BUSINESS

Anger on wheels

There is a new debate over insurance costs

JOHN DeMONT December 12 1988
BUSINESS

Anger on wheels

There is a new debate over insurance costs

JOHN DeMONT December 12 1988

Anger on wheels

BUSINESS

There is a new debate over insurance costs

Life promises never to be the same for Ontario’s 169 automobile insurance companies. Just four months ago, the Ontario Automobile Insurance Board—the regulatory agency that the provincial government created in February to set automobile insurance rates at levels that are in the best interests of consumers—eliminated the industry’s criteria, which date back to the 1950s, of age, sex and marital status for determining premiums. Then, two weeks ago, the board ruled that Ontario’s insurers would only be allowed to earn a 12.5-per-cent return on shareholders’ equity during 1989— rather than the 18-per-cent return that many companies said they needed to make a profit. And now, members of the insurance industry say that they are about to lose even more of their autonomy. This week, pension consultant William A. Mercer Ltd. is scheduled to file a report with the provincial insurance board. Following a series of public hearings, the report will likely be used as the basis for setting benchmark premium

rates for Ontario’s 5.7 million drivers. The impact threatens to be long-lasting. In response to mounting public pressure against escalating rates, the Ontario government has limited increases to 9.2 per cent since April, 1987. Government insurance board chairman

John Kruger has assured the companies that he will permit rates to increase again in 1989. But industry spokesmen insist that companies operating in the province pay far more in claims than they take in with premiums. And they add that the firms need premium increases in the 20-per-cent range. Otherwise, car insurers say that they might have to abandon the Ontario market.

But the board also must consider consumers’ demands for lower premiums—and the political interests of the majority Liberal government. Indeed, the Ontario dispute is just one of the bitter political battles being fought across Canada and the United States as angry consumers revolt against skyrocketing automobile insurance. Howard Pawley’s New Democratic Party was driven from office in Manitoba last April after it proposed major auto insurance premium increases. And provincial governments with privately run insurance plans are closely watching Ontario. Said George Poirier, New Brunswick’s deputy superintendent of insurance under the Liberal government of Premier Frank McKenna: “I imagine that whatever Ontario does, we will do immediately.”

In the United States, the fight is centred in California. During the recent election, residents voted in Proposition 103 to cut all automobile premiums by 20 per cent in the state, with another 20 per cent off for drivers with good safety records. And the Californian revolt could spread. Consumer groups and legislators from 30 states have already contacted the author of Proposition 103, Harvey Rosenfield, a Santa Monica lawyer. Rosenfield led a group of concerned California consumers known as “Voter Revolt” who were angered by what they perceived as the influence of the insurance industry in the state’s legislature. The group was instrumental in the passage of Proposition 103.

But American insurers have fought back with nine lawsuits challenging the constitutionality of Proposition 103. And several companies are threatening to pull out of the auto insurance industry altogether. In all, officials in the California insurance industry estimate that the proposal will cost them $4.8 billion in lost premiums. Said Rosenfield: “We are confident the courts will not permit themselves to be used as a shield to protect the insurance industry’s profits at the expense of the pocketbooks of the voters of California.”

Many Canadian consumers have expressed outrage similar to the revolt in California. According to Statistics Canada, the average cost of insuring a car—public and private—has increased by 77.4 per cent from June, 1981, to October, 1988. But in some cities, motorists have seen their insurance costs grow far more dramatically. According to the Ontario Insurance Board, a principal male driver over the age of 21 in Toronto with three years’ driving experience and without any accident claims paid a maximum of $1,717 in 1987, compared with $634 in 1982. And a typical 18-year-old male Toronto driver had to pay a maximum of $4,705 in 1987 compared with $1,906 six years ago. For their part, the companies say that accident claims and settlements have been rising even faster.

