SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT FINANCIAL SERVICES COMMISSION OF ONTARIO April 15, 2013
Table of Contents SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT 1. INTRODUCTION... 1 2. ONTARIO AUTO INSURANCE MARKET... 3 3. ONTARIO AUTO INSURANCE SYSTEM... 4 a) Third-party Liability... 7 b) Statutory Accident Benefits... 7 c) Physical Damage Coverages... 9 d) Other Optional Enhancements... 9 4. THE ROLE OF THE FINANCIAL SERVICES COMMISSION OF ONTARIO (FSCO)... 9 5. AUTOMOBILE INSURANCE RATES AND RISK CLASSIFICATION SYSTEMS...13 a) General...13 b) How Individual Auto Insurance Rates Are Set...15 c) Impact of Removing Territorial Rating...16 d) Rate Filing and Review Process...18 6. INSURERS FINANCIAL RESULTS...20 7. EVOLUTION OF AUTO INSURANCE IN ONTARIO...24 a) Late 1980s...24 b) 1990 Ontario Motorist Protection Plan (OMPP)...25 c) 1994 Bill 164...25 d) 1996 Bill 59...26 e) 2003 Reforms...26 8. AUTO INSURANCE SYSTEMS IN OTHER PROVINCES...28 a) Private and Government Run Systems...28 b) Compensation Structure...29 c) Claims Experience in Other Provinces...31 9. PROBLEMS AND PRESSURES 2006-2010...32 a) Rapid Rise in Accident Benefits Costs...34
b) Greater Toronto Area Cost Rising More Rapidly...35 c) Main Components of Accident Benefits Increase...36 d) Comparison to Other Coverages...37 e) Decrease in Reported Injuries...38 f) Experience in Other Provinces...39 g) Factors Contributing to Increased Costs...41 10. 2010 REFORMS AND OTHER RECENT INITIATIVES...44 11. PROGRESS ON 2010 REFORMS AND OTHER INITIATIVES...45 12. CONCLUSION...56 APPENDIX...57 BIBLIOGRAPHY...61
SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT 1. INTRODUCTION Auto insurance is a form of property and casualty (P&C) insurance 1 that is purchased by owners and drivers of motor vehicles from an insurance company that in turn undertakes to compensate accident victims for eligible costs arising from vehicle damage and personal injuries. In addition to providing compensation, the insurer also undertakes to protect the owner and driver of the vehicle from any legal claims for injuries or damages caused to others. The auto insurance premiums that drivers pay represent the cost of transferring the risk of loss to the insurer. Since 1980, auto insurance has been mandatory for Ontario drivers. All vehicle owners are required to purchase auto insurance from private insurance companies either through general insurance brokers or directly from companies through agents. In order to curb rising auto insurance costs, the government introduced what is commonly called Ontario s first no-fault system in 1990. Under this new system, all those injured in car accidents receive more immediate access to resources from their insurer to pay for recovery (regardless of who was at-fault) whether for personal injuries or damaged vehicles. The ability to receive accident benefits, however, did not depend on fault. This new system was referred to as a threshold no-fault system because it imposed a restrictive limitation on the right to sue through a verbal threshold. The verbal threshold was death, permanent serious disfigurement, or permanent serious impairment of an important bodily function caused by continuing injury which was physical in nature. By contrast, in a fault or tort based system, the driver who is at-fault for causing an accident is responsible for paying the victim's medical expenses and 1 Property and Casualty is the type of insurance that primarily covers home, auto, and various forms of business risks. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 1
compensating for additional damages, such as loss of wages, and pain and suffering. The assignment of fault and the amount of compensation would be litigated through the courts. Today, if injured in an accident, an accident victim is eligible to sue the at-fault driver for economic loss or health care expenses in excess of their accident benefit coverages, and for pain and suffering, if the person meets a threshold of death, permanent serious disfigurement or permanent serious impairment of an important physical, mental, or psychological function. In order for automobile insurance to be affordable, fairly priced, and available, a balance needs to be maintained between price and the appropriate coverages policyholders need in the event of an accident. Historically, the reforms of Ontario s system have largely been motivated by the need to stabilize rising costs and premiums and restore this balance. The auto insurance system is complex and there have been several reforms over the past 25 years. With each set of changes to the system, there was some initial success in stabilizing costs and premiums followed by another cycle of rising costs. In addition, notwithstanding reforms, the auto insurance system continues to face challenges associated with fraud and misuse of the system, which, if left unchecked, will always contribute to rising premiums. The reforms announced by the government in 2009, and implemented in September, 2010, have addressed rising costs, stabilized premiums and have given drivers more choice and flexibility in choosing levels of coverage. To try and avoid a repeat of the past, the government continues to focus on improving the auto insurance product and system in Ontario. New initiatives have been announced in the past two Ontario Budgets including the establishment of an Auto Insurance Anti-Fraud Task Force and a heightened focus on evidence-based approaches to the treatment and recovery from injuries. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 2
