The straight facts on how Ontario auto insurance rates are set

TORONTO, Dec. 15, 2011 – Insurance Bureau of Canada (IBC) understands the frustration of consumers in Ontario who face the highest auto insurance premiums in the country.

“But we’re extremely disappointed with the implication that people in lower income neighbourhoods are charged higher rates simply because they earn less than those in more affluent neighbourhoods,” said Ralph Palumbo, Ontario Vice-President, IBC. “Any such implication is objectionable.”

This week the Ontario NDP questioned the cost ranges of auto insurance rates in various regions across the Greater Toronto Area. The suggestion was that lower income neighbourhoods were being targeted by insurance companies. “What we don’t understand,” said Palumbo, “is why they based their argument on just the use of simplistic online marketing processes that may not give you the complete picture.”

The online quote system, the method used by the NDP to gather their auto insurance quotes, is not a perfect science. These tools only provide information from a very narrow perspective and are not representative of the rates offered by the majority of insurers, thereby limiting the availability of competitive quotes that any consumer can obtain.

A full review by IBC of available rates based on the profile submitted by the NDP shows that for those drivers focused on price, lower premiums were available. The NDP’s quote for a driver in the Jane and Weston area was $2,517, yet a survey of the wider insurance market found lower rates of $1,822 for that same driver.

Insurance rates are based on many factors, including claims frequency. If one neighbourhood has more claims than another, it will face higher rates to pay for those higher claims payouts. It’s an effective and fair model of pooling risk, based on objective data that all insurers use. Added Palumbo, “Surely, this is a more equitable system than having people who live in areas that experience lower claims subsidize the higher costs of those who live in areas that have higher claims. “

A preliminary review of 2011 collision data for the neighbourhoods selected by the NDP shows that the Jane and Weston area reported three times as many collisions as Lawrence Park.

The claim that auto insurance rate approvals are based on a 12% rate of return is also incorrect, as is the claim that there is a guaranteed profit rate for insurance companies. “There is absolutely no guarantee of profits in the setting of auto insurance rates. The 12% return on equity is a benchmark established by the Financial Services Commission of Ontario when it reviews insurance rate applications made by insurers,” said Palumbo.

The Ontario Auditor General’s recent report highlighted the fact that fully 89% of the $9.8 billion in auto insurance premiums went to paying claims – which left very little to cover operating expenses. It is a fact that, far from earning profits, insurers lost $1.7 billion in Ontario auto insurance in 2010 and $2.8 billion over the past three years.

IBC would have welcomed a dialogue about the setting of insurance rates and the factors that are used in determining premiums. We would be happy to enter into a more constructive approach to providing the public with credible, reliable and useful information about auto insurance.

IBC’s Consumer Information Centre is available for all Ontarians who have questions relating to auto, home and business insurance and can be reached at 1-800-387-2880, Monday to Friday, 8 a.m. to 5 p.m.

About Insurance Bureau of Canada

Insurance Bureau of Canada is the national industry association representing Canada’s home, car and business insurers. Its member companies represent 90% of the private property and casualty (P&C) insurance market in Canada. The P&C insurance industry employs over 114,000 Canadians, pays more than $7 billion in taxes to the federal, provincial and municipal governments, and has a total premium base of $40 billion.

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