Focus: Insurance company profits under microscope

Competing financial statements were on the table as hearings on the auto-insurance industry before the standing committee on general government resumed in mid-April.

The flurry of financials is the result of an MPP advisory sent out by the Ontario Trial Lawyers Association in March 2013 that alleged the Insurance Bureau of Canada is misinforming officials about insurance premiums, claims costs, and profits. It pointed to the “embarrassing” increase in profits since the 2010 reductions in benefits and claimed the insurance system now greatly tilts in favour of insurers.

“We called them out,” says Andrew Murray, president of the OTLA. He notes the strong wording of the letter stemmed from data available on the web site of the General Insurance Statistical Agency that assists insurance regulatory authorities with governance, accountability, and oversight. “There is a fine level of detail collected from premium and claim information that lets regulators see if the aggregate industry is providing a return that is inadequate or excessive or unfairly discriminatory,” says Murray.

The Insurance Bureau of Canada responded by publishing an actuarial analysis from JF Cheng and Partners on March 28, 2013, and then a KPMG LLP-authored analysis of Ontario private passenger automobile insurance results for 2008-12. The actuarial analysis relied on data from the Beyond 20/20 database and KPMG used information from the Office of the Superintendent of Financial Institutions. Both reports cited shortcomings in the statistical agency data and the challenges in drawing conclusions from it.

Murray addressed the different approaches when testifying before the resumed standing committee hearing. “I said to the legislature that it shouldn’t be this hard to find out the figures,” he said.

“I asked that the auditor general do an independent review and ask what the savings have been.”

The OTLA analysis showed the cost of claims was $6.5 billion, an amount representing 56 per cent of premiums.

“The IBC says $8.15 billion,” says Murray.

“There is a $1.5 billion gap, which is way too much money to have a philosophical discussion about.”

The OTLA suggests the industry’s own data shows injured accident victims have paid the price for the sector’s dramatic turnaround through restricted coverage and limited treatment. Its members report seeing many cases where people have run out of treatment dollars either because they fall under the minor injury guidelines or they’ve exhausted their $50,000 in medical and
rehabilitation coverage.

The NDP has also relied on the statistical agency data to demand a premium reduction from insurers. During an opposition day on April 10, the NDP introduced a motion to have the Financial Services Commission of Ontario mandate a 15-per-cent reduction in auto insurance premiums within the next 12 months. The Liberals supported the motion. The NDP cited statistical agency figures that show the insurance industry’s benefit costs dropped by $2 billion following the 2010 auto insurance reforms without any corresponding reduction in premiums.

In its submission before the standing committee, the Insurance Bureau of Canada reiterated its contention that rising costs are resulting in premium increases and that the best way to combat them is through reforms tackling fraud and the mediation backlog in the province. It professed a willingness to reduce rates if the government addresses those matters.

The Insurance Bureau of Canada representatives relied on the actuarial analysis that found a return on equity of 5.5 per cent in 2012. It also referred to the KPMG report that stated: “Despite the improvement in results, return on equity remains well below the 12 per cent permitted in FSCO’s pricing model and well below returns on equity that would be expected by most private businesses.” A 3.6-per-cent reduction in premiums, unless accompanied by decreases in claims costs, would wipe out industry profits, the report noted.

“It shouldn’t be all about the reduction of premiums,” says Murray.

“Let’s not lurch from one crisis to another. Let’s look at longer horizons. We will probably need to ratchet up [minor injury guideline] benefits to $10,000 or $15,000, so let’s not apportion all the savings to reduction of premiums. Let’s deploy it holistically to make it a better system.”
The OTLA talks about what it calls the three Ps: profit, premium, protection. Murray compares it to a three-legged stool. “Don’t just lop off the premium leg and put the protection side out of balance.”

Another study that will be of interest in the debate is the review conducted by FSCO of the 12-per-cent benchmark for the insurance industry’s return on equity. The review follows recommendations by the auditor general in 2011 and is expected to be complete by the spring.

Another arena where industry profits are sure to arise is the renewed consideration of the catastrophic impairment provisions. The provincial government has reopened the issue by starting stakeholder consultations not restricted to medical experts as was the case with last year’s review by FSCO.

“Where’s the fire?” asks Dale Orlando of McLeish Orlando LLP in relation to the catastrophic impairment review. “They’re searching for a solution to a problem that simply doesn’t exist. Around one per cent of claims are deemed catastrophic. On a claim-by-claim basis, it’s a lot of money, but in the scheme of things, there’s no evidence that there’s been an upswing in costs.”

For more, see "Targeting insurance fraud."

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