The Interim Report of the Ontario Auto Insurance Anti- Fraud Task Force released earlier this month is more interesting for what it doesn’t report than what it does.
Last week’s report on auto insurance regulatory oversight by Ontario Auditor General Jim McCarter presents a compelling argument for placing Ontario’s car insurance industry under a microscope. Here are the highlights, as I see them.
• In determining insurance premiums the Financial Services Commission of Ontario — the Ministry of Finance agency empowered to regulate insurers — factors in what it considers a reasonable rate of profit. That rate is based on a 12% return on equity. But this was set in 1996 when the long-term Canadian bond rate was 10%. Long-term rates are now about 2.6%. Rates have been low for a long time and are forecast to remain low, so why are insurers allowed to charge premiums based on out-of-date data?
• While FSCO reports premium approvals on a quarterly basis, it’s impossible for consumers to correlate their premiums to the approved premiums, thereby allowing insurers to charge illegal rates. The AG cited insurer over-billing errors of between $1 million and $11 million. Since most of the illegal rates were self reported, we have no means of knowing the full extent of over-billing. Indeed, as the AG pointed out, FSCO has no procedure for determining if insurers are charging their approved rates.
• FSCO has a policy of approving an insurer’s proposed rates even if it’s up to 3% higher than FSCO’s calculated rate. The AG cited one case where FSCO allowed a rate increase 8% higher than warranted by FSCO’s determination, which could have resulted in an additional $25 million in premiums for the insurer.
• In 10% of all rate increase filings between 2006 and 2010, FSCO approved a rate higher than initially requested. Worse, there was inadequate documentation to support these decisions.
• FSCO is responsible for providing a timely dispute resolution process between insurers and accident victim claimants, yet in the 2010-11 fiscal year, most mediations were dealt with 10 to 12 months following requests. Worse, the number of mediation requests is growing quickly and while the AG didn’t point this out, there can be a delay of two years or more before mediation and arbitration procedures are completed. Apparently FSCO doesn’t capture any information on the reasons for the increasing mediation/arbitration case load. Clearly, accident victims are not satisfied with the handling of their claims, and for good reason, based on the arbitration decisions I’ve read.
• Insurance fraud is rampant … or is it? Without attempting any real analysis, the AG quoted the insurance industry’s estimate of $1.3 billion of fraud a year. Never mind that this figure appears to have remained static for 20 years. Never mind the Ontario Auto Insurance Anti-Fraud Task Force Interim Report released earlier this month stated the $1.3 billion figure “cannot be considered a verifiable measure of the extent of fraud.†The Alliance of Community Medical and Rehabilitation Providers calls the $1.3 figure “baseless†and insists an independent investigation be undertaken to determine the extent of fraud. As they say, the “insurance industry has an incentive to over-report the problem in order to push the government to dedicate the highest possible resources to this issue and hence remove costs and responsibility from them.â€
• Insurers are required to reimburse Ontario for the health care system costs of accident victims. But the amount paid by insurers hasn’t increased since 2006, even though health care spending has risen by about 25%.
• FSCO doesn’t conduct any reviews to verify if insurers handle claims judiciously or pay proper amounts to claimants.
Knowing Ontario’s car insurance premiums are the highest in the country, while Ontario simultaneously has the lowest cap for services for those deemed to have suffered a “minor injury,†the AG’s report is convincing evidence why an independent inquiry into car insurance is necessary. Indeed it’s long overdue.
