Auto insurance rancour heats up

The rancour among personal injury lawyers and the insurance industry continues to heat up with both sides trading accusations over who’s responsible for high insurance premiums in Ontario.

Earlier this month, a study commissioned by the Ontario Trial Lawyers Association suggested Ontarians had overpaid for auto insurance by about $3.1 billion between 2001 and 2013. The Insurance Bureau of Canada, meanwhile, accused lawyers of being behind the high costs, arguing they received $500 million from injury claimants out of their insurance settlements in 2013.

“If the lobbyists and well-heeled lawyers want to know who is driving up insurance costs, they need to take a look in the mirror,” says Ralph Palumbo, the insurance bureau’s Ontario vice president. “Personal injury lawyers and their sky-high fees are putting justice out of reach for too many Ontarians. Perhaps it is time that lawyers also reduce their fees to further reduce costs to consumers.”

The study released by the lawyers’ association, however, found “premiums have been too high, and consumers in Ontario have been paying too much for auto insurance.”
The researchers, Fred Lazar and Eli Prisman of York University’s Schulich School of Business, found the profit cap imposed by Financial Services Commission of Ontario for insurance companies is excessive.

In 2014, the commission capped the return on premiums at six per cent, which is equivalent to about a 12-per-cent return on equity, according to the researchers. “The six per cent return on premium benchmark is out of line with current financial market realities,” the authors wrote.

The researchers, who had previously done work for FSCO, said they had recommended a gradual reduction of the profit cap to a 5.6-per-cent return on equity, which is the equivalent of a 1.8-per-cent return on premiums.

“Auto insurance companies in Ontario have had a relatively free ride during the past 20 years. Since the [returns on equity] permitted by FSCO since 2001 exceeded the [returns] we estimated for the auto insurance industry, it is conceivable that premiums have been too high and as a result, consumers in Ontario have paid too much for auto insurance. The possible over-payments range as high as $685 million, with total over-payments of approximately $3.1 billion between 2001 and 2013.”

Steve Rastin, president of the trial lawyers association, says the findings surprised him.

“I think we all believed the industry was overcharging for coverage, but I was surprised at the magnitude consumers are being overcharged by,” says Rastin, who argues the government should now “do the right thing” and reduce the profit caps for insurance companies.

The association would also like the auditor general to conduct an independent review of the insurance industry in Ontario.

The insurance bureau, however, was quick to discredit the study. The authors “are reaching completely misleading conclusions about the industry profits by excluding one-third of the industry,” it said in a statement. When taking into account all insurers, the return for the industry was very small, it suggested.

Lazar denies the excluded portions of the industry amount to one-third. While he can’t say with certainty what the percentage is due to a lack of public data, he believes the number is about 10 per cent. In the study, the researchers noted they had excluded companies with negative returns for good reason.

“It is reasonable to exclude the companies with negative [returns on equity], especially over an 11-year period, and focus on the profitable ones,” they wrote. “Economic theory is quite clear that unless a company earns at least a risk-adjusted, competitive rate of return over time, the company will exit the industry. For a company with negative [returns] to remain in the industry, either the accounting rules employed understate its profitability from an economic perspective, or the business unit with a negative [return] generates value for one or more other business units in the company.”

When it comes to the role of legal fees in insurance costs, Rastin says lawyers are among the most heavily regulated of professions. With counsel and their clients arranging the fees, it’s clear lawyers don’t drive up costs, he suggests, noting those who are unhappy with their legal bills can seek a free assessment by the courts.

“It is a mistake to believe the big insurance hype that we need to be looked at or regulated. We’re already heavily regulated,” says Rastin.

Lazar says when FSCO retained him and Prisman in 2013 to look at the issue, the duo concluded the profitability benchmark should have fallen over the last 20 years to a 5.6-per-cent return on equity by 2012. Since suddenly lowering it from the existing 12 per cent to six per cent would have been “too drastic,” the recommendation was to lower the profit cap progressively over a 10-year period, Lazar adds.

Since their recommendation, two things have happened, according to Lazar: “One, they [FSCO] initially cut the benchmark from 12 per cent to 11 per cent and more recently . . . they changed their methodology to a return on premium rather than a return on equity.”

The chosen return-on-premium benchmark is six per cent when the equivalent of an 11-per-cent return on equity should have been about 5.3 per cent, says Lazar. “So what they’ve done is actually increase the profitability benchmark but they’ve obfuscated this by introducing this new rule.”

For its part, FSCO believes the six-per-cent return-on-premium benchmark is “in line with current financial market realities based on the recommendation provided to FSCO by the consultants,” said FSCO spokesman Malon Edwards. “The OTLA study . . . is inconsistent with the recommendations in the 2013 report provided to FSCO. In the 2013 report, the consultants [Lazar and Prisman] recommended [a return on equity] of 11.24 per cent, based on a 10-year rolling average process and the rolling average process be used for subsequent years. This would result in [a return on equity] of 10 per cent for 2014, not 5.7 per cent that is now suggested in this report prepared for OTLA.”

Consumer advocacy groups, meanwhile, are calling for “a fresh start” with new insurance legislation. “What we need is a fresh start, a new Insurance Act for a start and an end to the empire-building and turf-protection stance we now have in this highly polarized situation,” says Rhona DesRoches, board chairwoman of the FAIR Association of Victims for Accident Insurance Reform. “It’s a shame that while these well-heeled lobby groups are so busy slinging mud at each other . . . no one seems to notice that tens of thousands of injured auto accident victims are being forced to sit in that mud for many years while they wait for the right thing to be done,” she adds.   

For more, see "IBC wants regulation for personal injury lawyers."

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