Tuesday, November 3, 2009

Winners and losers in Ontario's insurance reform

intact insurance

The auto insurance reform package that the Ontario government released Monday is, on the whole, a favourable development for the country’s property and casualty insurers, and that should be good news for shareholders of Intact Financial Corp.

Intact, which was known as ING Canada before it was spun off by its Dutch parent earlier this year and listed on the Toronto Stock Exchange, is the biggest home, auto and business insurer in Canada. Its shares rose 1.06 per cent, or 35 cents, Monday after the news, which is still being digested by the market.

Roughly one-quarter of all of the property and casualty insurance premiums paid in this country come from auto insurance in Ontario. And yet no insurer has managed to turn a profit by selling coverage to the province’s drivers over the past year. (The industry lost $390-million on the business last year).

Insurers have been complaining that the generous minimum insurance benefits that drivers in the province must carry were causing the system to “get fat.” i.e., with every driver carrying at least $100,000 in medical and rehabilitation insurance for car accident injuries, insurers say they were routinely paying out close to that amount for people who had relatively minor injuries.

On Monday, Ontario’s finance minister, Dwight Duncan, unveiled 41 changes to the auto insurance rules (the business is strictly regulated because the product is mandatory for drivers), many of which could help restore profitability to the business for insurers. They include a reduction in the minimum basic medical and rehab coverage to $50,000, reductions in other types of coverage, and a higher deductible for basic insurance.

It might not seem obvious that a reduction in the mandatory basic coverage will be a good thing for insurers’ profits. They should be charging premiums that reflect the amount of coverage they’re offering, right? But, as in any highly regulated business, the pricing is somewhat distorted. Auto insurance premiums are regulated by the Financial Services Commission of Ontario, and between now and next summer each of the P&C insurers will have to apply for approval of their rates for the new insurance packages. FSCO has to strike a balance between ensuring that the companies still have an incentive to offer auto insurance in the province (they’re not required to), and ensuring it’s cheap enough that most drivers can afford it. In order to meet the first goal, FSCO has recently been approving higher premiums in the province.

Insurers say they’ve had no choice but to jack up rates. Rising abuse of the auto insurance system in Ontario was only one of the problems that they have been struggling with in the past two years. Others include losses in many of their investment portfolios due to the financial crisis, and wacky weather that’s forced them to pay hundreds of millions to fix damaged roofs and basements.

The situation was bad enough that Robin Spencer, who was chairman of the Property and Casualty Insurance Compensation Corporation, said this summer that the industry was in the eye of a storm from a solvency perspective. The Office of the Superintendent of Financial Institutions, which regulates about 200 property and casualty insurers, said it was worried about capital levels in the industry, and had specifically mentioned auto insurance in Ontario as a problem confronting the industry.

And so, Ontario’s government and regulator have recognized a need to restore some profitability to the province’s auto insurance business. As a result, it’s a reasonable guess that, while many drivers will opt to save some money by opting for the new lower benefit packages next year, their premiums won’t fall by quite as much as some people might expect. Mr. Duncan said yesterday that he hopes the government’s reforms will lead to flat pricing over the next few years.

Drivers will still have the option of paying for more than the minimum coverage, and that too should help insurers, who will have more flexibility to tailor products and pricing.

The provincial changes also include a number of other measures designed to lower insurers’ costs by reducing complexity, red tape and paper work in the system.

On the flip side, it’s possible that a few of the measures, including a yet-to-be-drafted new definition of what constitutes a “catastrophic” injury, could still turn out to be unfavourable for insurers. And there is expected to be some opposition to the changes from within the legal and medical community. Drivers with basic coverage could wind up having to pay out of their own pockets for much of their rehabilitation, these opponents argue.

Insurers say the opposition just proves their point that many professionals were milking the system. Ontario’s drivers were paying more for coverage than those anywhere else in the country because medical costs for an average injury in a no-fault accident in the province were amounting to more than $40,000, compared to about $4,000 in Alberta where those benefits are capped. And yet, the industry claims, Ontarians weren’t getting better care.