SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS FINANCIAL SERVICES COMMISSION OF ONTARIO

Transcription

1 SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS FINANCIAL SERVICES COMMISSION OF ONTARIO July 9, 2012

2 Table of Contents SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS 1. INTRODUCTION ONTARIO AUTO INSURANCE MARKET ONTARIO AUTO INSURANCE PRODUCT... 4 COVERAGES... 5 a) Third-party Liability... 6 b) Statutory Accident Benefits... 6 c) Physical Damage Coverages... 8 d) Other Optional Enhancements THE ROLE OF THE FINANCIAL SERVICES COMMISSION OF ONTARIO (FSCO) HOW AUTOMOBILE INSURANCE IS PRICED...12 a) How Individual Auto Insurance Rates Are Set...13 b) Impact of Removing Territorial Rating...15 c) Distribution of Insurance...17 d) Insurers Financial Results EVOLUTION OF AUTO INSURANCE IN ONTARIO...19 a) Late 1980s...19 b) 1990 Ontario Motorist Protection Plan (OMPP)...19 c) 1994 Bill d) 1996 Bill e) 2003 Reforms AUTO INSURANCE SYSTEMS IN OTHER PROVINCES...23 a) Private and Government Run Systems...23 b) Compensation Structure...23 c) Claims Experience in Other Provinces PROBLEMS AND PRESSURES a) Rapid Rise in Accident Benefits Costs...28

3 b) Greater Toronto Area Cost Rising More Rapidly...29 c) Main Components of Accident Benefits Increase...30 d) Comparison to Other Coverages...31 e) Decrease in Reported Injuries...32 f) Experience in Other Provinces...33 g) Factors Contributing to Increased Costs REFORMS...38 IMPACT OF THE REFORMS ONGOING INITIATIVES...39 a) Auto Insurance Anti-Fraud Task Force...40 b) Attestation by Insurers...40 c) Development of Minor Injury Protocol...40 d) Definition of Catastrophic Impairment...41 e) Review of the Dispute Resolution System...43 f) Closed Bodily Injury Claims Study CONCLUSION...44 APPENDIX...45 BIBLIOGRAPHY...49

4 SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS 1. INTRODUCTION Auto insurance is a form of property and casualty insurance 1 that is purchased by owners and drivers of motor vehicles from an insurance company that in turn undertakes to compensate accident victims for eligible costs arising from vehicle damage and personal injuries. In addition to providing compensation, the insurer also undertakes to protect the owner and driver of the vehicle from any legal claims for injuries or damages caused to others. The auto insurance premiums that drivers pay represent the cost of transferring the risk of loss to the insurer. Since 1980, auto insurance has been mandatory for Ontario drivers. All vehicle owners are required to purchase auto insurance from private insurance companies either through general insurance brokers or directly from companies through agents. In order to curb rising auto insurance costs, the government introduced what is commonly called Ontario s first no-fault system in Under this new system, all those injured in car accidents got quicker access to resources from their insurer to pay for recovery (regardless of who was at-fault) whether for personal injuries or damaged vehicles. The ability to receive accident benefits, however, did not depend on fault. This new system was referred to as a threshold nofault system because it imposed a restrictive limitation on the right to sue through a verbal threshold. The verbal threshold was death, permanent serious disfigurement, or permanent serious impairment of an important bodily function caused by continuing injury which was physical in nature. By contrast, in a fault or tort based system, the driver who is at-fault for causing an accident is responsible for paying the victim's medical expenses and 1 Property and Casualty is the type of insurance that primarily covers home, auto, and various forms of business risks. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 1

5 compensating for additional damages, such as loss of wages and pain and suffering. The assignment of fault and the amount of compensation would be litigated through the courts. Today, if injured in an accident, an accident victim is eligible to sue the at-fault driver for economic loss or health care expenses in excess of their accident benefit coverages, and for pain and suffering, if the person meets a threshold of death, permanent serious disfigurement or permanent serious impairment of an important physical, mental, or psychological function. In order for automobile insurance to be affordable, fairly priced, and available, a balance needs to be maintained between price and the appropriate coverages policyholders need in the event of an accident. Historically, the reforms of Ontario s system have largely been motivated by the need to stabilize rising costs and premiums and restore this balance. The auto insurance system is complex and there have been several reforms over the past 25 years. With each set of changes to the system, there was some initial success in stabilizing costs and premiums followed by another cycle of rising costs. In addition, notwithstanding reforms, the auto insurance system continues to face challenges associated with fraud and misuse of the system, which, if left unchecked, will inevitably contribute to rising premiums. The reforms announced by the government in 2009, and implemented in September, 2010, have addressed rising costs, stabilized premiums and have given drivers more choice and flexibility in choosing levels of coverage. To try and avoid a repeat of the past, the government continues to focus on improving the product in Ontario. New initiatives have been announced in the past two Ontario Budgets including the establishment of an Auto Insurance Anti-Fraud Task Force and a heightened focus on evidence-based approaches to the treatment and recovery of injuries. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 2

6 2. ONTARIO AUTO INSURANCE MARKET There are over nine million drivers and 6.6 million private passenger vehicles insured in Ontario. Automobile insurance is privately delivered in Ontario. Automobile insurance is a component of the property and casualty (P&C) insurance market. P&C insurers in Ontario received approximately $20 billion in direct written premiums in Total written automobile insurance premiums made up approximately $11.3 billion or 56.3 per cent of the total P&C market in Of this amount, private passenger vehicles made up approximately $9.8 billion in total written premiums. Ontario has a competitive automobile insurance marketplace with 192 companies licensed to operate and over 100 companies writing private passenger automobile insurance. In 2010, 25 automobile insurance companies constituted 80 per cent of the automobile insurance market. Private passenger automobile insurance accounts for approximately 87 per cent of Ontario s automobile insurance premiums. The other categories of auto insurance (e.g. commercial, motorcycles, snow vehicles, public buses) account for the remaining 13 per cent of premiums. The government prescribes accident benefits and determines the mandatory minimum coverages for auto insurance while the Financial Services Commission of Ontario (FSCO) regulates insurers and approves insurers rates. Legislation requires that the rate approval process ensures that rates proposed by companies are just and reasonable in the circumstances, not excessive, and do not impair the financial solvency of the company. Since debate about the auto insurance system in Ontario predominantly revolves around private passenger automobile insurance, that is the focus of this submission. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 3

