Auto insurance rate cuts are coming, like it or not

Whether it's reasonable or not, insurers must respond: IBAO CEO Panel

Aviva's Maurice Tulloch, The Dominion's Brigid Murphy and Karen Gavan of Economical participating in the CEO panel at the 93rd IBAO Convention, October 24, 2013.

Whether its doable or not, a 15% reduction in auto rates in Ontario has been mandated, so insurers need to respond.

That was the general consensus of members of the CEO Panel at the IBAO Convention in Toronto on Thursday, October 24. The panel featured former president and CEO of Aviva Canada, Maurice Tulloch (who flew back to Toronto from his role as CEO of Aviva UK and Ireland General Insurance); Karen Gavan, president and CEO of Economical; Brigid Murphy, president and CEO of The Dominion; Alister Campbell, president and CEO of The Guarantee; and Jean-Francois Blais, president of Intact Insurance.

Read: Premier Wynne addresses auto rate cuts at IBAO Convention

Moderator Evan Solomon of the CBC kicked off the panel discussion by asking whether or not the 15% rate reduction is “reasonable and responsible.”

Tulloch was the first to respond, and instead of answering the question he offered six ways in which he believes the target could be met.

“We’ve got to revise the CAT [catastrophic impairment] definition,” he said. “The government had actually commissioned a piece of work a couple of years ago. That piece of work, which was through an independent body, had great findings. We have to move that forward.

Read: Pastore decision broadens definition of CAT impairment

“We’ve got to adjust things like the interest rates. Interest rates still on SABS are 1% a month compounded. I don’t know which interest rates you guys are getting, but I know I’m certainly not getting those from my bank account. Why doesn’t the interest rate mirror something like 1.5, 2% per year?”

Tulloch said he also wants to see the minor injury reform stabilized, treatment costs reduced, the arbitration process reformed, and the Ontario bodily injury verbal threshold replaced.

Read: Maurice Tulloch appointed CEO of Aviva UK and Ireland General Insurance 

“I think that if we actually look at things that we can put in place, I think we can get pretty close to the government’s objective.”

Tulloch stressed that in order for the industry to meet the 15% target, all stakeholders need to be on the same page.

“We need to respond and we need to stop talking about things that are fluffy. I’m not saying fraud is not worth something, but it’s not going to get you anywhere close to 15%.”

Murphy then dismissed Solomon’s question of whether the cuts are reasonable or responsible, by saying, “We are where we are.”

Read: Cuts to auto insurance rates could mean trouble for industry

“We’re in a situation where somebody else is controlling the dialogue and we’re stuck with it. It’s not about being responsible, it’s about dealing with it.”

Blais added that the Ontario auto product has approximately 3% inflation built into it. “So when you don’t change the premium, basically you are giving a 3% rate reduction every year to the consumer.” Additionally, he added, bodily injury costs continue to rise. “So I think it’s already a challenge to keep the premiums flat.”

The discussion then shifted to the Greater Toronto Area, and the adverse political reaction that could be sparked by rates being cut outside of the GTA but not inside the GTA.

“That’s certainly a concern because even where we’ve had reasonably good results over all, there are still pockets around the GTA where we’re losing money on the product. So, the rate filing process is highly misunderstood, in that you have to look at the cost for each territory relative to the premium rate for each territory. It’s not an aggregate reduction across the board,” explained Gavan.

Read: Which insurer ranks highest in auto claims experience?

“The reality is if you’re forced to reduce rates… you’re going to do it in a way that maximizes the outcome for your company. You have to. It’s going to be based on who needs rate the most, how can you get it to the risk that need it the most, and how do you keep your best business,” said Murphy. “The reality is not everybody in Ontario will get 8% by August of 2014 even if the industry reduces by 8%, guaranteed.”

Gavan added: “What I’m concerned with is that someone in Timmins or Thunder Bay or Sarnia is expecting a big rate decrease because of the cost saving measures. It’s not going to reduce the costs there. They’re already getting a reasonable premium for the product they’ve got. So it’s built false expectations among consumers across the province.”

“Where we are today with this minus 15% is we’ve created the perception that everybody will get minus 15%, which is not the case,” added Blais. “When you have to do a full filing with FSCO you have to justify, to the dime, what you charge everyone. You cannot just say its minus 15 across the board, because there is more than one rating variable.

Read: Rate reduction won’t fix Ontario auto problems, says IBC

“The premium reductions have to follow the loss experience. There is no way around this. Even FSCO will support that.”

On the topic of carriers exiting marketplaces because of the 15% rate reduction, Campbell said capacity withdrawal is a real risk. “The risk is that when you try to find the 7% after the 8% [reduction], and the reforms have not taken place, that companies that were forced to take more than they should have to get to 8%, wash their hands and walk away.”

He added: “We don’t know for sure how this is going to work out with the insurance companies, but we already do know it’s not great for brokers. …Your revenue is going down when growth is hard to find.”

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