The Need to Reform Auto Insurance

Recent headlines regarding billions of dollars in profits for the insurance industry have confirmed what we have known for some time: the industry is viable and the dramatic erosion of the rights of innocent accident victims has translated into huge profits for insurance companies.

It should be clear to anyone who has followed the auto insurance debate over the last 5 years that when the insurance industry cried “poor”, they were really crying “wolf”. The reforms introduced as of October 1, 2003 (including a harsh definition of the verbal threshold and an increase in the deductible) were motivated by politics and sparked by threats from the insurance industry. It is clear that the changes which further eroded the rights of innocent accident victims were not necessary to maintain a viable insurance industry.

Publicity about insurers’ good fortune has focussed almost exclusively on premiums. While premiums are vitally important to all (particularly as a hot political issue), it appears that the so-called stakeholders have lost sight of the need to balance an affordable product with the rights of accident victims. The product we buy with our premium dollars is a much-diminished product. Accident victims are almost universally shocked at the inadequacy of the protection they receive; something they do not discover until disaster strikes.

Restoration of some of the rights of innocent accident victims ought to be a priority. This can be done without disgorging all the profits made by the insurers. The insurance industry has failed to concentrate on reduced costs and waste, and reduce its internal expenses of administering such a complex product. The Ontario Government has decided to focus on eliminating DACs. However, it is the entire accident benefits scheme that must be overhauled to really find savings in costs that can translate into a restoration of rights.

In our view the insurance industry has used the wrong approach to seeking reduction in premiums for auto insurance.

The approach taken has resulted in reduced costs through the dramatic reduction in the value of the product the consumer buys. This is done with little or no consumer awareness of the reduced value until they become accident victims. The industry has been involved in “risk transfer” but has called it “insurance reform”.

Liability insurance is concerned with protecting the innocent from the guilty. The reason we have generous minimum insurance limits in Ontario is to provide that very protection. The recent changes to auto insurance have moved significantly away from that fundamental principle.

How has Industry Found Savings?

Any costs savings achieved have been at the expense of the accident victim, without addressing other systemic problems with auto insurance.

We have a verbal threshold and a deductible. This is redundant. They are both designed to remove small claims from litigation. One will do so without the other.

We have a deductible that is so high, any objective person can demonstrate that it effectively eliminates many “serious” claims. The October 2003 change has re-introduced the word ” continuous” to the threshold. Concern about erosion of the threshold by the courts did not justify this gross overreaction caused by the new definition.

We have a new definition of the verbal threshold which the insurance industry now wants entrenched in legislation. Ontario has the harshest verbal threshold in all of North America. We have an accident benefits system that is so layered with complexity that it makes it virtually impossible for any but the most sophisticated to negotiate through it. It is also worth noting that many experts feel that enhanced accident benefits result in exaggeration and abuse, leading to fraud.

Premiums are a reflection of many factors, primarily “costs”. When we talk about costs, we must include: tort payouts; accident benefits payouts; and, administrative costs. The industry has sought to reduce costs relating to tort and SABS, without adequately dealing with administrative costs. Added complexity increases administrative costs. We are not proposing to tell insurers how to run their business. There has been evidence that insurers have been reducing expenses in recent years. At the same time there is clear evidence that some insurers do it a lot better than others. We are talking about the cost to administer an auto insurance system that has become increasingly complex and cumbersome since significant no-fault benefits were introduced in June 1990 under OMPP. More will be said in a moment.

The U.S. experience has shown that states with mandatory no-fault systems have the highest liability premiums. Moreover, premiums rise quicker in mandatory no-fault states.

Current Approach of Insurance Industry

The insurance industry wants to impose additional limits on accident benefits while at the same time ensuring that innocent accident victims cannot make up those real losses by claiming them in tort.

When it suited their purpose the Insurance Bureau of Canada (“IBC”) expressed concern about the huge administrative cost of the accident benefits system. In the IBC submissions to the government of October 17, 2001, it was clearly recognized that the main challenge under Bill 59 was the control of medical and rehabilitation costs (page 6). It went so far as to say that:

“…motorists have unknowingly been required to finance the unjustified enrichment of some healthcare providers… When consumers understand how little of their money goes to seriously injured people, there will be concern…” (page 8)

“The costs associated with the medical, rehabilitation and care components of accident benefits are a great concern to Ontario insurers, threatening to make insurance unaffordable… There is no evidence that victims of Ontario collisions are receiving any tangible benefit from the exorbitant money being spent on their behalf.” (page 9)

In spite of these statements, the savings for the system were sought at the expense of innocent accident victims. No real attempt has been made to deal with these concerns. Moreover, many of the changes introduced (i.e., pre-approved framework, pre-approval of assessments, etc.) will have contributed to additional administrative costs, likely without any tangible benefit to injured parties.

In the meantime, the IBC continues to promote changes to auto insurance that will further harm innocent accident victims. The insurance industry is promoting a commutation of future unpaid collateral benefits with a view to deducting the future unpaid total of benefits from tort awards, without making the responsible insurer pay the benefit leaving the problem of collection with the insured. If they don’t collect the benefit, both tort and benefit insurers are unjustly enriched while the injured person does without.

Just when it seemed impossible to erode the rights of innocent accident victims further, the insurance industry also proposes customized coverage. It is worth talking about the fiction of customized coverage.