7 3. ONTARIO AUTO INSURANCE PRODUCT In Ontario, as in other provinces, automobile insurance is mandatory for all consumers who own a vehicle that is driven on public roads. Prior to 1980 and the introduction of compulsory automobile insurance, vehicle owners had the option of buying insurance or paying a fee into the Motor Vehicle Accident Claims Fund (MVACF) which defended and paid claims in situations where an at-fault driver failed to respond to a lawsuit. Often, accident victims had to go to court to determine who was at fault in the accident, and to access benefits they might require to recover from injuries or for damages to their vehicle sustained in the accident. The growing costs and liabilities of MVACF and number of uninsured drivers led the government of the day to make auto insurance mandatory. Given its compulsory nature, governments, appropriately, have developed a comprehensive regulatory system to protect consumers and regulate insurer conduct. In Ontario, this includes setting mandatory and optional levels of coverage that must be included and available to consumers in their auto insurance policies. The various changes and reforms implemented by governments over the last 25 years have focused primarily on the balance between the right to sue through third party liability coverages (described in detail later) and statutory accident benefits. A fundamental shift in compensation based on court awards to one based on more rapid access to expanded no-fault accident benefits occurred in 1990, with the passage of the Insurance Statute Amendment Act (Bill 68) commonly known as the Ontario Motorist Protection Plan (or OMPP which is described detail later in this submission). SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 4

8 Coverages Ontario currently has a system of mandatory coverages with additional optional coverages and benefits available for purchase. The following table sets out these mandatory and optional coverages which include the expansion in the choices available to consumers for statutory accident benefits implemented by the current government in the September 2010 reforms. Ontario s Automobile Insurance Coverages Mandatory Coverages Third-Party Liability Pays for claims as a result of lawsuits for economic damages and pain and suffering. Minimum coverage by law is $200,000. Court awards for pain and suffering include mandatory deductible amounts. Statutory Accident Benefits Schedule (SABS) Provides benefits, if a person is injured in an accident, regardless of who caused the accident. Includes medical and rehabilitation, income replacement, attendant care and death and funeral coverages. Direct Compensation Covers damage to an insured vehicle to the extent that another driver was at-fault for the accident subject to a $500 deductible. Uninsured Automobile Coverage Protects drivers from damage caused by an uninsured motorist. Optional Coverages Third-Party liability Higher limits for third-party liability coverage available; standard coverage in most policies is $1 million. Lower mandatory deductible. Direct Compensation Various deductibles are available including $0 Collision Coverage for repairs to an insured vehicle when the insured driver is atfault. Various deductibles are available. Comprehensive Pays for losses from theft, fire and non-collision damage. Various deductibles are available. Optional Accident Benefits Can include higher limits for standard Accident Benefits coverages or coverages such as housekeeping and caregiving. Other Optional Coverages Such as coverage for the cost of a rental vehicle while an insured vehicle is being repaired and full replacement cost for a relatively new vehicle. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 5

9 a) Third-party Liability The minimum coverage required in Ontario for third-party liability is $200,000. Drivers have the option of purchasing higher amounts, generally $500,000, $1 million, or $2 million. The standard amount that is usually purchased by drivers is $1 million. Over 99 per cent of drivers currently purchase more than the mandatory minimum of $200, If injured in an accident, and the driver is not at-fault, a person is eligible to sue the at-fault driver for economic loss or health care expenses in excess of their accident benefit coverages and for pain and suffering. In order to sue for excess health care expenses and for pain and suffering, the injuries of the injured person must meet a threshold of permanent serious disfigurement or permanent serious impairment of an important physical, mental, or psychological function. There is also a deductible that applies for court awards for pain and suffering of $30,000 (or $15,000 for family members under the Family Law Act). This deductible does not apply for pain and suffering awards if court awards exceed $100,000 (or $50,000 for family members under the Family Law Act). b) Statutory Accident Benefits The 2010 automobile insurance reforms created a new standard package of statutory accident benefits set out in the Statutory Accident Benefits Schedule (SABS), a regulation under the Insurance Act. These benefits are payable by the injured person s own insurer and are payable regardless of fault. The maximum available benefit levels are mistaken by some individuals as the total compensation they can expect to receive. These benefits are subject to the criteria set out in regulations and must be assessed based on these standards and the extent and nature of the injuries. The reforms announced by the government include an evidence-based approach to the treatment and recovery of injuries that relies on current scientific and medical evidence. The reforms 2 General Insurance Statistical Agency. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 6

10 also give owners and drivers the ability to purchase higher optional benefits that most suit their needs and financial circumstances. The table below summarizes the key accident benefit coverages and the additional choices available to consumers. Statutory Accident Benefits Coverage Medical, Rehabilitation and Attendant Care benefits - for non-catastrophic injuries Medical, Rehabilitation and Attendant Care benefits - for catastrophic injuries Caregiver benefit Housekeeping and Home Maintenance expenses Coverage under Standard Auto Insurance Policy $50,000 for medical and rehabilitation benefits, including assessment costs; $36,000 for attendant care benefits. $1,000,000 for medical and rehabilitation benefits including assessment costs; $1,000,000 for attendant care benefits. Up to $250 per week for the first dependant plus $50 for each additional dependant; available only for catastrophic injuries. Up to $100 per week; available only for catastrophic injuries. Options available to increase benefits $100,000 or $1,100,000 for medical and rehabilitation benefits including assessment costs; $72,000 or $1,072,000 for attendant care benefits. An additional $1,000,000 for medical, rehabilitation and attendant care benefits including assessment costs. Up to $250 per week for the first dependant plus $50 for each additional dependant; available for all injuries. Up to $100 per week; available for all injuries. Income Replacement benefit 70 per cent of gross income up to $400 per week. Weekly limit can be increased to $600, $800 or $1000 per week. Dependant Care benefit Not provided. Up to $75 per week for the first dependant and $25 per week for each additional dependant to a maximum of $150 per week. Death and Funeral benefits Indexation benefit applicable to income replacement benefit, nonearner benefit, caregiver benefit, attendant care benefit or medical and rehabilitation benefit $25,000 lump sum to an eligible spouse; $10,000 lump sum to each dependant; maximum $6,000 funeral benefits. Not provided. $50,000 lump sum to an eligible spouse; $20,000 lump sum to each dependant; maximum $8,000 funeral benefits. Annual adjustment according to the Consumer Price Index for Canada. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 7