2. ONTARIO AUTO INSURANCE MARKET There are over nine million drivers and 6.7 million private passenger vehicles insured in Ontario. Automobile insurance is privately delivered in Ontario. P&C insurers in Ontario received approximately $20.8 billion in direct written premiums in 2011. Total written automobile insurance premiums made up approximately $11.7 billion or 56.3 per cent of the total P&C market in 2011. Of this amount, private passenger vehicles made up approximately $10.3 billion in total written premiums. Ontario has a competitive automobile insurance marketplace with 192 companies licensed to operate and over 100 companies writing private passenger automobile insurance. In 2011, 20 automobile insurance companies constituted 80 per cent of the automobile insurance market. Private passenger automobile insurance accounts for approximately 88 per cent of Ontario s automobile insurance premiums. The other categories of auto insurance (e.g. commercial, motorcycles, snow vehicles, public buses) account for the remaining 12 per cent of premiums. The government prescribes accident benefits and determines the mandatory minimum coverages for auto insurance while the Financial Services Commission of Ontario (FSCO) regulates insurers and approves insurers rates. Legislation requires that the rate approval process ensures that rates proposed by companies are just and reasonable in the circumstances, not excessive, and do not impair the financial solvency of the company. Since debate about the auto insurance system in Ontario predominantly revolves around private passenger automobile insurance, that is the focus of this submission. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 3
3. ONTARIO AUTO INSURANCE SYSTEM In Ontario, as in other provinces, automobile insurance is mandatory for all consumers who own a vehicle that is driven on public roads. Prior to 1980 and the introduction of compulsory automobile insurance, vehicle owners had the option of buying insurance or paying a fee into the Motor Vehicle Accident Claims Fund (MVACF) which defended and paid claims in situations where an at-fault driver failed to respond to a lawsuit. Often, accident victims had to go to court to determine who was at fault in the accident, and to access benefits they might require to recover from injuries or for damages to their vehicle sustained in the accident. The growing costs and liabilities of MVACF and number of uninsured drivers led the government of the day to make auto insurance mandatory. Given its compulsory nature, governments, appropriately, have developed a comprehensive regulatory system to protect consumers and regulate insurer conduct. In Ontario, this includes setting mandatory and optional levels of coverage that must be included and available to consumers in their auto insurance policies. The various changes and reforms implemented by governments over the last 25 years have focused primarily on the balance between the right to sue through third party liability coverages (described in detail later) and statutory accident benefits. A fundamental shift in compensation based on court awards to one based on more rapid access to expanded no-fault accident benefits occurred in 1990, with the passage of the Insurance Statute Amendment Act (Bill 68) commonly known as the Ontario Motorist Protection Plan (or OMPP which is described in detail later in this submission). The sale of automobile insurance is undertaken by general insurance agents and brokers who are both licensed to sell insurance products. The distinction between an agent and a broker is that an agent sells insurance directly for a particular insurer (direct writer), whereas the broker is an independent business person who may sell insurance on behalf of a number of insurers, for a commission. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 4
Traditionally, most auto insurance was sold by independent brokers who served their customers by finding the most appropriate policy and price for a person s needs among a number of insurance companies with which the broker had contracts to sell their product. Insurance for a growing proportion of the market is now sold through agents by direct writer insurance companies. General insurance agents are licensed and regulated by FSCO. As of April 2013, there were 6,612 general insurance agents licensed to sell property and casualty insurance products, including auto. Independent insurance brokers are regulated by the Registered Insurance Brokers Association of Ontario (RIBO). RIBO is a self-funding and self-governing corporation. It was established in 1981 under the Registered Insurance Brokers Act and is responsible for licensing, standards of practice, prevention of misconduct and disciplining its members. In 2011-2012, there were 17,526 registered general insurance brokers. FSCO works closely with RIBO on emerging issues and committees. FSCO also ensures RIBO is fulfilling its regulatory responsibilities and operates to protect the interests of the public by conducting an annual examination of the affairs of RIBO and reporting to the Minister of Finance. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 5
Coverages Ontario currently has a system of mandatory coverages with additional optional coverages and benefits available for purchase. The following table sets out these mandatory and optional coverages which include the expansion in the choices available to consumers for statutory accident benefits implemented by the current government in the September 2010 reforms. Ontario s Automobile Insurance Coverages Mandatory Coverages Optional Coverages Third-Party Liability Pays for claims as a result of lawsuits for economic damages and pain and suffering. Minimum coverage by law is $200,000. Court awards for pain and suffering include mandatory deductible amounts. Statutory Accident Benefits Schedule (SABS) Provides benefits, if a person is injured in an accident, regardless of who caused the accident. Includes medical and rehabilitation, income replacement, attendant care and death and funeral coverages. Direct Compensation Covers damage to an insured vehicle to the extent that another driver was at-fault for the accident. Uninsured Automobile Coverage Protects drivers from damage caused by an uninsured motorist. Third-Party liability Higher limits for third-party liability coverage available; standard coverage in most policies is $1 million. Lower mandatory deductible. Direct Compensation Various deductibles are available including $0 Collision Coverage for repairs to an insured vehicle when the insured driver is atfault. Various deductibles are available. Comprehensive Pays for losses from theft, fire and non-collision damage. Various deductibles are available. Optional Accident Benefits Can include higher limits for standard Accident Benefits coverages or coverages such as housekeeping and caregiving. Other Optional Coverages Such as coverage for the cost of a rental vehicle while an insured vehicle is being repaired and full replacement cost for a relatively new vehicle. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 6
