Ontario Standing Committee to Review Auto Insurance

On April 16, 2012 the Standing Committee of General Government of the Ontario Legislature approved a motion presented by NDP MPP Rosario Marchese to conduct a review of the Ontario auto insurance system. The motion passed because the Liberal minority government also is a minority on standing committee because representation reflects the size of caucus in the Legislature.

As result of the motion the standing committee intends to initiate a fair and balanced study into a range of auto insurance industry practices and trends with the purpose of developing recommendations on how to make insurance rates more affordable, and that the committee report its findings to the House. The study shall include witnesses to be called upon to assist the committee and shall include, but not be limited to:

• the current overall profitability of the property and casualty industry, with an analysis of current and future trends in both investment and underwriting income;
• the profitability of auto insurance underwriting in Ontario and costs related to Ontario underwriting, with particular emphasis on profits in the post-September 30, 2010, era where the statutory accident benefits were amended;
• assessing the adequacy of med-rehab treatment as per the capped minor injury guideline;
• the relationship between insurance underwriters and their sales representatives and/or the role independent brokers of insurance play in the industry. This would include an in-depth look at the extent to which brokers that portray themselves as independent of insurers really are independent;
• the impact of fraud in the insurance industry and how that impacts insurance rates;
• assessment of the adequacy of the current definition of “catastrophic injury”;
• ongoing and future trends in claims fraud as well as the impact of recent anti-fraud initiatives in combating such activity;
• the appropriateness of the 12% return-on-equity rate and the approvals mechanisms related to the ROE rate;
• reviewing the auto insurance dispute resolution system; and
• reviewing risk assessment factors of drivers and the corresponding rates assigned to particular drivers, as well as the eligibility and classification factors that currently determine individual, corporate and fleet coverage.

So what does this all mean? Well many of the issues to be reviewed have in fact been previously announced as part of the Government's Budget or commitments made by FSCO in the proposed Statement of Priorities. For example the Government established a Auto Insurance Anti-Fraud Task Force last summer and will be making recommendations later this year. The Financial Services Commission of Ontario (FSCO) set up a medical panel to conduct a review of the definition of catastrophic impairment last year and the Government recently announced that it is planning to move ahead to amendment regulations to implement the panel's recommendations. Some of these initiatives including the review of the minor injury guideline and the 12% ROE rate are subject to FSCO Requests for Proposals and it is expected that the successful consultants will be announced shortly.

It is likely not helpful for the insurance industry or consumers to have parallel reviews taking place with two sets of recommendations. In fact many of the changes coming out of these reviews will not require legislation and likely never come before the Legislature. Cabinet has the authority to create and amend regulations specified in statute.

We have a minority government so it's not business as usual. Opposition parties are looking to flex their muscles and push their own agendas.

Another auto insurance private member's bill introduced in Ontario

On April 23, 2012 York West MPP Mario Sergio introduced New Drivers' Insurance Rate Reduction Act , 2012 (Bill 71), which is intended to lower rates for new drivers.

MPP Sergio previously introduced Bill 43 which deals with allowable elements of a risk classification system. Bill 43 has not proceeded beyond first reading in he Legislature. Both these bill are private members' bills and historically very few of these bill are passed.

Bill 71 requires a risk classification system used by an insurer to determine rates for automobile insurance to provide for lower rates for new drivers by crediting new drivers with additional years of driving experience. All new drivers get credit for 3 years driving experience and those that have completed a driver education course at a recognized school get credit for 6 years driving experience.

A new driver is disqualified from receiving additional years of credit in a number of circumstances, including

(a) if he or she has been found to be more than 25 per cent at fault in an accident;

(b) if his or her licence has been suspended for non-payment of a fine (excluding parking tickets); or

(c) if he or she has been convicted of,

(i) a provincial offence related to driving,

(ii) a Criminal Code offence related to driving, or

(iii) an offence under in another jurisdiction in North America for similar offence.

The bill can be found here.