11 c) Physical Damage Coverages Physical damage to a vehicle is paid through a number of coverages. These include Direct Compensation which pays for damage to a vehicle or its contents, and for loss of the use of the vehicle or its contents, to the extent that another person was at-fault for the accident. It is called Direct Compensation because even though someone else caused the damage, compensation comes directly from a person s own insurer, instead of the insurer of the person who caused the damage. The optional Collision coverage also pays for physical damages to one s own vehicle for the proportion that the person is at-fault in an accident. The optional Comprehensive coverage pays for losses other than those covered by Collision such as theft, vandalism, fire and other non-collision damage. Each of these physical damage coverages have standard and optional levels of deductibles that can be applied. d) Other Optional Enhancements There are other optional enhancements to coverages known as policy endorsements that are special agreements between insurers and consumers allowing for the addition or reduction of certain coverages for certain situations. The most common policy endorsements provide coverages for Rented or Leased Vehicles, Loss of Vehicle Use, Removing Depreciation Deduction, and Family Protection Coverage. 4. THE ROLE OF THE FINANCIAL SERVICES COMMISSION OF ONTARIO (FSCO) FSCO is an Ontario Government agency reporting to the Minister of Finance and is responsible for regulating auto insurance. Through the Financial Services Commission of Ontario Act, the Insurance Act, and the Compulsory Automobile Insurance Act, FSCO is charged with providing regulatory services that protect the public interest and promote public confidence SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 8

12 in auto insurance through its licensing, underwriting, class and rate approval, monitoring and enforcement activities. The Insurance Act and regulations set out the standard automobile insurance product. The Insurance Act sets out authority to regulate the auto insurance sector in the following ways: Approve insurers underwriting rules, premium rates and risk classification systems that are the factors used to set auto insurance premiums; Administer a dispute resolution process for disputes between claimants and insurers involving the SABS; Regulate insurance market conduct by investigating complaints, taking enforcement actions for unfair or deceptive practices, and contravention of the legislation; Enforce the legislation against other users of the system, (e.g. health care providers and unlicensed persons); Oversee the Facility Association (FA) which provides automobile insurance to high risk drivers who cannot obtain insurance in the regular marketplace; Provide consumers with information and educational material on the automobile insurance system; Administer the Motor Vehicle Accident Claims Fund (MVACF) that provides accident benefits to persons injured in automobile accidents when they have no access to an insurance policy; Work with stakeholders to improve the system s operation and make recommendations to the government on changes to the automobile insurance system. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 9

13 All insurance companies must submit proposed changes to their premium rates for pre-approval by FSCO. FSCO analyses rate filings taking into account actuarial evidence to confirm the rates are adequate to maintain the financial solvency of insurers without being excessive. Insurance companies must submit their criteria for selecting and rejecting consumers (underwriting rules) prior to use. Regulations under the Insurance Act define the criteria that cannot be used to deny coverage. For example, a person s health status, employment status or income and credit rating cannot be used to deny coverage. Insurers must also file their risk classification systems for FSCO approval. Under the Insurance Act, risk classification systems must be just and reasonable, reasonably predictive of risk, distinguish fairly between risks and generally be in the public interest. Risk classification systems set out the factors that an insurer will use when setting the prices they charge for auto insurance. These systems include territories which insurance companies identify that share similar risks due to traffic density, road conditions and other factors. Similar to underwriting rules, regulations impose restrictions on what factors an insurer can consider when calculating a driver s auto insurance rate (e.g. insurers cannot use not-at-fault accidents). More detail on how automobile insurance companies establish price and rates is outlined in later sections of this paper. FSCO also oversees the FA. The FA was established as a non-profit association in Ontario in 1979 as part of revisions to the Compulsory Automobile Insurance Act. It acts as the insurer of last resort for high risk drivers who cannot purchase automobile insurance in the regular market. It operates in Alberta, Ontario, Nova Scotia, New Brunswick, Newfoundland, Prince Edward Island, Northwest Territories, Nunavut, and the Yukon. All Ontario insurers are members of the FA and each member is allocated a share of SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 10

14 the FA s premiums, claims, expenses and investment income. In Ontario, the FA manages the Residual Market (FARM), the high risk segment, and a Risk Sharing Pool (RSP) that allows insurers to share the risk of some drivers, up to a limit of 5 per cent, among all insurers. The FARM currently insures about 5,800 private passenger vehicles, down from over 220,000 during Through the MVACF, FSCO provides compensation for personal injury or property damage to people involved in automobile accidents where no automobile insurance can be found to respond to the claim (e.g. drivers without auto insurance, hit and run accidents). A 2003 Insurance Act amendment requires the Superintendent of Financial Services to undertake a review of Part VI of that Act, dealing with auto insurance, once every five years and recommend to the Minister of Finance any amendments that will improve the effectiveness and administration of that part of the Act. The first such review was completed in 2009 and formed the basis for the government s deliberations in developing the 2010 reforms. In addition, FSCO regularly reviews the SABS to ensure they are current and responsive. FSCO also provides consumers with a wide range of information and educational material on the automobile insurance system. This information is distributed through the FSCO website, by responding to inquiries through its contact centre as well as at trade shows and other public events where drivers attend. A range of products are available including: brochures on how the automobile insurance system works, a tutorial on how rates are set, tips on saving money, and what to do in the event of an accident. Working with the Auto Insurance Anti-Fraud Task Force, FSCO has also expanded its website on fraud and what consumers can do to combat fraud. In addition to this material, FSCO also has a contact centre which responded to over 7,400 auto insurance inquiries in Facility Association. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 11