a) Third-party Liability The minimum coverage required in Ontario for third-party liability is $200,000. Drivers have the option of purchasing higher amounts, generally $500,000, $1 million, or $2 million. The standard amount that is usually purchased by drivers is $1 million. Over 99 per cent of drivers currently purchase more than the mandatory minimum of $200,000. 2 If injured in an accident, and the driver is not at-fault, a person is eligible to sue the at-fault driver for economic loss or health care expenses in excess of their accident benefit coverages and for pain and suffering. In order to sue for excess health care expenses and for pain and suffering, the injuries of the injured person must meet a threshold of permanent serious disfigurement or permanent serious impairment of an important physical, mental, or psychological function. There is also a deductible that applies for court awards for pain and suffering of $30,000 (or $15,000 for family members under the Family Law Act). This deductible does not apply for pain and suffering awards if court awards exceed $100,000 (or $50,000 for family members under the Family Law Act). b) Statutory Accident Benefits The 2010 automobile insurance reforms created a new standard package of statutory accident benefits set out in the Statutory Accident Benefits Schedule (SABS), a regulation under the Insurance Act. These benefits are payable by the injured person s own insurer and are payable regardless of fault. The maximum available benefit levels are mistaken by some individuals as the total compensation they can expect to receive. These benefits are subject to the criteria set out in regulations and must be assessed based on these standards and the extent and nature of the injuries. The reforms announced by the government include an evidence-based approach to the treatment and recovery from injuries that relies on current scientific and medical evidence. The reforms also give owners and drivers 2 General Insurance Statistical Agency. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 7
the ability to purchase higher optional benefits that most suit their needs and financial circumstances. The table below summarizes the key accident benefit coverages and the additional choices available to consumers. Statutory Accident Benefits Coverage Medical, Rehabilitation and Attendant Care benefits - for non-catastrophic injuries Medical, Rehabilitation and Attendant Care benefits - for catastrophic injuries Caregiver benefit Housekeeping and Home Maintenance expenses Coverage under Standard Auto Insurance Policy $50,000 for medical and rehabilitation benefits, including assessment costs; $36,000 for attendant care benefits. $1,000,000 for medical and rehabilitation benefits including assessment costs; $1,000,000 for attendant care benefits. Up to $250 per week for the first dependant plus $50 for each additional dependant; available only for catastrophic injuries. Up to $100 per week; available only for catastrophic injuries. Options available to increase benefits $100,000 or $1,100,000 for medical and rehabilitation benefits including assessment costs; $72,000 or $1,072,000 for attendant care benefits. An additional $1,000,000 for medical, rehabilitation and attendant care benefits including assessment costs. Up to $250 per week for the first dependant plus $50 for each additional dependant; available for all injuries. Up to $100 per week; available for all injuries. Income Replacement benefit 70 per cent of gross income up to $400 per week. Weekly limit can be increased to $600, $800 or $1000 per week. Dependant Care benefit Not provided. Up to $75 per week for the first dependant and $25 per week for each additional dependant to a maximum of $150 per week. Death and Funeral benefits Indexation benefit applicable to income replacement benefit, nonearner benefit, caregiver benefit, attendant care benefit or medical and rehabilitation benefit $25,000 lump sum to an eligible spouse; $10,000 lump sum to each dependant; maximum $6,000 funeral benefits. Not provided. $50,000 lump sum to an eligible spouse; $20,000 lump sum to each dependant; maximum $8,000 funeral benefits. Annual adjustment according to the Consumer Price Index for Canada. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 8
c) Physical Damage Coverages Physical damage to a vehicle is paid through a number of coverages. These include Direct Compensation which pays for damage to a vehicle or its contents, and for loss of the use of the vehicle or its contents, to the extent that another person was at-fault for the accident. It is called Direct Compensation because even though someone else caused the damage, compensation comes directly from a person s own insurer, instead of the insurer of the person who caused the damage. The optional Collision coverage also pays for physical damages to one s own vehicle for the proportion that the person is at-fault in an accident. The optional Comprehensive coverage pays for losses other than those covered by Collision such as theft, vandalism, fire and other non-collision damage. Each of these physical damage coverages have standard and optional levels of deductibles that can be applied. d) Other Optional Enhancements There are other optional enhancements to coverages known as policy endorsements that are special agreements between insurers and consumers allowing for the addition or reduction of certain coverages for certain situations. The most common policy endorsements provide coverages for Rented or Leased Vehicles, Loss of Vehicle Use, Removing Depreciation Deduction, and Family Protection Coverage. 4. THE ROLE OF THE FINANCIAL SERVICES COMMISSION OF ONTARIO (FSCO) FSCO is an Ontario Government agency reporting to the Minister of Finance and is responsible for regulating auto insurance. Through the Financial Services Commission of Ontario Act, 1997 the Insurance Act, the Automobile Insurance Rate Stabilization Act, 2003 and the Compulsory Automobile Insurance Act, FSCO is charged with providing regulatory services that SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 9