We must recognize some realities about customized coverage:

• People do not pay premiums for costs that aren’t incurred. Where an insured opts out of coverage that they would never have accessed, and therefore don’t need, there will be no cost savings.
• Costs savings will only be realized where the insured opts not to take coverage that they otherwise would have needed.
• In other words, for there to be cost savings under customized coverage, consumers must choose to give up benefits and therefore accept a lesser product. That is, the insurance industry is saying to the consumer, we are not going to cover you for some real loss you suffer and therefore you don’t have to pay us a premium.
• The reason for savings under customized coverage is because consumers will have to make do with less. Consumers will assume the risk for these losses, even though the underlying rationale for insurance is to avoid and spread risk.
• According to the IBC, insurance is intended to provide for “peace of mind” and “allow Canadians to go about their lives without fear of financial devastation”. This means we should buy a quality product for our premium dollar.
• On the chance that a loss is suffered the insured buys insurance so that “the uncertainty connected with it is removed” (these are the words of the IBC, 2004). As we diminish the coverage, and essentially shift the risk of loss back from the insurer to the insured, we increase the uncertainty for the insured.

At the same time, it is proposed that the consumer bear the responsibility for making poor coverage choices by insulating their brokers and the insurance industry from accountability in advising consumers. In other words, brokers will be compensated for their expert advice, but not be expected to stand behind it.

The IBC-promoted changes offend fundamental insurance principles and diminish the value of the product to the consumer because they are effectively shifting the risk back to the insured. As tort rights are further eroded and as more and more money is spent on stakeholders in the process, other than the insured, there is a further shift in risk back to the insured and a diminished product. With customized coverage as proposed by the IBC, there is a further shift of risk to the insured and a devalued product.

This shift in risk is due to a system that is outrageously expensive to administer, confers no significant advantage on the injured party over and above earlier schemes, and undermines the protection consumers think they are buying.

Why We Need Reform

Over-generous no-fault benefits, fraud and impossibly complex claims administration processes are largely behind the difficulties we face in auto insurance. This system is not sustainable and comes at too high a cost to the consumer in relation to the value they receive.

The product must be reformed. It is badly designed. It is wasteful and inefficient. Patch-work changes have made the problem worse. The consumer is not getting value for their premium dollar and is unwittingly assuming greater and greater risk with each successive patch.

Yet the expense to the insurance industry and, therefore, the costs to the driving public, for injury-related expenses are way up. This is due to the industry that has grown up in the wake of nofault. We need to shrink the bureaucracy that has overwhelmed us and consumed so many of our premium dollars. If the system is simplified, you incur less cost for salaries, rent, lighting, paper clips, training, staff turnover etc. There are too many players in the system resulting in waste and inefficiency:

• Insurance adjusters
  • More claims people are needed today.
  • Those claims people need more training.

The IBC said in October 2001:

• “Some observers have correctly noted that the insurance system has become very complex and that insurers are required to devote a lot of resources to claims management. The human resources challenges are daunting. Administration of SABS claims is a daunting challenge. Insurers estimate that the internal cost of dealing with these claims is two to three times the cost of managing other kinds of complex insurance.” (page 8).
• Insurer medical assessments and DACs
  • More must be spent on insurer examinations.
  • DAC assessment costs are significantly higher than assessments in other systems.
• FSCO
  • How much time and money is spent over SABS disputes?
  • Multiple proceedings for a single injured person.

To counteract these expenses, the insurance industry has proposed taking away from tort rather than addressing the utility of the no-fault concept. The SABS are too generous and, more importantly, too complex. Each time the insurance industry tries to plug a loophole or problem, another rule is made, more steps are added, and more forms are required. More people need to be trained and more time is spent to administer the claims. Ontario offers a no-fault benefits system that is far more generous than any other province.

Recommended Approach

The opposite approach is needed. We need to do the following:

• Reduce the complexity.
• Reduce the number of forms.
• Reduce the quantum of benefits, except for very serious claims. Experience in the U.S. has shown that repealed mandatory no-fault schemes have resulted in cost savings.
• These changes will also reduce the opportunity for fraud and exaggeration which has developed under SABs.
• Take the insurance industry out of the business of making health care decisions.
• Keep a verbal threshold that effectively eliminates non-serious cases.
• Allow all seriously injured people to claim in tort for real losses actually incurred.
• If commutation of benefits is to occur, fairness demands that they be paid at the time of quantification.

Whatever happened to the approach that required an auto insurance system that is fair, balanced and cost-effective?

In October 2000, the IBC submissions to the government recommended that “tort access should be extended to all injured accident victims for health care costs,” yet now the claimant must meet the very harsh threshold to claim for health care costs in tort. The industry promoted this based on the recognition that the definition of catastrophic had serious shortcomings.

In the October 17, 2001 submission to the government, the IBC once again promoted increased tort access to recover health care expenses.

The insurance industry must surely believe it is in the driver’s seat after it extracted every concession from the former Conservative government that could have been on its wish list. The increased deductible, the harsh new threshold and many of the SABS changes would not have been hurried through but for the Tory’s fear of losing the election. It may be difficult now to undo the harm caused to auto insurance and the inadequate protection we all buy as motorists.

Now that the insurance industry is enjoying an up-turn in its fortunes, there may be even less incentive to adopt a new approach to auto insurance. But this product can be improved; we can have enhanced tort rights at the same time as reasonable premiums and a viable insurance industry. Pre- 1990 tort, with some modifications to eliminate non-serious claims, would be cheaper that the current system. We need to stop shifting the risk to the consumer and make sure we provide them with more efficient and effective protection.