15 5. HOW AUTOMOBILE INSURANCE IS PRICED As noted earlier, insurance is a contract that protects consumers financially against a loss. Much of the money received from premiums will be paid out in future years to satisfy claims. This means insurance is priced before its costs are fully known. Insurers set aside or reserve funds and invest them to meet these future obligations. To ensure that sufficient premiums are collected to meet future needs, actuarial estimates are made for future or prospective costs that include claims and administration costs (overhead) and an allowance for a return on capital. Insurers and actuaries use past claims history as a major factor to estimate future costs. Their goal is to determine what rates to charge a consumer for the policy period to cover claims, operating expenses and a return to investors, after taking into account investment income. Actuaries are used as they are experts in the rate determination process. Determining rates involves estimating what the claims will ultimately cost. Insurers use accident year data, i.e. they look at claims data based on the year the accident occurred, as opposed to financial year data. The cost of administration includes the cost of processing and evaluating claims. Companies use a variety of approaches to claims handling that include: internal company claims staff; contracted independent adjusters that are not employees of the company; or a combination of the two. Depending on the actual number and size of claims, investment income generated and cost of administration, the insurer may experience a profit or loss on the premium charged in a specific time period. Based on this actual experience, companies will need to revise their assumptions on prospective costs and revise premiums. This process is referred to as determining rate adequacy. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 12

16 FSCO actuaries review all assumptions used by companies as to their reasonableness. They also independently calculate rate requirements for a company, using accepted actuarial standards. A return on equity (ROE) benchmark of 12 per cent is currently used by FSCO in this process recognizing that a return on invested capital is required in a business operation. ROE is only one of a number of factors that are considered in reviewing the reasonableness of rates proposed. A discussion of this benchmark and the recommendation for FSCO to review what constitutes a reasonable level for profit when approving rates was included in the 2011 Annual Report of the Office of the Auditor General of Ontario. 4 FSCO agrees with the recommendation and had previously identified the need to conduct a review that will be undertaken this year. a) How Individual Auto Insurance Rates Are Set Consumers are not all charged the same rate. Premiums vary based on risk characteristics. Auto insurance rates are determined by a combination of factors including a driver s personal profile, the amount of coverage purchased, the deductible selected, location and the insurance company chosen. Actuarial principles require that the rates should reflect the risk (claims costs). Claims costs vary across the province as do rates. A driver s personal profile includes: the driving record that includes any accidents where they were more than 25 per cent at-fault, usually in the last six years and driving convictions within the last 3 years; where a person lives; completion of a driver training course; how much a person drives; age and driving experience; the type of use (pleasure, commuting, business); other persons in the household who may drive a car, and type of vehicle driven. Other factors affecting the rates include the amount of additional optional coverages purchased (that include options for accident benefits, liability, collision Annual Report of the Office of the Auditor General of Ontario, pages SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 13

17 and comprehensive coverages); and the level of deductibles selected for certain coverages such as collision (damage to the vehicle for at-fault accidents) and comprehensive (e.g. theft, vandalism, hail). Auto insurance rates are affected by where a person lives. Territorial rating recognizes that all vehicles within a given territory share similar risks because of traffic density, terrain, road conditions and infrastructure, speed limits, crime rates (relates to auto theft) and weather conditions. Each company establishes its own territories based on its data and market information and where its business is concentrated. As the auto insurance system has evolved and population has increased, insurance companies have expanded the number of territories to better reflect risk and claims experience. FSCO has issued guidelines to ensure rating by territory is conducted in a fair manner. The guidelines include: No more than 55 territories in the Province and no more than 10 in the City of Toronto; A minimum of 2,500 vehicles in each territory for statistical credibility and to avoid unfairly targeting certain risks; Insurers must ensure territories are contiguous (i.e. insurers cannot pick out a series of isolated pockets and form a territory). Insurers generally use the first three characters of a postal code referred to as the forward sortation area, in defining territories; When establishing a new territory, the rates may not change by more than 10 per cent from the existing territory. Insurers also underwrite risks differently depending on their individual company s experience and analysis. Companies are allowed to use different risk classification systems. Companies can also have rules on the type of risks they may or may not accept. However, all underwriting rules must be filed and approved by FSCO and comply with the Insurance Act. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 14

18 b) Impact of Removing Territorial Rating The use of territorial rating is a standard and traditional tool in the rate setting process in automobile insurance systems. Territorial rating enhances the ability of insurance companies to underwrite and price risk more accurately by linking premiums to claims experience in the different territories. In a jurisdiction as large as Ontario with a mix of urban and rural areas, significant climate differences, variable road quality and traffic density, alongside other differences, eliminating territories would significantly increase cross-subisidization of drivers in higher claims areas by those in lower claims areas. There have been some recent discussions that the use of territories or where a person lives should be eliminated from the setting of rates. FSCO has analyzed the impact of this change assuming territorial rating was removed resulting in all drivers in the province paying the same premium. If an average written premium of $1,351 (based on the average written premium over the past five years) was set for the province, there would be significant cross-subsidization in communities across the province. The chart below illustrates the prospective impacts for five Ontario communities. The Greater Toronto Area (GTA) could see a reduction of 23 per cent while other communities could experience increases ranging from 24 to 40 per cent. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 15

19 Source: Financial Services Commission of Ontario. The chart below further illustrates this possible impact in dollar terms. The GTA could see a reduction in premium of about $412 while the other identified communities could see increases of $264 to $386 in premiums. Source: Financial Services Commission of Ontario. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 16

20 As illustrated, removing territories would result in the cross-subsidization between higher and lower cost geographical areas of the province. c) Distribution of Insurance The sale of automobile insurance is undertaken by general insurance agents and brokers who are both licensed to sell insurance products. The distinction between an agent and a broker is that an agent sells insurance directly for that insurer (direct writer), whereas the broker is an independent business person who may sell insurance on behalf of a number of insurers, for a commission. Traditionally, most auto insurance was sold by independent brokers who served their customers by shopping and finding the most appropriate policy and price for a person s needs among a number of insurance companies with which the broker had contracts to sell their product. Insurance for a growing proportion of the market is now sold by agents through direct writer insurance companies. General insurance agents are licensed and regulated by FSCO. In , there were 1,182 general insurance agents licensed to sell auto and other property and casualty insurance products. Independent insurance brokers are regulated by the Registered Insurance Brokers Association of Ontario (RIBO). RIBO is a self-funding and self-governing corporation. It was established in 1981 under the Registered Insurance Brokers Act and is responsible for licensing, standards of practice, prevention of misconduct and disciplining its members. In , there were 17,111 registered general insurance brokers. 5 FSCO works closely with RIBO on emerging issues and committees. FSCO also ensures RIBO is fulfilling its regulatory responsibilities and operates to protect the interests of the public by conducting an annual examination of the affairs of RIBO and reporting to the Minister of Finance. 5 Registered Insurance Brokers of Ontario Annual Report , page 7. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 17