protect the public interest and promote public confidence in auto insurance through its licensing, underwriting, class and rate approval, monitoring and enforcement activities. The Insurance Act and regulations set out the standard automobile insurance product. The legislation sets out authority to regulate the auto insurance sector in the following ways: Approve insurers underwriting rules, premium rates and risk classification systems that are the factors used to set auto insurance premiums; Administer a dispute resolution process for disputes between claimants and insurers involving the SABS; Regulate insurance market conduct by investigating complaints, taking enforcement actions for unfair or deceptive practices, and contravention of the legislation; Enforce the legislation against other users of the system (e.g. health care providers and unlicensed persons); Oversee the Facility Association (FA) which provides automobile insurance to high risk drivers who cannot obtain insurance in the regular marketplace; Provide consumers with information and educational material on the automobile insurance system; Administer the Motor Vehicle Accident Claims Fund (MVACF) that provides accident benefits to persons injured in automobile accidents when they have no access to an insurance policy; Work with stakeholders to improve the system s operation and make recommendations to the government on changes to the automobile insurance system. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 10
Every insurer writing automobile insurance must apply to the Superintendent for approval of the risk classification system and the rules it intends to use in determining the rates for each coverage and category of auto insurance. The statutory standard for risk classification approval requires the Superintendent to refuse to approve all or part of an application and permits him to require the insurer to vary a risk classification system if the risk classification system is not just and reasonable in the circumstances or is not reasonably predictive of risk or does not distinguish fairly between risks. The statutory standard for rate approval requires the Superintendent to refuse to approve all or part of an application and permits him to require the insurer to reduce or otherwise vary the rate if the rates are not just and reasonable in the circumstances; would impair the solvency of the insurer; or are excessive in relation to the financial circumstances of the insurer. However the legislation does not allow the Superintendent to order a specific rate, i.e. it does not provide for a rate setting function. This standard is applied on an individual company basis. Regulations provide requirements and prohibitions with respect to the elements that can and cannot be considered in classifying risks. Insurance companies must submit their criteria (underwriting rules) for selecting and rejecting consumers prior to use. Regulations under the Insurance Act define the criteria that cannot be used to deny coverage. For example, a person s health status, employment status or income and credit rating cannot be used to deny coverage. FSCO also oversees the FA. The FA was established as a non-profit association in Ontario in 1979 as part of revisions to the Compulsory Automobile Insurance SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 11
Act. It acts as the insurer of last resort for high risk drivers who cannot purchase automobile insurance in the regular market. It operates in Alberta, Ontario, Nova Scotia, New Brunswick, Newfoundland, Prince Edward Island, Northwest Territories, Nunavut, and the Yukon. All Ontario insurers are members of the FA and each member is allocated a share of the FA s premiums, claims, expenses and investment income. In Ontario, the FA manages the Residual Market (FARM), the high risk segment, and a Risk Sharing Pool that allows insurers to share the risk of some drivers, up to a limit of 5 per cent, among all insurers. The FARM currently insures about 4,480 private passenger vehicles, down from over 220,000 during 2004. 3 Through the MVACF, FSCO provides compensation for personal injury or property damage to people involved in automobile accidents where no automobile insurance can be found to respond to the claim (e.g. drivers without auto insurance, hit and run accidents). A 2003 Insurance Act amendment requires the Superintendent of Financial Services to undertake a review of Part VI of that Act, dealing with auto insurance, once every five years and recommend to the Minister of Finance any amendments that will improve the effectiveness and administration of that part of the Act. The first such review was completed in 2009 and formed the basis for the government s deliberations in developing the 2010 reforms. In addition, FSCO regularly reviews the SABS to ensure they are current and responsive. FSCO also provides consumers with a wide range of information and educational material on the automobile insurance system. This information is distributed through the FSCO website well as at trade shows and other public events where drivers attend. A range of products are available including: brochures on how the automobile insurance system works, a tutorial on how rates are set, tips on saving money, and what to do in the event of an accident. Working with the Auto 3 Facility Association. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 12
Insurance Anti-Fraud Task Force, FSCO has also expanded its website on fraud and what consumers can do to combat fraud. In addition to this material, FSCO also has a contact centre which responded to over 5,490 auto insurance inquiries in 2012-2013. 