FSCO's Proposed 2012 Auto Insurance Priorities

FSCO recently released a draft 2012 Statement of Priorities for consultation. Section 11 of the Financial Services Commission of Ontario Act requires that FSCO publish in The Ontario Gazette and deliver to the Minister of Finance by June 30 of each year a statement setting out FSCO’s proposed priorities. As in the past, the document includes a number of priorities for the auto insurance sector.

1.3 Implement auto insurance recommendations made in the Auditor General of Ontario’s 2011 Annual Report

The Auditor General of Ontario released his value for money audit of Ontario's auto insurance system in December 2011. There were a number of recommendations made that FSCO will be addressing over the next two years. The most significant observations in the Auditor's report were:

• The total cost of auto insurance injury claims in Ontario rose by 150% between 2005 and 2010, even though the actual number of injury claims rose only 30% over the same period.
• FSCO offers a mediation service for people who disagree with settlement offers from insurers, but since about half of all injury claims end up in mediation, the service is so backlogged that dispute resolution takes 10 to 12 months rather than the legislated 60 days.
• FSCO had not routinely obtained assurances from insurance companies that they had paid the proper amounts for claims. Without such assurances, there is an increased risk of unnecessarily high payouts, which could help insurers get FSCO approval for higher premium increases.

FSCO will address these recommendations while continuing to implement longer-term projects announced by the Ontario government as part of its 2010 auto insurance reforms.

1.4 Work with stakeholders to reduce auto insurance fraud

The Ontario Government’s Auto Insurance Anti-Fraud Task Force is focused on determining the scope and extent of auto insurance fraud in the province and making recommendations to reduce fraud in Ontario’s auto insurance system. An interim report was released by the Task Force in December 2011.

FSCO is actively engaged with the Task Force’s steering committee and working groups, which are identifying potential initiatives to reduce fraud in the areas of:

• prevention, detection, investigation and enforcement
• regulatory practices in the auto insurance system and
• consumer engagement and education.

FSCO is also leading a working group that is investigating how the Health Claims for Auto Insurance (HCAI) system could be used to detect and prevent fraud. The committee brings together insurers, health care providers, HCAI and government representatives.

1.5 Enhance regulatory oversight of compliance with auto insurance requirements

FSCO will complete its first cycle of follow-up activities associated with the 2011 attestation on Statutory Accident Benefits Schedule controls. The annual attestations are part of the Ontario Government’s commitment to address auto insurance abuse and fraud, as announced in the 2011 Ontario Budget.

The annual attestation process will be reviewed with the industry, and amendments will be made as necessary. The review will also include additional assurance on compliance with approved rates.

1.6 Undertake long-term auto insurance reform initiatives

In response to direction from the Ontario Government associated with the September 2010 auto insurance reforms, FSCO is developing a new evidence-based Minor Injury Treatment Protocol. The new protocol will update the approach to treating soft tissue injuries and reflect current medical science. This project is expected to take two years.

In December 2011, the Superintendent provided his report recommending changes to the definition of catastrophic impairment in the Statutory Accident Benefits Schedule to the Minister.

The Superintendent’s report was based on stakeholder consultations and the two reports prepared by the Catastrophic Impairment Expert Panel earlier in 2011. This panel was struck by the Superintendent at the request of the government to examine the current definition of catastrophic impairment in the Statutory Accidents Benefits Schedule.

In the 2012 Ontario Budget, the government announced that it would move forward to propose regulatory amendments to the definition of catastrophic impairment. FSCO will work with the Ministry of Finance to implement the amendments if they are passed.

1.7 Enhance auto insurance information and analysis to support risk-based approach to regulation

The Superintendent is required to review and approve auto insurance rates filed by auto insurers. The rates must be just and reasonable, not impair the solvency of the insurer and not be excessive in relation to the financial circumstances of the insurer.

The current benchmark return on equity level for auto insurance filings was established in 1988 with a minor modification in 1996.

The Auditor General recommended that FSCO review what constitutes a reasonable profit margin for insurance companies when approving rate changes, and periodically revise the benchmark to reflect changing capital market conditions.

FSCO will review the benchmark profit provision used in reviewing rate filings. FSCO will work with the auto insurance industry to complete a closed third party liability bodily injury claim study on tort claims. These findings will support policy analysis.

