The Evolution of Auto Reforms

Just a few weeks ago, one insurer announced a record loss of $1.2 billion on Ontario auto insurance, increasing the entire industry's loss ratio by almost 5%, up to 99.4%. How did we get to this point?

If we review the convoluted history of Ontario over the past 20 years, we may better understand the myriad pressures on a complex system with so many stakeholders with opposing vested interests. Increasingly difficult to understand, and more difficult to explain, Ontario auto insurance is without peer in its complexity. Litigation and dispute resolution outcomes continue to expand the scope of benefits and medical and rehabilitation costs continue to escalate at double digit inflation.

Ontario has reformed its auto insurance regime as of Sept. 1, 2010. The question is, though, did we get it right this time?

No Fault: Beginning of the End?

After a series of public inquiries, David Peterson's Liberal Government enacted the Ontario Motorist Protection Plan (OMPP) in 1990. This introduced a verbal bodily injury "threshold" to eliminate smaller claims. As a trade-off, no fault income replacement benefits (IRB) doubled from $70 to $140 per week and some medical rehabilitation benefits were enhanced. The reasoning here was this: with quicker access to treatments, injured accident victims would recover faster and resume their active place in society.

The first few years of the plan appeared to keep accident benefit and bodily injury (tort) costs in check. But just months after implementation, the NDP were elected.

The NDP's platform included government auto insurance, modeled on the success of the Insurance Corporation of British Columbia (ICBC). Thousands of insurance workers marched on Queens Park, attempting to dissuade then-Ontario premier Bob Rae from creating a new branch of the civil service, which they argued would displace 30,000 insurance workers during a recession. The insurance file was one of the issues leading to Rae's downfall.

Bill 164

The NDP changed tack from its platform, introducing Bill 164 in January 1994. Caregiver benefits, housekeeping and home maintenance benefits, attendant care benefits, residual earning capacity benefits were now available regardless of fault. In addition, concepts such as "pay now, dispute later" were introduced. IRB of up to $1,000 per week and generous benefits were available for non-earners.

This was a huge paradigm shift. Tight deadlines were imposed on insurers to issue bi-weekly cheques for IRB and to pay for medical rehab services promptly. To arbitrate disputes over medical entitlement, Designated Assessment Centres (DAC) were established as "neutral" assessors, paid by insurers, to balance the interests of insurers and claimants.

The potential long-term effects of Bill 164 terrified insurers and reinsurers. They scrambled to elicit promises from both Liberals and Conservatives in back rooms to rescind Bill 164 quickly should they succeed the NDP.

Bill 164 lasted only 22 months, but its legacy lives on. Many benefits and procedures problematic for insurers were hatched. It is significant that from this point onwards, all subsequent changes would reduce or eliminate some no fault benefits to try and achieve cost controls on claims.

Bill 59

The NDP lost to Mike Harris' Conservatives in 1995. The Harris government quickly introduced its new auto insurance scheme, Bill 59, effective Nov. 1, 1996. DACs stayed, but were placed under regulation of a government-appointed committee. IRBs were slashed from $1,000 to $400 per week unless optional benefits were purchased.

Bill 59 was called the Ontario Auto Insurance Rate Stability Act, which did not live up to its name. From 1995 to 2002, auto insurance loss costs continued to climb. Medical and rehabilitation costs increased 400%.
Premier Harris resigned in 2001, but the Conservatives introduced further changes contained in Bill 198 on Oct. 1, 2003.

Bill 198

Bill 198 highlights included:
• Pre Approved Framework (PAF) for treatment of minor whiplash injuries without prior approval.
• A one-year ban on cash-out settlements.
• Any denial of a benefit would require the insurer to set up a medical assessment or DAC.

Three weeks later, Dalton McGuinty's Liberals, who had campaigned on auto insurance reforms, took the reins. Their platform, Lower Rates for a Change, noted auto rates had increased 43% from 2001 to 2003.

The Liberals promised an immediate rate freeze and rate cut of 10% within 90 days of taking office. But when the Liberals took power, the changes introduced under the Harris government had only just begun to reduce insurers' loss costs. The Liberals went ahead and imposed the rate freeze. By March 2004, as many as 60% of insurers reduced their rates by filing 10% reductions.

The Demise of the DAC: O. Reg 403/96

Keeping an election promise, the Liberals eliminated DACs when they implemented Ontario Regulation 403/96 on Mar. 1, 2006. A virtual explosion of assessment clinics for both sides sprung up everywhere as a result.

The new medical rebuttal provisions, aimed at restoring fairness, drastically increased the number of assessments per file. The cost of assessments expense per vehicle increased 258%, from $39.31 in 2004 to $140.89 in 2009. On an AB claims file with $60,000 total costs incurred, insurers often spent $30,000 for cost of examinations. More money was going to assessment clinics than for treatment.

Other benefits paid increased sharply from 2004 to 2007. The costs of coverage per vehicle increased as follows:
• Attendant care benefits increased 101%, half of which was going to family or friends.
• Caregiver benefits increased 146%.
• Disability income benefits increased 20%.

Moreover, catastrophic impairment applications increased, with significant costs to assess.

Ontario Auto Reforms: O. Reg. 34/10

Soon after the Liberals were re-elected in 2007, the Financial Services Commission of Ontario (FSCO) recommended changes after hearing submissions from stakeholders. The new Statutory Accident Benefits Schedule (SABS), O Reg. 34/10, is the product of that FSCO report. The government's key objectives were to:
• help keep premiums affordable for most drivers; and
• provide consumers with more choice and flexibility.

What Next?

The changes took effect on Sept. 1, 2010. Critical to the new product, a Minor Injury Guideline (MIG) replaced the PAF. The MIG is intended to capture 70% of all injuries within a $3,500 cap. Very early indications suggest at least some insurers are able to reach this target. The number of assessments is down, and problematic benefits like housekeeping and caregiving are eliminated unless optional coverage has been purchased or the injury is catastrophic.

Since benefits are reduced, most changes apply only at renewal. Given a 10-month backlog in the dispute resolution arena, the new wording has not yet been tested. Attaining some certainty may take at least another 18 months.

Ontario will have a provincial election in October 2011. If the incumbent government falls, will the new one resist tinkering with auto insurance? Are we destined for another round of changes within five years?

Will history repeat itself? If so, any benefits to insurers of the current reforms will be short-lived; abusers of the system will ultimately discover and exploit loopholes. Transaction costs for insurer examinations and dispute resolution costs will again increase.

After 21 years of turmoil, hold on, here we go again.

_{Source: By: James I. Cameron, president, Cameron & Associates Insurance Consultants 2011-05-01 canadianunderwriter.ca}