If Ontario arbitrarily reduces its auto insurance rates by 15%, consumers could face problems finding auto insurance coverage, insurance industry associations told an Ontario legislative committee on April 15.
Ontario’s Standing Committee on General Government was formed in 2012 to conduct a study of auto insurance in the province. It will be developing recommendations for making rates more affordable.
“Reducing auto insurance rates without a plan to tackle the root problems in the auto insurance system will have a negative impact on drivers, insurers and, ultimately, Ontario’s economy,” the Insurance Bureau of Canada (IBC) warned in its presentation to the committee.
It will also have a negative impact on brokers. “Recently, insurance firm CEOs wrote to all three parties to highlight some of these impacts, including…limiting the amount of business written through brokers,” IBC told the legislative committee.
Basically, industry representatives say insurers might be less inclined to underwrite auto insurance risks if the companies are mandated to reduce premium at the same time that claims costs remain volatile. With the possible exception of the past year, claims costs have threatened the profitability of the province’s auto insurance product, insurers say.
IBC presented the results of two studies regarding the financial health of the province’s auto insurance product. The association commissioned the studies by KPMG and J.S. Cheng & Partners Inc. They show that the Ontario auto insurance industry lost $2 billion on the product between 2008 and 2010. (continued.)
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Partial reforms to the product introduced by the Ontario government in September 2010 seem to have brought the product back into profitability. But losing 15% in premiums would potentially erase these gains, insurers told the committee.
“It’s quite simplistic for the NDP to call for a rate cut without a plan,” said Ralph Palumbo, vice president of Ontario for IBC. “But do the math – a straight 15% cut to premiums would turn a modest profit in 2012 to another potential $1 billion loss across 90 insurance companies that sell auto insurance in Ontario and sets up the possibility of insurers leaving the market or becoming insolvent.”
Committee members asked representatives of the Insurance Brokers Association of Ontario (IBAO) about the potential for a market availability issue arising as a result of insurers cutting back or withdrawing from the province’s auto insurance market.
“Mandating a 15% reduction on an already unprofitable company will cause them to seriously re-consider doing business in certain parts of Ontario,” said IBAO chairman Rick Orr. “At a minimum, they will limit taking on new risk and do what they can to reduce their existing exposure.”
Auto insurance is mandatory in the province. One way to reduce exposure is to place more drivers with Facility Association (FA), a so-called “market of last resort” established by the insurance industry. FA ensures that automobile insurance is available to high-risk motor vehicle owners or drivers who are unable to obtain automobile insurance through the voluntary insurance market.
Since FA is a market of last resort, its rates are deliberately set higher than those found in the voluntary market, so that the markets don’t compete. IBAO recalled before the committee a time when insurance availability issue arose in 2004.
“Facility Association was at an all-time high of 14% of the market [in 2004],” Orr said. “Today it is at 0.5%. An availability issue would drive the young and new drivers into Facility, forcing the highest rates on those that can least afford them.”