It is significant that the consumer backlash has even spread to Manitoba, where car insurance rates are government-controlled and premiums, which are less than half of Ontario’s 1987 average auto premium of $660, remain among the lowest in North America. The Manitoba Public Insurance Corp. sparked public rallies, demonstrations and petitions throughout the province by announcing last winter that it planned to increase rates by 24 per cent on March 1,1988—even though they had only increased by nine per cent since 1985. The NDP government quickly lowered the increase to 18 per cent and launched a ninemonth inquiry into the auto insurance system

that ended up costing $600,000 and recommending that Manitoba adopt a total no-fault insurance system, under which there are prescribed benefits for any accident situation. But the rate hikes were so controversial that political observers cited them as one of the key

reasons the Pawley government lost the election. Last week, the provincial insurance corporation announced that it will be seeking an average rate increase of only 2.5 per cent for 1989. If the Manitoba Public Utilities Board approves the proposed rates, about half of the province’s 340,000 drivers would not have an increase. Said Walter Bardua, the insurance corporation’s newly appointed president: “The events of the past year have made the corporation more sensitive to the needs of Manitobans.”

Still, Ontario is the main battleground in the growing national debate over insurance rates. After the cost of insurance rose by 40 per cent in just two years, the Liberal government reacted to public complaints and capped premium rates in April, 1987. The government also began a comprehensive plan to assume greater control of the auto insurance industry. During the provincial NDP’s unsuccessful 1987 election campaign, that party even threatened to create a government-run car insurance corporation similar to those in Saskatchewan, Manitoba and British Columbia. However, the government watchdog Ontario Automobile Board has been the industry’s toughest opponent. Insurers strongly protested the board’s new criteria for premium rate classifications, which include such factors as annual driving distance, driver experience and accident history, although they ignore age, sex and marital status. But insurance company officials are evidently even more apprehensive about the board’s next move. The latest round of hearings is designed to set premiums for particular classifications of drivers at a level that will allow companies to meet the target return of 12.5 per cent for 1989. Insurance companies are allowed to appeal if they feel that the new rates are too low. Even so, the industry is already making dire predictions that some companies will be forced out of the industry if the new rates are inadequate. The reason: most of them say that they are losing money selling insurance in Ontario because of soaring accident claims. Overall, they say that in 1987 they paid out $142 million more in claims and operating expenses than the $3.2 billion they took in in premiums.

Ontario’s largest car insurer, Co-operators General Insurance Co., has already stopped issuing new auto insurance policies to new customers in Metropolitan Toronto because it says that the firm has been paying out almost $1.50 in claims for every $1 in premiums taken in. And other companies are reducing the number of independent brokers they deal with, while others are telling their brokers to limit auto business until they can write more property and commercial policies. Said James Hill, president of Economical Mutual Insurance Co. of Kitchener, Ont.: “We aren’t exactly beating the bushes for more auto business in Toronto.”

But the insurance board says that it will not yield to pressure from insurance companies or consumers’ groups. Chairman Kruger says that the board’s goal is to set premium levels that will not be too onerous for consumers— but that will still be high enough to stop companies from bailing out of the automobile insurance business. Added Kruger: “We will have to have the wisdom of Solomon.”

The activities and decisions of the board’s nine members—appointed by Ontario Premier David Peterson—will be watched closely by regulators in other provinces. Drivers in Alberta and the Atlantic provinces have not experienced drastic rate jumps in recent years, but officials in those provinces say that standards established in Ontario tend to set the pattern for the rest of the country. For their part, British Columbia industry-watchers also have expressed keen interest in the Ontario developments. Last May, the Insurance Bureau of Canada began an extensive—and expensive— lobbying effort to persuade B.C. insurance agents that they would be better off without the 14-year-old government insurance plan. But a private poll showed that 93 per cent of provincial agents were against returning to private automobile insurance because under the government system, they just have to renew premiums instead of going out and looking for commissions. Like many Canadians, it seems, even some agents are not convinced that the companies can do a better job on their own.

JOHN DeMONT with JOHN DALY in Toronto, DOUG SMITH in Winnipeg, HAL QUINN in Vancouver and BARBARA WADE ROSE in San Francisco