5. AUTOMOBILE INSURANCE RATES AND RISK CLASSIFICATION SYSTEMS a) General As noted earlier, insurance is a contract that protects consumers financially against a loss. Much of the money received from premiums will be paid out in future years to satisfy claims. This means insurance is priced before its costs are fully known. Insurers set aside or reserve funds and invest them to meet these future obligations. To ensure that sufficient premiums are collected to meet future needs, actuarial estimates are made for future or prospective costs that include claims and administration costs (overhead) and an allowance for a return on capital. Insurers and actuaries use past claims history to estimate future claims costs. Their goal is to determine what rates to charge a consumer for the policy period to cover claims, operating expenses and a return to investors, after taking into account investment income. Actuaries are used as they are experts in the rate determination process. Determining rates involves estimating what the claims will ultimately cost. Insurers use accident year data, i.e. they look at claims data based on the year the accident occurred, as opposed to financial year data. Accident year claims costs change as more data becomes available, primarily for those coverages such as third party liability- bodily injury or accident benefits where the payout will take a number of years. This process for assessing how much the accident will finally cost is referred to as claims development. Claims develop as (a) time elapses between when claims occur and when they are reported to an insurance company and (b) initial estimates by claims adjusters may not be accurate as to what the ultimate claim settlement amounts will be. Actuaries examine the pattern of how claims have SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 13
developed in the past to estimate the future claims amount. After a number of years, the accident year data matures and is not subject to as much volatility. In estimating the claims costs for the future period, actuaries also look at claims costs over a number of accident years. For example, in trying to determine what rates to charge in 2013, actuaries would likely look at claims costs in each of accident years 2008-2012 and weight the claims experience. Looking at the claims costs for just one year would result in very volatile rates and is inconsistent with actuarial practices in determining rates. Also, where there has been a change to the auto insurance product, as for example with the recent auto reforms, adjustment factors will be applied to historic claims costs to recognize the changed environment. The rate setting process also includes an estimate of claims inflation (also referred to as loss trend) so the rates charged will reflect the cost levels that are anticipated during the policy period. Insurers also estimate claims adjustment expenses, that are expenses associated with settling the claim but that are not paid to the claimant, and a general expense component (includes commissions, taxes, overhead) and a profit provision. The profit provision can be expressed as a return on equity component and then an assumption needs to be made to convert this to a premium basis. Insurers also take into account investment income. As the full claims are not ultimately paid out until the future, in many instances the insurer will be earning investment income on the cash flow. The cost of administration includes the cost of processing and evaluating claims. Companies use a variety of approaches to claims handling that include: internal company claims staff; contracted independent adjusters that are not employees of the company; or a combination of the two. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 14
Depending on the actual number and size of claims, investment income generated and cost of administration, the insurer may experience a profit or loss on the premium charged in a specific time period. The process of setting rates is prospective in that rates are set for the future period when the policies are in effect. The ratemaking process does not attempt to increase rates to re-coup past losses or to reduce rates because of historic profits. b) How Individual Auto Insurance Rates Are Set Consumers are not all charged the same rate. Premiums vary based on risk characteristics. Auto insurance rates are determined by a combination of factors including a driver s personal profile, the amount of coverage purchased, the deductible selected, location and the insurance company chosen. Actuarial principles require that the rates should reflect the risk (claims costs). Claims costs vary across the province as do rates. A driver s personal profile includes: the driving record that includes any accidents where they were more than 25 per cent at-fault, usually in the last six years and driving convictions within the last three years; where a person lives; completion of a driver training course; how much a person drives; age and driving experience; the type of use (pleasure, commuting, business); other persons in the household who may drive a car, and type of vehicle driven. Other factors affecting the rates include the amount of additional optional coverages purchased (that include options for accident benefits, liability, collision and comprehensive coverages); and the level of deductibles selected for certain coverages such as collision (damage to the vehicle for at-fault accidents) and comprehensive (e.g. theft, vandalism, hail). Auto insurance rates are affected by where a person lives. Territorial rating recognizes that all vehicles within a given territory share similar risks because of traffic density, terrain, road conditions and infrastructure, speed limits, crime rates (relates to auto theft) and weather conditions. Each company establishes its own SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 15
territories based on its data and market information and where its business is concentrated. As the auto insurance system has evolved and population has increased, insurance companies have expanded the number of territories to better reflect risk and claims experience. FSCO has issued guidelines to ensure rating by territory is conducted in a fair manner. The guidelines include: No more than 55 territories in the province and no more than 10 in the city of Toronto; A minimum of 2,500 vehicles in each territory for statistical credibility and to avoid unfairly targeting certain risks; Insurers must ensure territories are contiguous (i.e. insurers cannot pick out a series of isolated pockets and form a territory). Insurers generally use the first three characters of a postal code referred to as the forward sortation area, in defining territories; When establishing a new territory, the rates may not change by more than 10 per cent from the existing territory. Insurers also underwrite risks differently depending on their individual company s experience and analysis. Companies are allowed to use different risk classification systems. Companies can also have rules on the type of risks they may or may not accept. However, all underwriting rules must be filed and approved by FSCO and comply with the Insurance Act. c) Impact of Removing Territorial Rating The use of territorial rating is a standard and traditional tool in the rate setting process in automobile insurance systems. Territorial rating enhances the ability of insurance companies to underwrite and price risk more accurately by linking premiums to claims experience in the different territories. In a jurisdiction as large as Ontario with a mix of urban and rural areas, significant climate differences, SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 16