21 d) Insurers Financial Results The financial results of property and casualty insurers, which include auto insurers, are reported to and published by the Office of the Superintendent of Financial Institutions (OSFI), the primary federal regulator and supervisor of federally regulated deposit-taking institutions, insurance companies, and federally regulated private pension plans. It is responsible for solvency regulation of federally licensed insurance companies. The published financial results are posted on the OSFI website each quarter and are not broken down by province or class of insurance. The results published for property and casualty insurers include all classes of general insurance including auto, property, liability, surety, boiler and machinery, reinsurance and other classes. The profits reported represent the results from the sale of insurance in all these classes of insurance across Canada. Not all of these companies sell auto insurance in Ontario. On March 12, 2012, OSFI released the financial results for federally regulated P&C companies for the calendar year The results compared to 2010 show an improvement in after-tax net income and an increase in ROE from 6.8 to 9.5 per cent. This is primarily due to an improvement in underwriting results and an increase in other revenue and expenses. The results for the last ten years are summarized in the following table. FINANCIAL RESULTS FOR PROPERTY AND CASUALTY INSURERS IN CANADA YEAR AFTER TAX NET INCOME (000,000) RETURN ON EQUITY 2002 $ % 2003 $2, % 2004 $4, % 2005 $4, % 2006 $5, % 2007 $4, % 2008 $2, % 2009 $2, % 2010 $2, % 2011 $3, % Source: Office of the Superintendent of Financial Institutions Canada. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 18

22 6. EVOLUTION OF AUTO INSURANCE IN ONTARIO Successive governments have had to respond to rising costs of auto insurance and re-establish an appropriate balance between price and coverages through various reforms. The principal focus of many of these reforms has involved the right to sue (the tort system) and the accident benefits structure. Following is a description of how the system has evolved over the past 25 years. a) Late 1980s In the mid-1980s the Ontario Task Force on Insurance, headed by Dr. David Slater, was appointed to study problems of availability, affordability and adequacy of general liability insurance in Ontario. The Slater Task Force released its report in May of Although the focus of the Slater Task Force was primarily on forms of liability insurance other than auto, Dr. Slater did make some recommendations concerning auto insurance and the issue of tort reform. In November of 1986 the government appointed the Honourable Mr. Justice Coulter Osborne to conduct a review of the tort system for compensation for injuries in automobile accidents and the consequences of the implementation of a no-fault automobile accident scheme. The Report of Inquiry into Motor Vehicle Accident Compensation in Ontario (Osborne Report) by the Honourable Mr. Justice Coulter Osborne was released in However, costs continued to rise due primarily to the costs of litigation and court awards. This led the Liberal government to implement reforms in 1990 referenced earlier that were commonly known as the OMPP. b) 1990 Ontario Motorist Protection Plan (OMPP) The OMPP represented a fundamental shift in focus from the primary delivery of compensation through the tort system to compensation primarily being paid SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 19

23 directly for physical damage and no-fault accident benefits for injuries. In exchange for these higher accident benefits, access to the right to sue for damages for both economic loss and pain and suffering was restricted to cases involving death or injuries that were permanent, serious and physical in nature. The changes also adopted a number of recommendations set out in the Osborne Report. In addition, a system for rate approvals was introduced along with a mediation and arbitration system for disputes between claimants and insurance companies. This was delivered outside of the courts through the Ontario Insurance Commission (the predecessor to FSCO). c) 1994 Bill 164 In September 1990, a New Democratic government was elected. Its platform had included the establishment of a public auto insurance system. In September 1991, the government decided not to proceed with a government-run system and instead implemented an expanded accident benefits schedule in January 1994, in Bill 164 (Insurance Statute Law Amendment Act). The reforms significantly expanded the level and access to accident benefits while eliminating the right to sue for economic damages and expanded access to sue for pain and suffering for serious injuries. An increase in costs and in premiums followed. d) 1996 Bill 59 Following the election of the Progressive Conservative Party in 1995, the government reintroduced the right to sue for economic losses and continued limited access to court for pain and suffering with a $15,000 deductible. The mandatory medical and rehabilitation coverage was also reduced to $100,000 for non-catastrophic injuries and $1 million for catastrophic injuries. Other changes included the ability for the Commissioner of Insurance (predecessor to the Superintendent of Financial Services) to issue fee schedules for health care providers and services, and the requirement for providers to submit treatment plans and seek prior approval before commencing treatment. While costs and premiums stabilized initially after 1996, by 2000 costs had again risen SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 20

24 substantially. e) 2003 Reforms In response to the sharp increase in the costs of both accident benefits and court settlements, premiums increased significantly through 2003 triggering action by the government. In 2003, a number of significant reforms were implemented including Bill 198, Keeping the Promise for a Strong Economy Act (Budget Measures), 2002, introduced by the Progressive Conservative government: Introducing a Pre-approved Framework (PAF) guideline for the treatment of whiplash injuries, which accounted for the majority of automobile insurance medical and rehabilitation claims. A limit was set on the amount that could be billed without prior approval; Reducing the maximum hourly rate by 30 per cent for most health care providers by issuing professional fee guidelines; Expanding the right to sue for excess health care expenses; Doubling the deductible for court awards for pain and suffering to $30,000 (and $15,000 for family members for Family Law Act awards); Initiating a regular review of the automobile insurance system every five years to be conducted by the Superintendent of Financial Services and to be reported back to the Minister of Finance. Later in 2003, the Liberal government introduced the Automobile Rate Stabilization Act, 2003 (Bill 5), as a temporary measure to freeze auto insurance rates and facilitate a rate reduction of 10 per cent. Bill 5 also increased the authority of the Superintendent to deal with rate applications. As with most previous cycles, the reforms were generally followed by a reduction in premiums and more stable costs. However, premiums again began to rise in 2008, although the average nominal premium only returned to the 2003 level by the end of SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 21

