Captive agencies like Geico and Allstate may be stealing away a lot of auto insurance business from producers, but not all is rosy in their garden. According to one policy analyst, insurance reform and regulation is causing heavy losses for auto insurers.
Speaking at the Insurance Bureau of Canada’s Regulatory Affairs Symposium, Professor Sharon Tennyson of Cornell University highlighted three issues US auto insurers have seen with insurance reform to educate Ontario insurers on what to expect from the area’s recent reform policies.
One of the problems with insurance reform is the introduction of thresholds, Tennyson said.
“Thresholds are problematic,” she said. “When Massachusetts raised its claims to the $2,000 threshold, the ‘sprains and strains’ claims peaked at $2,000. Thresholds are seen as hurdles to overcome, as heralded in the media – ‘Accident victim wins challenge to Ontario’s $3,500 minor injury cap.’”
Rate regulation is another issue, where governments attempt to control rates in the face of uncontrolled losses.
“It changes consumer expectations,” she said. “As consumers feel they are the ones in the middle – but really who is in the middle? The [regulator], the consumer, or the insurance companies?”
Problems with payment emphasis is the third leg of Tennyson’s problems with insurance reform.
“Insurance systems designed with an emphasis on consumer rights, the payment of benefits, generally fail to control incentive problems,” she says. “Consumers feel they have a right to low-cost insurance, and insurers become ‘sitting ducks’ in the face of inadequate cost controls; it makes the system and insurers an easy target for fraud and abuse.”
And when fraudulent claims grow, insurers are handcuffed to react in a heavily regulated situation, Tennyson points out.
“In the US, soft tissue injury claims are 42% more prevalent in US states that permit unlimited general damages awards,” she says.
Tennyson cited another study where auto repair cost estimates are 32.5% higher for insured cars than for uninsured cars.
“Moral hazard is a real thing. You don’t want to believe people would act in this manner, but it is a very real problem,” she says. “There is a real moral problem, and the studies out there prove it.”
Insurers must be proactive to stay one step ahead of the organized fraud occurring, Tennyson said.
“If you are going to fight fraud, you need very good data bases,” she advised. “In Massachusetts, they had great success with the Community Insurance Fraud Initiative. They found the fraud was localized and organized. Some areas were more problematic than others.”
By studying it and addressing the problem, said Tennyson, it has paid off in the reductions of claims and cost.