50,000 from $100,000) in medical and rehabilitation benefits, and the limit (from $72,000 to $36,000) for attendant care in the mandatory auto policy.
In 2010, carriers had lost a total of about $1.7 billion on Ontario auto and the following year the industry-wide profit was $233.2 million on written premiums of $10.3 billion. In the wake of complaints from opposition politicians that rates were increasing, the ruling Liberals passed a law in 2013 mandating “an industry-wide target reduction,” by 15%, o
f the “average of the authorized rates that may be charged by insurers” for private passenger auto, with a two-year target. Since then, carriers have been required by law “to propose rates and a risk classification system that contribute adequately” to that target, when filing rates with FSCO.
At the time, IBAO expressed concern that the mandated reduction “could result in future availability and affordability concerns for consumers in this province.”
On Nov. 20, 2014 an omnibus bill aiming to reduce auto claims costs was passed into law. Bill 15, the Fighting Fraud and Reducing Automobile Insurance Rates Act, will include:
•a change to the Consumer Protection Act to require tow and storage providers to publish their rates, accept credit card payments and provide itemized invoices before receiving payment;
•a reduction, from 60, the number of days that a vehicle can be stored after an accident without giving notice to the owner and other persons;
•a reduction, from 5% per year, to the prejudgment interest rate for non-pecuniary loss for auto accident victims;
•a new requirement, under the Highway Traffic Act, for tow truck operators to have a Commercial Vehicle Operator’s Registration (CVOR) certificate; and
•a move of the auto insurance claim dispute resolution system from FSCO to the Ministry of the Attorney General’s licence appeal tribunal.