High auto insurance industry profits a wake-up call

An updated report spotlighting the high profits of the Ontario auto insurance industry is a wake-up call that requires government action, says critical injury lawyer Patrick Brown.

The report — Price Regulation and Possible Premium Overpayments: Automobile Insurance Companies in Ontario — was prepared for the Ontario Trial Lawyers Association by Dr. Fred Lazar, an associate professor of economics at the Schulich School of Business.

“Based on my calculations using the latest publicly available data, auto insurance companies in Ontario made $1.5 billion in pre-tax profits in 2016, an increase of 57 per cent or $534 million since 2012,” Lazar states in the report.

He estimates that there has been a possible premium overpayment of $5.4 billion by Ontario drivers since 2001.

‘$5B overpayment’

“The auto insurance industry has literally got a $5-billion overpayment and a roughly 60 per cent increase in profits,” says Brown, a partner with McLeish Orlando LLP. “It’s disheartening to have to have a professor from a leading business school dive into it — I expected the government to be all over this.”

The Financial Services Commission of Ontario (FSCO) regulates the Return on Equity (ROE) that the auto insurance industry is meant to receive, namely 5.1 per cent. Lazar finds that the average ROE for Ontario auto insurance companies in 2016 was 15.9 per cent, more than three times the recommended level. He says insurers collectively have generated ROEs well in excess of the FSCO caps for years.

Brown says there is nothing wrong with having a strong profitable model for the Ontario industry, but there has to be some kind of limit on profitability.

‘Take a hard look’

“Sixty per cent is a high amount compared to other industries, especially in one partly regulated by the government,” he says. “The government has got to step up and take a hard look at where the money’s going.”

Lazar’s opinion is that the increase in profitability is likely the result of a widening gap between reductions in claims coverage costs and premiums. He gives examples of years where average claims per vehicle declined dramatically but premiums barely dropped.

Brown recalls that a number of years ago, the insurance industry said it was in crisis. “They said that profitability was not sustainable. When they were asked what the problem was, they said it was the amount paid out to victims. Since then, the government has cut benefits dramatically.”

He says there was a similar reaction when people complained about high premiums, with the government legislating more cuts to victims to try and get the industry to lower their premiums.

“Then to turn around and find out that profitability has gone up 60 per cent, you have to ask: Why do this to those victims? It’s a real problem. It’s a government problem. They should address this issue and readjust the system in order to help protect victims,” Brown says.

Vulnerable Road User laws

Through his involvement with Friends and Families for Safe Streets and a coalition in support of new Vulnerable Road User laws, Brown is fighting for victims’ rights.

“Victims should be in the forefront of any reforms. At stakeholder meetings, they have representatives for the insurance and medical rehabilitation industries and some limited lawyer input. When are they speaking to victims? Unfortunately, victims don’t have the money to lobby the way other groups do and seldom have a seat at the table,” he says.

In response to the report, Finance Minister Charles Sousa said the government is aware of “alarming costs that do in fact exist in our system,” and he pointed to the establishment of the Financial Services Regulatory Authority (FSRA) as a major step toward tackling the situation, CTV reports.

The FSRA will be a new, independent Ontario financial services regulator, tasked with duties now performed by FSCO and the Deposit Insurance Corporation of Ontario, as well as new functions intended to improve consumer and pension plan beneficiary protections. Work is underway to make it fully operational by April 2019.

Access to financial information

“One would certainly hope the FSRA would help,” Brown says. “The government should have full access to financial information from these entities and so should the ordinary consumer.”

The business practices of the auto insurance industry warrant scrutiny, he adds.

“Companies that employ good business practices, such as saving overhead and using technology, will continue to be profitable and will bring premiums down. The system should not protect poor performers or prop up lower premiums on the backs of victims,” he says. “That’s simply wrong.”

The true costs of crash victims’ injuries are spilling over into Ontario’s health-care system, Brown says.

“We’re all paying for it now. Meanwhile, the auto insurance industry’s profits are sky high and victims, if they are even compensated at all, are receiving half the amount.”