variable road quality and traffic density, alongside other differences, eliminating territories would significantly increase cross-subisidization of drivers in higher claims areas by those in lower claims areas. There have been some recent discussions that the use of territories or where a person lives should be eliminated from the setting of rates. FSCO has analyzed the impact of this change assuming territorial rating was removed resulting in all drivers in the province paying the same premium. If an average written premium of $1,381 (based on the average written premium over the past six years) was set for the province, there would be significant cross-subsidization in communities across the province. The chart below illustrates the prospective impacts for five Ontario communities. The Greater Toronto Area (GTA) could see a reduction of 24 per cent while other communities could experience increases ranging from 24 to 41 per cent. Source: Financial Services Commission of Ontario The chart below further illustrates this possible impact in dollar terms. The GTA could see a reduction in premium of about $429 while the other identified communities could see increases of $270 to $400 in premiums. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 17
Source: Financial Services Commission of Ontario As illustrated, removing territories would result in the cross-subsidization between higher and lower cost geographical areas of the province. d) Rate Filing and Review Process Insurers are required to have their rates and risk classification systems filed and approved by the Superintendent. Depending upon the complexity of the changes proposed, it normally takes a company up to 60 days to prepare a filing. In recent years insurers have used more sophisticated analytical models to price risks. These models may require additional time to prepare filings. While actuaries are primarily involved in the development of a filing, the proposed rates and risk classification system may also take into consideration the competitive environment. Company underwriting staff are also involved and comparison with other companies market rates can influence the decision as to the rates to propose. FSCO has established approved filing guidelines for use by insurers, which differ depending on the nature of the filing. Simplified filing guidelines have been SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 18
approved for filing rate reductions. Major filing guidelines have been approved for other filing changes including changes to an insurer s risk classification system. All filings are made electronically. Major filings amount to several hundred pages. Major filings require that a Certificate of the Actuary be filed by a Fellow of the Canadian Institute of Actuaries, attesting to the data being used in the filing is reliable and sufficient for the determination of the indicated rate change and that the indicated rate changes have been calculated in accordance with Accepted Actuarial Practice. The indicated rate change is the rate change calculated by the actuary, based on all actuarial assumptions used in the filing, after taking into consideration expected claims costs, expenses, investment income and a Return on Equity (ROE). Major filings require that a Certificate of the Officer be included and that the signing officer attests that the proposed rates are just and reasonable, do not impair the solvency of the insurer, and are not excessive in relation to the financial circumstances of the insurer. As noted above, the actuary attests to the indicated rate change while the Officer attests to the proposed rates. The proposed rate change may be lower than the indicated rate change due to competitive forces. Where the proposed rate change is lower then the indicated rate change, the ROE underlying the proposed rates will be lower than the ROE used in the actuary s calculation. A major filing includes all the data and assumptions used in determining the proposed rates. FSCO actuaries review assumptions used by companies in rate filings as to their reasonableness. They also independently calculate rate requirements for a company using accepted actuarial standards. Changes to the rating elements are also reviewed to ensure they comply with regulation requirements and with FSCO guidelines (e.g. territorial rating guideline). SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 19
A ROE benchmark of 12 per cent is currently used by FSCO in this process recognizing that a return on capital is required by shareholders investing in any business operation. ROE is only one of a number of factors that are considered in reviewing the reasonableness of rates proposed. Following the review of the filing there will be discussions with an insurer where there are differences in assumptions that are material to rate changes proposed. An insurer will be required to amend its proposed rates or risk classification systems where it does not comply with the statutory standards. Following approval of a filing, the effective date of the rate changes must comply with provisions set out in regulation (a minimum of 45 days to the broker and 30 days notice to the consumer). In practise, most renewals will be issued about 60 days after approval by FSCO, where insurance is sold through a broker. Insurers that deal directly with the consumer will take less time. Most automobile insurance policies sold are for an annual term. It will take a full 12 months to have all policies issued at the revised rates and risk classification system. Only one-twelfth of a company s policies will come up for renewal in any month, assuming a uniform distribution of policies throughout the year. 6. INSURERS FINANCIAL RESULTS The financial results of federally incorporated P&C insurers, which include the majority of auto insurers licensed in Ontario, are reported to and published by the Office of the Superintendent of Financial Institutions (OSFI). OSFI is the prudential regulator and supervisor of federally incorporated insurance companies. The published financial results are posted on the OSFI website each quarter and are not broken down by province or class of insurance. The results published for P&C insurers include auto, property, liability, surety, boiler and machinery, reinsurance and other classes of general insurance. The profits reported represent the results from the sale of insurance in all these classes of insurance across Canada. Not all of these companies sell auto insurance in Ontario. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 20