1.8 Implement Administrative Monetary Penalties model in the insurance sector

In the 2012 Ontario Budget, the government announced that it plans to introduce amendments to insurance-related legislation and the FSCO Act to provide for administrative monetary penalties. FSCO will work with the Ministry of Finance to implement this tool if the legislation is passed.

2.2 Reduce mediation backlog

FSCO has implemented initiatives to deal with the increase in the number of mediation applications and to reduce wait times for the assignment of files to mediators.

Current initiatives include: an electronic scheduling system, mandatory blitz settlement days, a consent to fail process on request and outsourcing.

In January, FSCO issued a Request for Proposal (RFP) seeking up to four private dispute resolution companies to provide dispute resolution services to address the backlog. Successful proponents will be contracted to begin offering dispute resolution services in 2012.

FSCO is currently developing a policy and process to streamline the screening of applications.
In the 2012 Ontario Budget, the government announced that it would engage in a review of the auto insurance dispute resolution system. FSCO will support the government’s review.

These initiatives address the Auditor General’s recommendations on FSCO’s dispute resolution services.

3.3 Raise awareness of FSCO’s auto insurance filing processes and requirements

Following work done in 2011, FSCO will continue to raise awareness of and enhance transparency around its auto insurance filing processes and requirements. FSCO will use several tools to enhance stakeholders’ understanding of legislation, regulations, filing requirements, the rate approval process and overall compliance obligations pertaining to auto insurance rate filings. These include ongoing meetings with the sector and online media such as newsletters, e-bulletins and webcasts.

4.4 Communicate and coordinate auto insurance regulatory issues through CARR

FSCO will participate in common training and education initiatives as well as co-operative research opportunities with other Canadian regulators on matters involving auto insurance rate regulation through the Canadian Automobile Insurance Rate Regulators Association (CARR).


Links

Auditor General of Ontario 2011 Annual Report - Chapter 3, Auto Insurance Regulatory Oversight

Ontario Auto Insurance Anti-Fraud Task Force, Interim Report

Reports by the Catastrophic Impairment Expert Panel

Mediation Backlog Initiatives

Mobilizing Against Fraud

The Ontario Auto Insurance Anti-Fraud Task Force has taken preliminary steps to establish the scope and appropriate response to fraud.

by Willie Handler

March 2012 issue of Canadian Underwriter

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Recognizing the importance of preventing auto insurance fraud, the Government of Ontario appointed the Auto Insurance Anti-Fraud Task Force on July 29, 2011. Directed by a five-person steering committee, the Task Force is independent of the government. Its mandate is to:
• assess the extent and nature of fraud in the Ontario auto insurance system; and
• recommend actions to reduce the incidence of fraud for the benefit of policyholders.
 
The Task Force submitted an interim report to the government on Nov. 21, 2011. The interim report describes what the Task Force has learned during the four months since its appointment; outlines actions with short-term benefits that might be taken; and establishes an agenda for the balance of its mandate.
 
The final report of the Task Force is due by Fall 2012.
 
Early Observations
 
For some time, a figure of $1.3 billion has been used to describe the cost of fraud in Ontario, but the Task Force believes this figure is not reliable. The Task Force indicates in its report that a comprehensive research and analysis on the scope of auto insurance fraud in Ontario will be undertaken over the remainder of its mandate.
 
The Task Force has categorized fraud into “organized,” “premeditated” and “opportunistic.” These defined categories will create some controversy among auto insurance stakeholders, since some groups do not agree they all constitute fraud.
 
Organized fraud
 
The Task Force defines “organized” fraud as an organized scheme designed to generate cash flow through either staged accidents or fabricated accidents. Individual claimants are not the organizers of these schemes: they generally rely on white-collar professionals to support the schemes. Stakeholders in the system completely agree that these activities constitute fraud.
 
Premeditated fraud
 
Premeditated fraud is defined as continual pattern of charging insurers for goods and services that are not provided or that are unnecessary. A claimant may or may not be complicit in the fraud. As well, in this type of fraud, the participant is not dependent upon a larger organization. Some stakeholders do not consider that claiming for some of these goods and services to be fraud. Rather, they believe these are simply disagreements over what constitutes reasonable and necessary expenses.
 
