A collision course for car insurance
Leading up to the provincial election, the Liberals, Conservatives and NDP are calling for an end to location-based rating within car insurance. At first glance, this may appear as a rallying cry for fairness. In reality, it blames insurance companies instead of committing to system-wide reform — a strategy that would directly benefit consumers. Car insurance is on a collision course unless Ontario’s next leader takes a firm stance on reforming the current system in this province.
It’s a common misconception that insurance companies set auto insurance rates. That’s the responsibility of a regulatory agency with the Ministry of Finance, the Financial Services Commission of Ontario (FSCO). Its objective is to share the cost of claims proportionately across accident and claim patterns, an ongoing challenge shared by approximately 60 insurance companies in Ontario. Typically, the higher the risk, the higher the premium.
Generally, injury expenses from car accidents aren’t covered by OHIP. Insurance policies — or insurance companies — cover the expense. This differs from other provinces where expenses are covered by provincial health care.
Fraud is more prevalent in Ontario compared to other provinces, and inefficiencies in both product and process drive up the cost of claims. Within the current environment, the legal system is incentivized to increase the value of claims in order to expand legal fees — just one of the inefficiencies identified in a government-issued report Fair Benefits, Fairly Delivered. Fraudulent activity occurs in multiple ways, everything from inflated health-care expenses to the cost of fixing your damaged car. It’s been estimated that fraud in Ontario drives up premiums by as much as 15 per cent. Fraud costs insurance companies hundreds of millions of dollars every year, which is then passed on to its policyholders.
The average cost for consumers to insure their vehicle in Ontario is $1,500 a year. There are three regions around the Greater Toronto Area that, on average, pay higher premiums.
Recently politicians have chosen to focus on Brampton, an area that pays the highest rates in the province, and perhaps the country. Headlines reference the end of geographic or postal code discrimination, but fail to explain the reason rates are higher in specific parts of the province: the more cars on the road, the more accidents occur, the higher number of claims and higher insurance rates for consumers. This is generally the case across the GTA. It’s also typically regions with the highest carinsurance rates that experience the greatest fraudulent activity.
Insurance rates are a balancing act where consumers pay for their possibility of risk. Where your car lives is one of the strongest predictors of the probability a claim will be made. If this variable is removed from the rating equation to satisfy consumers in the GTA, those outside the GTA will inevitably cover the cost. People living in more remote areas of the province with fewer cars, accidents and claims would see premiums increase by up to $500 a year.
Insurance companies have been filing for rate increases based on the cost of settling claims in Ontario but the regulator hasn’t awarded what’s required to maintain financial stability. As a result, many insurance companies are operating at a loss on auto insurance while they are left to try recouping the cost from other products lines, if they can.
If companies aren’t sustainable, they may consider leaving Ontario’s auto insurance industry. Less competition will lead to higher rates for Ontarians without addressing the underlying issues.
Consumer choice and market competition is something everyone wants.
Insurance brokers across Ontario are working hard to advocate for consumers. To effectively lower rates, the party that wins the Ontario election on June 7 needs to keep location within rate setting for car insurance, implement solutions outlined in Fair Benefits, Fairly Delivered and transition from our current system regulated by FSCO to one that expands enforcement and allows the industry to appropriately set and police regulation changes.
Ontario’s next premier must take a proactive approach to protecting against some of the highest insurance rates in the country: commit to fixing the system, uphold premiums that effectively represent risk, and implement responsible measures that benefit all consumers in Ontario.
IF COMPANIES AREN’T SUSTAINABLE, THEY MAY CONSIDER LEAVING.