In March 2013, OSFI released the financial results for federally regulated P&C companies for the calendar year 2012. The results compared to 2011 show an improvement in after-tax net income and an increase in ROE from 9.5 to 11.4 per cent. This is primarily due to an improvement in underwriting results across all lines of business. The following table shows loss ratios (claims costs as a percentage of premiums): LOSS RATIOS PROPERTY AND CASUALTY INSURERS IN CANADA LINE 2011 2012 Personal Property 68.0% 58.7% Commercial Property 70.9% 66.2% Liability 60.4% 56.1% Automobile 76.0% 73.3% Ontario Automobile Only 81.2% 76.6% Source: Office of the Superintendent of Financial Institutions Canada SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 21
The results for the last 11 years for all lines of P&C insurance are summarized in the following table. YEAR FINANCIAL RESULTS FOR PROPERTY AND CASUALTY INSURERS IN CANADA AFTER TAX NET INCOME (000,000) RETURN ON EQUITY 2002 $242 1.4% 2003 $2,199 11.9% 2004 $4,084 19.0% 2005 $4,043 16.5% 2006 $5,534 20.1% 2007 $4,949 16.1% 2008 $2,485 7.8% 2009 $2,524 7.6% 2010 $2,440 6.8% 2011 $3,555 9.5% 2012 $4,417 11.4% Source: Office of the Superintendent of Financial Institutions Canada Financial Year Data Looking at financial year data, it is important to understand that premiums charged for a policy are only taken into revenue over the policy period. For example, if an annual policy is renewed on September 1, 2012 for $1,200 then one-third of $1,200 ($400) would be recorded as premium revenue in 2012 and the remaining two-thirds ($800) would be recorded as premium revenue in 2013. Also, insurance policies come up for renewal at various points in time. In the case of annual policies, once an insurer has a rate change approved, it will take a full year for the policies to come up for renewal and the new rates charged, and two years for the premium charged to be fully taken into revenue. This is important in considering how any rate changes (increases or decreases) and their effective dates would impact premium revenues and a financial profit/loss in any year. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 22
Looking at financial year data, it is also important to understand the impact that the estimates of insurer s claims liabilities have on claims costs in any financial year. Any changes in the estimates for claims liabilities are recorded in the year the estimates are revised, regardless of when an accident occurred. It should be noted that estimating claims liabilities is an inherently uncertain process. This can be further compounded by changes to the automobile insurance product or system. In estimating the total claims liabilities for a particular financial year, that are discounted, the actuary must take the following into account: 1. Amounts paid on claims arising from accidents on or before the year-end; 2. Individual case reserves established by claims adjusters for claims the company is aware of by the year end; 3. An estimate of the deficiency in case reserves as of the year-end; 4. An estimate of costs for accidents that occurred on or before the year-end, that have not as yet been reported to the insurance company (also referred to as Incurred But Not Reported or IBNR) 5. An estimate of claims settlement costs to be paid on claims arising from accidents that occurred on or before the year end; and 6. A provision for adverse deviation that is calculated in accordance with the standards of the Canadian Institute of Actuaries. The claims costs that are reported in financial statements will reflect any claims actually paid in the year (regardless of when the accident occurred) and the change in claims liabilities from the end of the prior year to the claims liabilities at the end of the current year. Revisions to estimated claims liabilities for accidents that occurred in prior years may have a significant impact on the calculation of the current year s net income/loss. An increase in estimated claims from prior years is referred to as SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 23
adverse development and a decrease is referred to as favourable development. Therefore, one should not assume that a profit or loss in any particular year is solely due to accidents that occurred in that year. Insurers financial loss ratio has improved from 99.7 per cent in 2010 to 81.2 per cent in 2011, and to 76.6 per cent in 2012 for Ontario automobile insurance. The Ontario automobile loss ratio is still higher than the overall automobile loss ratio for the rest of Canada. The Ontario automobile accident benefits loss ratio improved from 150.5 per cent in 2010 to 77.2 per cent in 2011, and to 51.3 percent based on OSFI financial data. However, while accident benefits loss ratios have decreased, third party liability loss ratios for Ontario automobile have increased. In 2010 the loss ratio was 79.5 per cent and it increased to 90.8 per cent in 2011, and to 100.3 per cent in 2012. 4 Our understanding is that there has been adverse development for prior accident years on the third party liability bodily injury coverage. 7. EVOLUTION OF AUTO INSURANCE IN ONTARIO Successive governments have had to respond to rising costs of auto insurance and re-establish an appropriate balance between price and coverages through various reforms. The principal focus of many of these reforms has involved the right to sue (the tort system) and the accident benefits structure. Following is a description of how the system has evolved over the past 25 years. a) Late 1980s In the mid-1980s the Ontario Task Force on Insurance, headed by Dr. David Slater, was appointed to study problems of availability, affordability and adequacy of general liability insurance in Ontario. The Slater Task Force released its report in May of 1986. Although the focus of the Slater Task Force was primarily on forms of liability insurance other than auto, 4 Office of the Superintendent of Financial Services Canada. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 24
