Industry must focus on cost management to fix Ontario auto system

Sharon Tennyson tells IBC Regulatory Affairs Symposium that there is hope for Ontario auto

Regan Reid on November 1, 2013

Tennyson gave the luncheon address, “Ontario auto—Great Expectations,” at the Insurance Bureau of Canada’s 2013 Regulatory Affairs Symposium in Toronto on October 31.

Read: Insurance industry faces “rising tide” of risks

Though she sees some positive industry developments, Tennyson began with the bad news about the Ontario insurance system.

“The hard truth is that auto insurance systems like Ontario’s—partial no-fault systems with generous first party benefits—are expensive systems. They’re expensive systems because they’re offering more benefits to consumers than other systems, whether they be tort systems or government-run systems,” she said. “So small changes around the edges of that system are not going to change that fundamental fact.”

One of the big issues plaguing the product, she said, is moral hazard.

See: Photos from the 2013 IBC Regulatory Affairs Symposium

“By moral hazard, I mean making benefits available tends to attract claims. This can happen either by extra risk taking, extra use of benefits, or in some cases, even outright fraud,” she explained.

To demonstrate this theory, she presented some startling statistics:

•    Soft tissue injury claims are 42% more prevalent in US states that permit unlimited general damages awards

•    Canadian drivers who choose replacement cost coverage for automobile theft losses are nine times more likely to report theft, but only when the policy is near the expiration date.

So how can the industry combat moral hazard?

Read: Premier Wynne addresses 15% rate cut at IBAO convention

“You need to think about the processes that govern how premiums are determined, how benefits are determined, how access to benefits and insurance are determined. Those things are important. Reforms so often focus on the product—let’s cap the amount of benefits, let’s cap the amount that you can claim for a small injury.”

She gave the example of claims severity for sprains and strains in Massachusetts. She presented a graph that showed that the large majority of sprain and strain claims were under $1,000, but there was a spike in claims at $2,000.

“When Massachusetts changed its threshold to $2,000, you got claims attracted by the threshold because claims that meet the $2,000 threshold are eligible to also gain tort compensation, third-party compensation,” she explained.

Read: Industry urges Ontario to adopt Anti-Fraud Task Force recommendations

“Under the previous threshold, which was $750, you didn’t see this second peak [in claims] at $2,000. Guess what! You saw a second peak at $750. So you change the threshold, the peak in claims severity migrates out to meet the threshold: a clear example of moral hazard, but a big problem with thresholds.”

If claims costs are being driven up because of moral hazard and fraud, and if Ontario doesn’t want to completely scrap its system, Tennyson again stressed that the industry needs to focus on cost management—something she thinks regulators in Canada are starting to realize.

Read: Auto rate cuts are coming to Ontario, like it or not: IBAO CEO panel

“I think there’s a greater sense of realism, perhaps, on the part of regulators. For example, there’s concern amongst insurers about this 15% rate reduction. But as I read about it, the encouraging news is there’s not an intention to make it a 15% across the board rate roll back. Maybe that’s a small thing, but that’s an important small thing in terms of trying to adjust processes.”

She also praised the Anti-Fraud Task Force report as a step toward sustainable process reforms.

“If acted upon, it provides some great opportunities for making improvements in the performance of Ontario’s auto insurance system. Now it comes down to effective regulatory implementation.”