25 Rising costs and premiums led the government to address the design of the auto insurance product utilizing recommendations set out by the Superintendent of Financial Services in the Report on the Five Year Review of Automobile Insurance, March 31, 2009 and other work. Reforms were implemented by the government in September of Although average automobile insurance premium increases have held below the rate of inflation since 2004, 6 the government continues to focus on emerging automobile insurance issues. Initiatives were included in both the 2011 and 2012 Ontario Budgets aimed at preventing the cycle of rising costs and premiums from reoccurring. The following chart, from the December 2011 Interim Report of the Ontario Auto Insurance Anti-Fraud Task Force, summarizes the cyclical premium pattern described in this section. Auto Insurance Premiums Reacting to Major Cost Control Measures from 1985 to 2010 (2010 Dollars) 1990 Reforms 1996 Reforms 2003 Reforms 2010 Reforms $1,500 $1,000 $500 $ Source: Ontario Auto Insurance Anti-Fraud Task Force, Interim Report, December Ontario Budget, Budget Papers, Strong Action for Ontario, Chart 1.9, page 56. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 22

26 7. AUTO INSURANCE SYSTEMS IN OTHER PROVINCES Ontario s claims experience, which is discussed later in more detail, contrasts unfavorably with that of other provinces. This section provides an overview of the different laws and compensation structures in place for the delivery of mandatory auto insurance in other provinces. a) Private and Government Run Systems Six provinces including Alberta, Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador along with the three territories have privately delivered auto insurance. Four provinces deliver auto insurance through government-owned insurance corporations. These are Quebec, Manitoba, Saskatchewan and British Columbia. In Quebec, a hybrid system exists where the government insurer provides insurance to protect against injuries and death while only private insurers provide coverage for property damages. b) Compensation Structure Each of the provinces has different compensation frameworks in place, ranging from full no-fault systems with no right to sue in Manitoba and Quebec, to mixed no-fault/tort systems in which compensation is paid through a mixed system of accident benefits and the right to sue at-fault parties. Saskatchewan has a system in place where consumers choose between a full no-fault system or one with limited accident benefits and the right to sue at-fault parties for further damages. Most consumers in Saskatchewan choose the full no-fault product. Despite the higher total medical and rehabilitation benefits available in both Saskatchewan and in Manitoba, as referenced in the 2011 Annual Report of the Office of the Auditor General of Ontario, the average accident benefit costs per claim paid out in those provinces in 2010 were lower than in Ontario Annual Report of the Office of the Auditor General of Ontario, page 53. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 23

27 The table below summarizes the compensation structure in Ontario and other provinces. Private/Public Delivery Third Party Liability Private Ontario $200,000 $50,000 10yr cut-off or age 25 if under 15, $1,000,000 for catastrophic injuries Alberta $200,000 $50,000 2yr cut-off Newfoundland/ Labrador $200,000 Optional $25,000 4yr cut-off Nova Scotia $500,000 $50,000 4yr cut-off New Brunswick Prince Edward Island Public British Columbia Saskatchewan No Fault Saskatchewan Tort $200,000 $50,000 4yr cut-off $200,000 $25,000 4yr cut-off Key Basic Accident Benefits Coverages in Canada Medical and Attendant Care Income Rehabilitation Replacement $36,000 max for first 104 weeks, $1,000,000 lifetime for catastrophic injuries No additional. Included under medical limit. Optional No additional. Included under medical limit. No additional. Included under medical limit. No additional. Included under medical limit. No additional. Included under medical limit. $200,000 $150,000 No additional. Included under medical limit. $200,000 $6,250,817 Functional- $789/week, Cognitive- $395/week $200,000 $24,440/ $183,308 for catastrophic injuries Manitoba $200,000 No specified limit Quebec $50,000 -property No specified limit Up to $400 per week Up to $400 per week Optional Up to $140 per week Up to $250 per week Up to $250 per week Up to $140 per week Up to $300 per week Based on max $82,804 gross income None Up to $368 per week Personal care assistance up to $4,266/month max Up to $806/week Sources: Various Provincial Government websites; Insurance Bureau of Canada. Based on max $85,500 gross income Based on max $66,000 gross income Death & Funeral $10,000 to $25,000, $6,000 funeral $3,000 to $15,000, + $2,000/dependent if death of head, $5,000 funeral Optional $2,000 to $10,000, Optional $1,000 funeral $5,000 to $25,000, $2,500 funeral $5,000 to $50,000, + $1,000/dependent if death of head, $2,500 funeral $2,000 to $10,000, + $1,000/dependent if death of head, $1,000 funeral $1,500 to $5,000, + $1,000/child + up to $145/week/survivor for 104 weeks if death of head, $2,500 funeral $28,660 to $64,486, + 5% of calculated benefit to each dependent child, $9,376 funeral $54,992 min, + 5% of calculated benefit to each dependent child, $6,110 funeral $12,668 to $427,500, $7,553 funeral $51,617 to $330,000, $4,826 funeral SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 24

28 Among the provinces with private sector delivery of automobile insurance, Ontario continues to have the most generous accident benefit structures available to compensate injured accident victims. A notable difference identified in the Report of the Five Year Review of Automobile Insurance 8 is the ability of health care providers between provinces in triggering treatment and certifying disability. In Ontario there are 21 selfregulating health professions and a number of additional professions in transition to becoming regulated health care professionals. Nine of these regulated professions are given health practitioner status under the SABS and can therefore recommend treatments, assessments and in some cases certify disability. Other regulated professions can also propose treatment under the SABS if it is approved and recommended by one of these health practitioners. This level of health care participation in the auto insurance system is much higher in Ontario than in other provinces, some of which limit certification of treatment and disability to doctors only. c) Claims Experience in Other Provinces As identified in the 2011 Annual Report of the Auditor General, the average payout for claims in Ontario for private passenger vehicles is higher than in any of the other provinces that reported data including some of the government-run auto insurance systems. 9 While part of these higher costs may be attributable to the generous accident benefit system in place in Ontario, the significant disparity with other jurisdictions is likely due to other factors such as fraud and the incentives in the system that have encouraged higher utilization by some of the participants in the system. A comparison of claims costs of the provinces with privately delivered insurance systems is outlined in more detail in the next section further illustrating these higher payouts. 8 Report of the Five Year Review on Automobile Insurance, March 31, 2009, Financial Services Commission of Ontario, page Annual Report of the Office of the Auditor General of Ontario, pages SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 25