Dr. Slater did make some recommendations concerning auto insurance and the issue of tort reform. In November of 1986 the government appointed the Honourable Mr. Justice Coulter Osborne to conduct a review of the tort system for compensation for injuries in automobile accidents and the consequences of the implementation of a no-fault automobile accident scheme. The Report of Inquiry into Motor Vehicle Accident Compensation in Ontario (Osborne Report) by the Honourable Mr. Justice Coulter Osborne was released in 1988. However, costs continued to rise due primarily to the costs of litigation and court awards. This led the Liberal government to implement reforms in 1990 referenced earlier that were commonly known as the OMPP. b) 1990 Ontario Motorist Protection Plan (OMPP) The OMPP represented a fundamental shift in focus from the primary delivery of compensation through the tort system to compensation primarily being paid directly for physical damage and no-fault accident benefits for injuries. In exchange for these higher accident benefits, access to the right to sue for damages for both economic loss and pain and suffering was restricted to cases involving death or injuries that were permanent, serious and physical in nature. The changes also adopted a number of recommendations set out in the Osborne Report. In addition, a system for rate approvals was introduced along with a mediation and arbitration system for disputes between claimants and insurance companies. This was delivered outside of the courts through the Ontario Insurance Commission (the predecessor to FSCO). c) 1994 Bill 164 In September 1990, a New Democratic government was elected. Its platform had included the establishment of a public auto insurance system. In September 1991, the government decided not to proceed with a government-run system and instead implemented an expanded accident benefits schedule in January 1994, in Bill 164 SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 25
(Insurance Statute Law Amendment Act). The reforms significantly expanded the level and access to accident benefits while eliminating the right to sue for economic damages and expanded access to sue for pain and suffering for serious injuries. An increase in costs and in premiums followed. d) 1996 Bill 59 Following the election of the Progressive Conservative Party in 1995, the government reintroduced the right to sue for economic losses and continued limited access to court for pain and suffering with a $15,000 deductible. The mandatory medical and rehabilitation coverage was also reduced to $100,000 for non-catastrophic injuries and $1 million for catastrophic injuries. Other changes included the ability for the Commissioner of Insurance (predecessor to the Superintendent of Financial Services) to issue fee schedules for health care providers and services, and the requirement for providers to submit treatment plans and seek prior approval before commencing treatment. While costs and premiums stabilized initially after 1996, by 2000 costs had again risen substantially. e) 2003 Reforms In response to the sharp increase in the costs of both accident benefits and court settlements, premiums increased significantly through 2003 triggering action by the government. In 2003, a number of significant reforms were implemented including Bill 198, Keeping the Promise for a Strong Economy Act (Budget Measures), 2002, introduced by the Progressive Conservative government: Introducing a Pre-approved Framework (PAF) guideline for the treatment of whiplash injuries, which accounted for the majority of automobile insurance medical and rehabilitation claims. A limit was set on the amount that could be billed without prior approval; Reducing the maximum hourly rate by 30 per cent for most health care providers by issuing professional fee guidelines; SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 26
Expanding the right to sue for excess health care expenses; Doubling the deductible for court awards for pain and suffering to $30,000 (and $15,000 for family members for Family Law Act awards); Initiating a regular review of the automobile insurance system every five years to be conducted by the Superintendent of Financial Services and to be reported back to the Minister of Finance. Later in 2003, the Liberal government introduced the Automobile Insurance Rate Stabilization Act, 2003 (Bill 5), as a temporary measure to freeze auto insurance rates and facilitate a rate reduction of 10 per cent. Bill 5 also increased the authority of the Superintendent to deal with rate applications. As with most previous cycles, the reforms were generally followed by a reduction in premiums and more stable costs. However, premiums again began to rise in 2008, although the average nominal premium only returned to the 2003 level by the end of 2009. Rising costs and premiums led the government to address the design of the auto insurance product utilizing recommendations set out by the Superintendent of Financial Services in the Report on the Five Year Review of Automobile Insurance, March 31, 2009, and other work. Reforms were implemented by the government in September of 2010. Although average automobile insurance premium increases have held below the rate of inflation since 2004, 5 the government continues to focus on emerging automobile insurance issues. Initiatives were included in both the 2011 and 2012 Ontario Budgets aimed at preventing the cycle of rising costs and premiums from reoccurring. The following chart illustrates the cyclical premium pattern described in this section. 5 2012 Ontario Budget, Budget Papers, Strong Action for Ontario, Chart 1.9, page 56. SUBMISSION TO THE STANDING COMMITTEE ON GENERAL GOVERNMENT Page 27