Car insurance signs clear: bumpy road ahead Complex reasons for rising rates
THOMAS WALKOM Toronto Star June 21 2003 Ontario's auto insurance system doesn't work. After three governments and almost 15 years of tinkering, that's the sad reality. The obvious problems are well known. Premiums are shooting up and companies are getting stickier about renewing policies. The average Ontario driver pays about 20 per cent more in auto premiums than he did last year. But the more troubling figure is the growing number of drivers refused policies by the province's 164 car insurers. These people — and there are roughly 80,000 of them now — have been forced into the so-called Facility Association, an insurer of last resort that is owned by the private firms and which charges considerably higher rates. Last year, according to association head Dave Simpson, there were only about 20,000 drivers signed on with the Facility. For the government, this should be the canary in the coal mine, the early-warning signal that something is wrong. The Facility is supposed to insure only the very worst drivers in the province, those whose accident record is so bad that no sensible person would cover them. But when relatively good drivers find themselves forced to pay Facility-style rates, politicians know they are in for a pasting. Some of the problems in the Ontario system are endemic to insurance. In essence, insurance is a kind of legalized pyramid scheme: The insurer agrees to cover all his policyholders if they have car accidents, but he's betting that only a small number will be making claims at any one time. If the cost of servicing those claims rises unexpectedly, the insurer is forced to find the money to cover his bets — either by raising premiums or refusing to write policies. Insurers say that's what is happening in Ontario. They complain that the benefits they are shelling out to accident victims — particularly for so-called soft-tissue injuries such as whiplash — are out of control. George Cooke, president of Dominion of Canada General Insurance Co., cites one comparison the industry likes to use: In 1992, insurers paid out $380 million for rehabilitation and assessment to car-accident victims; by 2002, that number had climbed to $1.5 billion. The other endemic problem involves the stock and bond markets. Insurers don't simply stick their customers' premiums under the mattress. They invest them and either keep the profits or use them to cover some of their claims costs. The amounts involved are not trivial. The Insurance Bureau of Canada, the private industry's trade association, reports that Canadian property and casualty firms (which write auto policies) made $2.2 billion from investments in 2002 — money they used to cover the $1.4 billion they lost on underwriting. Insurers like to say that they are subsidizing customers' rates when they do this. In fact, a good case can be made that customers are subsidizing insurers by allowing them to use their premium money interest-free. In any case, when the bond and stock markets falter — as they have over the past two years — insurers try to compensate by raising the rates they charge customers. In 2002, according to the Insurance Bureau, investment income to property and casualty firms dropped by almost 20 per cent. No wonder then that they responded by raising rates to car drivers by about the same percentage. But the other, more telling, problems with the Ontario system are more specific to this province. Ironically, one is the industry's very competitiveness. There are 164 firms selling auto policies in Ontario. In good times, they compete furiously to lower rates. In bad times, they compete furiously to raise them. The result is a rate instability that many drivers find maddening. Recent history illustrates this. In 1996, Ontario's economy was rebounding from recession. Stock markets were up, which meant insurers were flush with cash. At the same time, the newly elected government of then-premier Mike Harris had just passed a new law that reduced benefits to car accident victims. Insurers scrambled to get customers. The key for many was to gain access to that interest-free premium money that they could then invest profitably in financial markets. And so, with costs down and potential revenues up, they cut premiums. According to Ontario's finance ministry, average premium costs in Ontario fell steadily, from $1,019 in 1996 to $918 in 2000. After that, they started to climb again until, by 2002, according to the government's Financial Services Commission of Ontario, rates were back at 1996 levels. Or, to put it another way, over the last seven years, auto insurance premium increases have averaged less than 3 per cent annually. If all drivers had experienced this, they might be more understanding. But averages do not take into account individual reality. Over seven years, people's circumstances change; they move (which may affect their rates) or buy new cars (which may raise them). A driver paying $2,300 for insurance on his SUV today may have been paying far less six years ago for coverage on his old sedan. Or he may not remember what he paid. As any politician can attest, voter gratitude has a limited shelf life. So that is one problem with the auto insurance system in Ontario. Rates are volatile. By and large, people do not appreciate volatility in the price of necessities. The second problem has to do with deliberate policy. In 1990, Ontario moved to a form of what is called no-fault auto insurance, a system that severely limited the role of lawsuits. Insurers, who had lobbied for no-fault, were delighted. In theory, no-fault should work splendidly. You get into a car accident; you receive appropriate benefits, whether it is money to fix your car or to fix you. No muss, no fuss. No need to wait (as under the so-called tort system) for rival insurers to fight out compensation levels in court. No need for high-priced lawyers. But no-fault introduced an entirely new problem. By establishing set benefits for accident victims, the government had unwittingly set targets. Now, someone who had been in a car accident could feel he was entitled to the $100,000 his policy promised him — whether he needed it or not. As Justice Coulter Osborne had suggested in 1988, in a report produced for and shelved by the then-Liberal government, reducing the role of the courts removed a certain external discipline from the process. As well, no-fault explicitly introduced new interest groups into the political equation. Physiotherapists, chiropractors and registered massage therapists now had a vested interest in the government's new no-fault benefits package. As long as rates were low, few cared. But every major hike in premiums forced the government to intervene. In 1996, the Mike Harris Tories passed a new law designed to reduce premiums by limiting benefits to accident victims. For the last 10 months, the Ernie Eves Tories have been struggling in protracted negotiations with the various vested interests to try and do the same thing all over again. The answer this time, according to Mississauga MPP Rob Sampson, the government's auto insurance point man, is to try and put a regulatory lid on the length, type and amount of rehabilitation services a typical auto accident victim might get. It's an oddly intrusive solution for a government that purports to hate red tape. But given the swamp that Ontario auto insurance has become, it is not illogical. Is there an alternative to Ontario-style private, no-fault auto insurance? The obvious one is a public system that allows lawsuits. The New Democrats are campaigning on this again, but thanks in large part to the experience of former premier Bob Rae's government (which promised public insurance but backed down ignominiously after finding it too difficult to do), they are not terribly credible. This is unfortunate. Public insurance remains stunningly popular in the four provinces — Manitoba, Saskatchewan, Quebec and British Columbia — that have so far adopted it. After a full-scale review, even British Columbia's right-wing Liberal government has decided to keep public insurance. Much to the anger of private insurers, Premier Gordon Campbell concluded that reintroduction of a full-scale, Ontario-style, private system would raise rates and disrupt drivers. Indeed, the evidence from British Columbia indicates that the economies involved in a public monopoly (similar to those that medicare enjoys) allow B.C. drivers to enjoy rates that are significantly below those charged Ontario drivers, while at the same time not penalizing victims. For unlike Ontario and other no-fault provinces such as Manitoba and Quebec, British Columbia allows all of its accident victims to sue. However, perhaps the most important element of public insurance is rate stability. Drivers don't necessarily benefit from cuts when times are good (in British Columbia, premiums were frozen between 1995 and 2001). But they don't suffer abrupt rate hikes when things turn bad. Usually, governments like this state of affairs. Drivers don't mind it either.