29 Billions 8. PROBLEMS AND PRESSURES As documented in the 2011 Annual Report of the Office of the Auditor General of Ontario, the December 2011 Interim Report of the Auto Insurance Anti-Fraud Task Force and the 2009 Report on the Five Year Review of Automobile Insurance, the total cost of auto insurance claims in Ontario increased dramatically by approximately $3 billion or about $450 per vehicle over the past five years. $10.0 Auto Insurance Claims Costs in Ontario Increased from 2006 to 2010 $8.0 $6.0 $4.0 $ $3 Billion or $450 per Vehicle $ Source: Ontario Auto Insurance Anti-Fraud Task Force, Interim Report, December 2011 During this period, the increase in premiums did not match the rapid rise in costs leading to deterioration in the financial health of auto insurers. The incurred loss ratio, which is an indicator of the financial health of the insurer, divides average claims costs per vehicle by earned premiums per vehicle. Any ratio with a value higher than 80 per cent of total claims expenses compared to total premium revenues may result in a loss for an insurance company when other administrative and overhead costs (minus investment income) are factored in. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 26

30 As illustrated in the chart below, the incurred loss ratio for companies deteriorated from 71 per cent in 2006 to 93 per cent in While average claim costs per vehicle increased by 43 per cent, average earned premiums 10 per vehicle only increased from $1,306 to $1,433 a rise of 9.7 per cent. Source: General Insurance Statistical Agency. As reported in the Auditor General s Annual Report, the incurred loss ratios reported to FSCO among the top 40 Ontario auto insurers ranged from 65 per cent to 176 per cent in This pattern of increasing claims costs and loss ratios was not sustainable; companies might continue to operate for a while by injecting more capital into the business but, in the absence of the 2010 reforms, companies may have been forced to either dramatically increase premiums or to consider whether it made business sense to continue operating in the Ontario auto insurance market. 10 Earned premium means when premiums charged on a policy are taken into revenue on a company s financial statement Annual Report of the Office of the Auditor General of Ontario, page 51. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 27

31 Billions a) Rapid Rise in Accident Benefits Costs Breaking down these costs by coverages, the most dramatic growth was exhibited by accident benefits. The graph below shows that these costs more than doubled during this period, increasing by 118 per cent. Of the $3 billion increase in total claims costs, $2.4 billion dollars or 80 per cent came from accident benefits costs. Accident Benefits Claims Costs Increased from 2006 to 2010 $5.0 $4.0 $3.0 $2.0 $ $2.4 Billion or $370 per Vehicle $ Source: Ontario Auto Insurance Anti-Fraud Task Force, Interim Report, December With this dramatic rise, an increasing proportion of costs came from accident benefits. The following charts illustrate this dramatic shift over the six years where accident benefits, which made up approximately 30 per cent of all loss costs after the 2004 reforms, increased to approximately 50 per cent by SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 28

32 Source: Financial Services Commission of Ontario. b) Greater Toronto Area Cost Rising More Rapidly In breaking these costs down by areas of the province, the rise in accident benefits is more significant in the Greater Toronto Area (GTA) than in the rest of Ontario. The graph below shows changes in accident benefits claims costs in the GTA, urban areas other than the GTA, and rural Ontario. Claim costs per insured vehicle were used so that population growth does not affect the data. The graph shows that the gap between accident benefits costs in the GTA and these costs in other areas of Ontario grew significantly between 2006 and The accident costs per vehicle in the GTA grew by $715 per vehicle versus $24 in rural areas and $95 in other non-gta urban areas Ontario Auto Insurance Anti-Fraud Task Force, Interim Report, December 2011, page 25. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 29

33 Claims Cost per Vehicle Insured Accident Benefits Claims Costs Have Grown Rapidly in the GTA Rural Non-GTA Urban Greater Toronto Area $1,500 $1,000 $500 $ Source: Ontario Auto Insurance Anti-Fraud Task Force, Interim Report, December The extent of this growth is not readily explained by available data; only 45 per cent of auto accidents involving injuries occur in the GTA, and there is no evidence that injuries sustained in GTA collisions are more severe than in other parts of the province. c) Main Components of Accident Benefits Increase The graph below highlights some of the principal components of the rise in accident benefits costs between 2006 and 2010 including an increase in housekeeping costs of 178 per cent, caregiver costs of 186 per cent, attendant care costs of 67 per cent, and medical costs of 105 per cent. The most concerning and largest increase of 228 per cent was the cost of assessments and examinations that provide no treatment or rehabilitation to the injured person. In 2006, insurers spent $1.90 in medical and rehabilitation treatment for motor vehicle collision victims for every $1 spent on examining and assessing their injuries. By 2010, insurers spent just under $1.20 in medical and rehabilitation treatment for motor vehicle collision victims for every $1 spent on examining and assessing their injuries. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 30

34 Cost per Vehicle Insured Physical Damage Claims Costs Have Remained Relatively Unchanged While Accident Benefits Costs Have Increased Significantly $250 Physical Damage Costs 105% Accident Benefits Costs $ % $150-1% 7% $100 $50-20% 67% 38% 178% 186% $0 Comprehensive Collision Direct Compensation Medical Exams & Assessments Attendant Care Income Housekeeping Replacement Caregiver Source: Ontario Auto Insurance Anti-Fraud Task Force, Interim Report, December d) Comparison to Other Coverages Another concerning trend emerges when the 118 per cent increase in accident benefit costs is compared to other coverages in the automobile insurance policy. The graph above shows that the physical damage costs paid to repair and replace vehicles damaged in accidents, by weather events, vandalism or thefts during this period remained stable. This divergence in trends is more apparent when looking at the actual accidents and injuries reported to the Ontario Ministry of Transportation (MTO) during this period. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 31

35 e) Decrease in Reported Injuries A further divergence to this dramatic rise in costs, also identified in the Auditor General s Report and Interim Report of the Auto Insurance Anti-Fraud Task Force, is the actual drop in the number of personal injury collisions reported to the Ontario Ministry of Transportation. Between 2006 and 2009 the number of personal injury collisions decreased by 7.1 per cent while the number of persons reported injured dropped by 9.1 per cent. 13 Given the trend in claim costs, it would normally be expected that the number of reported personal injury accidents and injury claims would parallel one another. During the same period as the reported drop in personal injuries to MTO, the number of injury claims made to Ontario auto insurers increased by 18.9 per cent or 11,777 claims. 13 Source: Ontario Ministry of Transportation. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 32