Opportunistic fraud
 
Opportunistic fraud involves an individual claimant who pads the value of his or her auto insurance claim by claiming for goods and services that are unnecessary or unrelated to the accident. Again, some people will see this as a disagreement about what constitutes a reasonable or necessary expense rather than a deliberate, fraudulent “padding” of claims.
 
Cost Trends
 
A significant portion of the Task Force’s interim report is dedicated to analyzing the costs structure and trends in the Ontario auto insurance system. Although the Task Force did not make a quantitative estimate of the extent of fraud in the system, it did make a number of interesting observations.
The Task Force identified a large — and as yet unexplained — gap between changes in accident benefits claims costs and changes in factors that are expected to influence those costs. The report notes that theses costs are concentrated in the GTA.
 
According to Exhibit 3 in the interim report, accident benefits claims costs increased by $2.4 billion or $370 per vehicle between 2006 and 2010. Exhibit 6 shows that $2 billion in accident benefits claims costs or $300 per vehicle is unexplained.
 
This gap was calculated by comparing actual accident benefits claims costs with projected accident benefits claims costs over that same period had they grown at the same rate as private health expenditures in Ontario.
 
Another concern for the Task Force was the increased frequency of accident benefits claims. Between 2006 and 2009, 6,400 fewer people were injured in auto accidents, based on Ministry of Transportation statistical reports. And yet, accident benefits claims increased by 14% over the same period.
 
The Task Force concluded that the fastest-growing categories of auto insurance fraud are premeditated and organized fraud. This is based on the belief that opportunistic fraud through the padding of claims could not have grown so quickly in such a short period of time.
 
Task Force Analysis
 
The Task Force spent a considerable amount of time collecting and analyzing available historical data. This gives us a very good perspective of how the Ontario system has gone off the rails over the past few years. However, the historical analysis is based on a system that no longer exists. Ontario’s auto insurance reforms, implemented in September 2010, dramatically changed the landscape of the province’s auto insurance system.
 
Prior to the reforms, the largest increases in accident benefits costs from 2006 to 2010 were assessments and examinations (228%), caregiver benefits (186%), housekeeping expenses (178%) and medical benefits (105%), according to Exhibit 16 of the interim report. All these benefits were affected by the reforms. Caregiver benefits and housekeeping expenses are now only paid to catastrophic claimants (about 1% of claims) and policyholders who purchased the optional coverage (also about 1% of claims).
 
Anecdotal feedback from health care professionals conducting medical assessments and examinations indicates business is down 50% since the reforms were introduced. Meanwhile, a number of insurers report that 50% to 70% of their claimants are being treated under the Minor Injury Guideline and are consequently subject to the $3,500 medical and rehabilitation cap.
 
And so, assuming most claimants no longer claim caregiver benefits and housekeeping expenses, if health professionals are conducting half the number of assessments as they did pre-reforms, and if at least half of insurers’ claimants are subject to the $3,500 cap, one would expect significant claims cost reductions since September 2010. I estimate this should work out to a reduction in costs of roughly $1.3 billion. This leaves about $700 million in current unexplained costs in the system. This is still a significant figure, and it speaks to the need to gain a good understanding of the extent and source of fraud in Ontario, particularly during the post-reform period.
 
Expected Changes
 
The Task Force is already working on changes that should have a positive effect on the auto insurance system. These include working on optional e-learning for police officers; changes in Health Claims for Auto Insurance (HCAI), the electronic system health professionals use for transmitting auto insurance claims forms to insurers, that allow health professionals to check for unauthorized use of their identity, FSCO guidelines on health care billing practices; and new anti-fraud brochures and Internet material.
 
More substantive recommendations are still to come. The interim report highlights some of the possible recommendations including:
• licensing and/or regulation of rehabilitation clinics;
• enhancing regulation of the towing industry;
• establishing a dedicated fraud investigation unit; and
• developing a consumer engagement and education strategy.
 
