May 28, 2012 � Toronto – I am here to deliver a simple message on behalf of our member companies – auto insurance rates in Ontario are TOO HIGH. We know you hear this from your constituents and while we can’t deal with individual issues today, I do want to say that a key service of IBC is helping consumers navigate through the insurance system through our Consumer Information Centre. We have provided the contact information with our presentation today.
Now the facts:
The average private passenger auto annual premium in Ontario as of April 2012 was $1,534. That compares with $1,051 in Alberta, $989 in Newfoundland & Labrador, and in the 800s in the other Maritime Provinces.
While four years ago Ontario premiums were on average 25% higher than the next highest province � Alberta – today the average Ontario premium is now more than 45% higher than Alberta’s and almost twice as high as premiums in the maritime provinces.
Calculating how much insurance should cost is a complex task because insurers must set the price long before knowing what costs they will incur. Insurers cannot know for certain ahead of time how many consumers will make a claim, or how much those claims may be. Therefore, the cost of premiums must be calculated based on actuarial science using information from past experience. Insurers must determine the price to charge consumers today to protect against claims they may incur in the future. The rates that insurers charge are approved through a rigorous process undertaken by the Financial Services Commission of Ontario.
So how did Ontario’s insurance rates get so high? This is what we know:
Ontarians are not the worst drivers in Canada. In fact, Ontario has the safest roads in North America.
Cars are now better equipped for protecting passengers.
There are 12% fewer serious accidents requiring hospital admission.
So if the roads are better, cars are safer and accidents are less severe, what is driving up insurance costs?
I want to answer that question, but first I would like to dispel a few myths about the factors at play in higher premiums.
Let’s start with the issue of insurance industry profits.
FSCO sets a benchmark profit provision of 12% as part of the rate approval process. But this does not mean that insurance companies have a guaranteed 12% profit. In reality, the Canada-wide industry Return on Equity across all insurance lines was 8.0% in 2011.
That compares with levels of 9.8% in mining, 10.6% in manufacturing, and 11.8% in retail trade.
If we look back at the last few years, insurance ROE was 7.6% in 2010, 6.9% in 2009 and 6% in 2008.
Between 2008 and 2010, the industry lost a total of $2.96 billion on Ontario auto — $1.76 billion in 2010 alone. (This is not a case of profits being less than expected. These figures are losses.)
I can say without equivocation that during this period when premiums were rising significantly insurer profits were not a factor.
Any reasonable person would ask “if you’re losing money then why do you still do business here?”
The answer is that insurance profitability is cyclical. Insurers didn’t always lose money in Ontario and they hope they won’t always lose money here. As well, Ontario is a significant market and no one wants to abandon it.
Home, car and business insurers are safe investors. They invest in secure bonds that are far less vulnerable to stock market fluctuations than other investors. That’s why, in 2008, when the TSX and Mutual Fund Indices finished in negative territory, P&C Industry Investment Returns came in at almost 4%.
What the current investment climate DOES mean is that insurers cannot depend on investment returns to cancel out underwriting losses.
Then what is driving up the cost of auto insurance in Ontario?
Claim costs in Ontario have been the culprit in driving up premiums. If the problem was the factors that insurers use to classify risk, like the use of territory or any other rating factor, then we would see premium increases in other private sector insurance markets like Alberta, but we don’t. Something very unique is happening in this province.
Since 1990, when the concept of no-fault coverage was introduced, the Ontario auto insurance product has offered the highest benefit package in Canada, in fact, in North America. Ontarians receive more compensation from insurers than any other Canadians. Why?
Because the benefit package has been � and remains � so rich, it has been vulnerable to significant inflation. Some of that inflation is the result of fraud, but a large part is due to the mentality on the part of too many health care professionals, medical suppliers, claimants and lawyers that goes: if the money is there, we should use it. Quite simply, the benefit maximums in the auto insurance product have become targets.
Ontario auto claim costs are made up of two components:
(i) no fault accident benefit (AB) injury claims; and
(ii) bodily injury (BI) claims, where the injured person sues the at-fault driver.
Beginning in 2005 and up until the Sept 2010 reforms, accident benefits costs were spiralling out of control.
From 2005 to 2008, the total value of these claims went up 70%. But premiums did not go up right away, but rather because of competition in the insurance market insurers took the loss and average premiums actually fell by 2.6% during that period. Subsequently, however, claims costs continued to rise — by another 60% to 2010. And then premiums had to catch up � average premium rose 12% over that 2 year period. So while claims costs increased by 60% average premiums rose 12%.
While the September 2010 reforms were a needed first step in reducing the pressure on no fault injury costs, claims costs are still out of control.
First, there is an excess of 30,000 unresolved claims cases awaiting dispute resolution at FSCO and these have undetermined costs. Depending on how these cases are decided it could re-ignite the accident benefits costs spiral.
I cannot stress strongly enough how this backlog is a major risk to insurance premium stability. Claimants don’t know what their benefits will be and insurers don’t know how much their claims are going to cost.
Second, the number of catastrophic injury claims is rising faster than other claims.
From 2004 to 2010, the number of all no fault injury claims rose 28%, whereas the number of large claims has more than doubled.
Acute care for accident victims is covered through OHIP and insurers reimburse the government over $142 million a year for these services. And as I mentioned earlier, hospitalizations from motor vehicle accidents are down 12%. Still � and this is a mystery � auto insurers are being presented with many more catastrophic injury claims.
Third, Bodily Injury claims cost are increasing rapidly.
Latest available figures show that the frequency of these claims has been rising, as has the average claims cost. When you consider that BI claims represent more than $2 billion in costs each year, it is very concerning that the volume and average cost of these types of claims appear to be rising so rapidly.
BI is on the same track Accident Benefits were before the 2010 reforms and more needs to be done to assess the causes and what can be done to alter this concerning trend. As one part of the insurance product is reformed, other parts feel the pressure � much like squeezing a balloon.
Fourth, there is persistence of fraud in the Ontario auto insurance system
Just last week, a Scarborough man was sentenced to three and a half years in a Federal Penitentiary in connection with a staged collision ring, known as Project 92. This was the 29th conviction in relation to this investigation that may have cost insurers as much as $25 million.
The government has taken unprecedented steps to stop fraud and so have insurers. Many are currently in the process of preparing responses to a FSCO SABS questionnaire about their internal practices to address fraudulent and abusive claims. Companies have taken significant steps to enhance their claims management process � for some companies this has meant wholesale restructuring of their claims departments. As well, consumers are becoming more educated. We want to continue this momentum because society as a whole will benefit from fighting this crime.
What can we do about high premiums?
We all agree that premiums are too high in this province.
We have made a good start with the 2010 reforms � but more needs to be done.
The habit of abusing Ontario’s benefit rich auto insurance system has grown up over more than 20 years. It will take a firm commitment to ongoing reform and to ongoing efforts against fraud and abuse to turn that habit around.
And that will only happen when all of us – industry, government, policyholders, stakeholders, and members of the legislature – work together to do what is necessary to drive down claim costs The affordability of insurance is fundamental to the health and success of Ontarians.
About Insurance Bureau of Canada
Insurance Bureau of Canada is the national industry association representing Canada’s private home, car and business insurers. Its member companies represent 90% of the 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.
To view media releases and information, visit the media section of IBC’s website at www.ibc.ca.