Oct 09
28
Auto Insurance Reform
Automobile insurance reform in Ontario is long overdue.
The Superintendent of the Financial Services Commission of Ontario (FSCO) has an obligation to review automobile insurance every 5 years. In March of this year the report was submitted to the Minister of Finance. There were 39 recommendations made by FSCO to the Minister to improve automobile insurance.
Public outcry over the last decade has demanded two criteria from the Automobile policy in Ontario: Increased benefits or coverage and lower premiums. As a business model this will eventually fail. It’s failing now.
Any business that has greater expenses than income received will eventually cease to exist. Apply this to automobile insurance in Ontario; if the Insurance Company’s costs are increasing, and the premiums are decreasing, the Insurer will eventually be unable to operate.
To review their profitability, Insurance Companies calculate the total claims paid plus any unpaid claims reserves still open and they divide this amount by the total premium collected. Unpaid claims reserves include funds set aside to pay a possible future settlement. For example: you hit a pedestrian with your car. It may take 5-7 years for lawyers on both sides to determine if your Insurance Company should pay anything to the pedestrian. Your Insurance Company sets aside $30,000 in the event they have to make a payment. They have to keep that money aside until the claim is settled.
Increased costs in everything from hourly wages of mechanics & lawyers, costs to repair vehicles, medical & rehabilitation costs, and administration are weighing heavily on this system and in turn, Insurance Companies have increased their automobile premiums in an attempt to recover some of their losses.
As consumers, we quickly forget the basic principal of insurance: The losses of the few are paid by the premiums of the many. To which We quickly respond: Why should I have to pay for some other person’s mistake? My answer would be: The annual premium you pay now is far less than the repair bill you might have to pay without an insurance policy.
The Insurers have some thinking to do as well. How could Insurance Company X charge a lower rate for the same product that Insurance Company Y is offering?
Poor Insurance Company management and a lack of underwriting discipline are contributing factors to the increased premiums of today. If Insurance Companies drop their rates to become more competitive, or to attract new business, they are taking a chance with funds that could be used to cover their expenses. If they ease up on their underwriting criteria and accept greater risks, those greater risk clients could contribute to increased claim costs.
As well, if an Insurer does not take a regular rate increase to cover their costs on a regular basis, they’ll have to play ‘catch-up’ at some point. What ends up happening is Your Insurance Company doesn’t increase your rate dramatically for three years and they keep you as a client (because you are happy). They send you your renewal in the fourth year, with a large increase to cover the increases they should have taken over the last three years, and you are no longer satisfied. Finding a happy medium for all parties is challenging at best.
It doesn’t take much proof to substantiate Reform in Automobile insurance is a necessity. A ‘bail out’ to the Insurers in Ontario by the Provincial or Federal Goverment won’t help. That’s just a band-aid solution to a problem that requires surgery. Having the Province of Ontario become the automobile insurance carrier for the public would end with worse results than we already have. This is not a solution either. The private sector is held to a higher standard of care than our crown corporations are.
It is my opinion that a reduction in claims costs & expenses from the independant broker channel, the Insurance Companies, and the policyholders (the public) will help turn this around in the right direction.
We might even end up with more stability in our premiums.