Licensing/regulating rehab clinics
 
The Task Force indicated interest in the licensing requirements introduced by Hillsborough County, Florida in September 2011. Some of those requirements include:
• A physician must be responsible for operating a clinic.
• All persons associated with operating a clinic must submit 1) a copy of their state license; 2) a list of criminal convictions, if any; and 3) a set of fingerprints.
• A clinic must agree to inspections by county code or law enforcement officers.
 
These changes are new, so there is little experience to date regarding their effectiveness as an anti-fraud measure.
 
It is also difficult to determine what body in Ontario would take on this regulatory responsibility, which would include licensing, inspection and enforcement activities. Ontario is reportedly facing a $16-billion deficit and has appointed former bank economist Don Drummond to conduct a public service review. Under the current fiscal environment, don’t expect new money and resources from the Ontario government to regulate rehabilitation clinics.
 
Is there an alternative model? Well, there are the health regulatory colleges. But moving in this direction would require a substantial change in mandate to cover multidisciplinary facilities. In addition, the colleges have their own fiscal and resource restraints.
 
Regulation of the towing industry
 
Towing operators and drivers are currently licensed and regulated by a patchwork of municipal bylaws. Some are effective but many are not.
 
Regulation of the towing industry was proposed in a private members bill (Bill 147) introduced in the Ontario Legislature in April 2011. Bill 147 did not proceed past second reading before the fall Ontario election; therefore, it died on the Order Paper. Had the bill passed, it would have introduced a self-regulatory body, the Towing Industry Council of Ontario.
 
Don’t expect to see the bill revived under the current session, because the towing industry does not yet have the infrastructure in place for self-regulation. Government expenditure constraints will challenge the Task Force to develop a framework that will require minimal public resources.
 
Dedicated fraud investigation unit
 
The Task Force has shown interest in the U.S. National Insurance Crime Bureau (NICB). The NICB partners with insurers and law enforcement to identify, detect and prosecute insurance criminals. Data analytics is a critical tool of the NICB. The mandatory reporting of data by insurers facilitates the data collection. Introducing a similar model in Ontario would likely require legislation and engage some discussions about existing privacy legislation.
 
Where in Ontario would such a potential fraud investigation body be housed? Again, government financing constraints would likely be a factor. Building in some way on the experience of the IBC’s Investigative Services makes sense and more closely follows the American model.
 
Consumer education strategy
 
 The Task Force concluded there is little public awareness of Ontario’s auto insurance system and existing types of fraud. Fraud organizers use this lack of public knowledge to their advantage. Some consumers participate in fraud schemes without their knowledge and without understanding the risks.
The Task Force believes fraud prevention includes a better-informed public. The extent of any potential public education campaign is unknown at this time. But if it happens, it will require funding. FSCO and the Ministry of Finance have no history of funding consumer education campaigns dealing with auto insurance, so expect the financial burden to fall on the insurance industry.
 
The Task Force’s interim report received almost no media coverage, but expect more interest when the final report is completed and released later this year. None of these issues are simple, so the Task Force has its work cut out for itself.

Is the Rate Differential Between Young Male and Female Drivers Still Justified?

According to a study published this week in the Journal of Studies on Alcohol and Drugs, cited by U.S. News & World Report, in 1996, an underage male driver (aged 16-20) with a blood alcohol concentration of .1 percent was four times as likely as a similarly impaired underage female to get into a fatal car accident.

By 2007, that gap had closed.

Eduardo Romano, one of the study's co-authors, speculates that the rise in fatal accidents among female drivers may be related to Independent Women (Part I)'s new found taste for danger, in the form of night driving.

"I think it's a reflection that women have become more independent out in the world. In the past, men always drove on dates, now more women are driving themselves. They're driving more often at night," he says. "Night is always a much more risky time to drive."

According to a AAA report released last week, newly licensed teen girls are also twice as likely as boys to use an electronic device while driving. They are more likely to eat, drink, and adjust non-essential controls like the radio or air conditioner. Boys are more likely to turn around and interact with people outside the vehicle. Girls are more likely to groom themselves while driving.


Journal of Studies of Alcohol and Drugs study is here

AAA report: Distracted Driving Among Newly Licensed Teen Drivers is here