36 f) Experience in Other Provinces The overall level and growth in Ontario s claim and accident benefit costs is also much higher than other provinces with privately delivered automobile insurance systems. The average payout for an accident benefit claim in 2010 was over $56,000 in Ontario, compared to levels ranging from approximately $3,809 to $12,619 in other provinces with privately delivered auto insurance systems. This may in part be due to the generous nature of Ontario accident benefits system; however such a large divergence between Ontario and other provinces with similar delivery systems cannot be explained on the level of accident benefits alone. The Ontario Auditor General in his 2011 Annual Report noted that these payouts were higher than under the government run automobile insurance systems in Manitoba where there is no right to sue and in Saskatchewan where, as noted earlier, there is choice of systems. 14 Third party liability claim costs in Ontario also remain high in comparison with other provinces despite restrictions on the right to sue Annual Report of the Office of the Auditor General of Ontario, page 53. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 33

37 Auto Insurance Claims Cost Average Cost Per Claim ($) by Major Coverage Ontario and Other Privately Delivered Jurisdictions 2006 to 2010 Ontario Alberta 15 New Brunswick Nova Scotia Newfoundland & Labrador Prince Edward Island Third Party Liability ,126 9,938 9,566 8,841 12,580 11, ,347 10,306 8,295 8,661 14,202 8, ,876 10,216 8,388 7,596 14,820 9, ,641 9,407 8,870 7,834 13,657 8, ,303 10,369 8,433 8,230 15,949 10,679 Accident Benefits ,853 2,782 10,556 5,615 4,963 5, ,824 3,031 10,139 5,071 6,025 7, ,359 3,361 12,107 5,154 5,508 5, ,948 3,694 11,932 5,282 5,984 6, ,092 3,809 12,619 6,057 7,451 7,920 Collision (all deductibles) ,969 3,711 5,010 3,708 4,167 3, ,107 4,403 4,864 4,019 4,202 3, ,223 4,974 5,087 4,344 4,428 3, ,151 4,903 5,011 4,192 4,133 3, ,556 5,093 5,283 4,542 4,395 3,660 Comprehensive (all deductibles) ,547 3,149 1,647 1,390 1, ,547 3,922 1,709 1,344 1, ,592 4,189 1,568 1,409 1, ,362 4,631 1,371 1,342 1, ,264 5,005 1,512 1,461 1, Source: General Insurance Statistical Agency. 15 Alberta third party liability includes uninsured coverage SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 34

38 As illustrated in the following graph from the Ontario Auto Insurance Anti-Fraud Task Force Interim Report, from 2006 to 2010, accident benefits costs grew faster in Ontario than the four other Canadian provinces where auto insurance is privately delivered. Overall Accident Benefits Claims Costs Have Grown More Rapidly in Ontario than Elsewhere in Canada Newfoundland and Labrador Alberta New Brunswick Nova Scotia Ontario ON NL Provinces Indexed to 100 in 2006 AB NB NS Source: Ontario Auto Insurance Anti-Fraud Task Force, Interim Report, December g) Factors Contributing to Increased Costs As identified in FSCO s 2009 Report on the Five-Year Review of Auto Insurance, the principal factor contributing to these increased costs was not a rise in the number of accidents or injuries, but an overutilization of accident benefits by participants in the system and the over-assessing and over-treating of patients. It appears that participants took advantage of weaknesses in the system, particularly the lack of cost controls and limits on exams and assessments. This level of costs and assessments is inconsistent with other provinces. The increase in utilization of benefits was also accompanied by an increase in disputes coming forward into FSCO s dispute resolution services. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 35

39 A contributing factor to this overutilization is a lack of accountability over who is managing a patient s treatment and rehabilitation. As noted earlier, in Ontario there are numerous health care providers and clinics that service auto insurance claimants. As of February 2011, all health care facilities and providers in Ontario were required to use the Health Claims for Auto Insurance (HCAI) database to transmit auto insurance claims forms to insurers. HCAI is a centralized database that transmits information contained on specific Ontario auto insurance health claim forms between insurers and health care providers. HCAI is owned by the insurance industry and has been set-up as a not-for-profit corporation. Its use is mandated by FSCO. According to HCAI, over 8,600 registered clinics and 29,537 health care providers 16 are registered for the purpose of billing auto insurers for services to accident victims. As noted earlier, MTO statistics show a declining trend in personal injury accidents. In the latest data available, there were approximately 62,500 personal injuries in auto accidents, the vast majority being minor. A clear example of the overutilization in the system was the period leading up to the implementation of the reforms on September 1, Both the HCAI system, which was in a pilot stage at that time and not fully implemented, and auto insurers reported a significant increase in claim forms being submitted for treatment and assessments even though there was no indication of any corresponding rise in the number of accidents. In August of 2010 one month prior to the introduction of the September 2010 reforms health care providers submitted over 205,500 claims forms. This figure did not include other paper claims forms that continued to be submitted by some providers outside of the HCAI system during this pilot stage. In September 2010, one month later, the number was down to 143,478 forms. The data shows the number of claims forms submitted to insurers was just under 88,500 in May 2012, as depicted in the following chart. 16 Health Claims for Auto Insurance. SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 36

40 Source: HCAI Operations Statistics as of May 2012 Insurers also bear some responsibility for overutilization and increased costs in the system, particularly when it comes to claims management. Some companies did not appear to be applying adequate due diligence in reviewing and evaluating proposed assessments and claims, perhaps understandably, with the volume of claims being received in advance of the reforms. However, in not applying an appropriate level or standard of claims management, the costs of unnecessary or possible fraudulent claims were being passed on to consumers. In addition, between 2006 and 2010, there was a significant growth in legal services being provided to claimants as evidenced through the dramatic increase in claims being disputed through the mediation process at FSCO. In 2006, FSCO received 13,015 requests for mediation; in 2010, FSCO received over double that number (27,955). In 2011, FSCO received 36,492 requests for mediation. These numbers are at odds with the previously mentioned decrease SUBMISSION TO THE STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS Page 37