It may be dark skies and rain for a lot of Ontario’s auto insurers right now, but one U.S. analyst is seeing a pot of gold at the end of the rainbow.
“I see some things happening in Ontario auto that gives me maybe not ‘Great Expectations’, but certainly ‘hopeful expectations,’” says Sharon Tennyson, a professor of Policy Analysis at Cornell University. “I’m encouraged by the Anti-Fraud Task Force Report, which shows some glimmers of better things happening in Ontario. It is a wonderful report; a terrific document.”
Speaking at the Insurance Bureau of Canada’s Regulatory Affairs Symposium, Tennyson was optimistic that Ontario’s regulator was moving forward on the anti-fraud report and ready to produce true reform within the industry.
“There is a greater sense of realism among regulators,” she says, “and with a sustainable process reform, there will be some great opportunities to improve the Ontario auto situation.”
Tennyson says that true insurance reform can come by changing the process, not the product.
“You need to think of more than just the product,” she says. “The key thing to think about in bringing about true reforms is the process problems.”
One of the problems with insurance reform is the introduction of thresholds, Tennyson says. (continued.)
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“Thresholds are problematic,” she says. “When Massachusetts raised its claims to the $2,000 threshold, the ‘sprains and strains’ claims peaked at $2,000. Thresholds are seen as hurdles to overcome, as heralded in the media – ‘Accident victim wins challenge to Ontario’s $3,500 minor injury cap.’”
Rate regulation is another issue, where governments attempt to control rates in the face of uncontrolled losses.
“It changes consumer expectations,” she says, “as consumers feel they are the ones in the middle – but really who is in the middle? The provincial regulator, the consumer, or the insurance companies?”
The example of a political backlash – as seen by the 15 per cent goal set by Ontario – leads into the third leg of Tennyson’s problems with insurance reform, problems with payment emphasis.
“Insurance systems designed with an emphasis on consumer rights, the payment of benefits, generally fail to control incentive problems,” she says. “Consumers feel they have a right to low-cost insurance, and insurers become ‘sitting ducks’ in the face of inadequate cost controls; it makes the system and insurers an easy target for fraud and abuse.”
And when fraudulent claims grow, insurers are handcuffed to react in a heavily regulated situation, Tennyson points out. (continued.)
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“In the U.S., soft tissue injury claims are 42 per cent more prevalent in U.S. states that permit unlimited general damages awards,” she says. “In Quebec, drivers who choose replacement cost coverage for automobile theft losses are nine times more likely to report theft, but only when the policy is near its expiration date.”
Tennyson cited another study where auto repair cost estimates are 32.5 per cent higher for insured cars than for uninsured cars.
“Moral hazard is a real thing. You don’t want to believe people would act in this manner, but it is a very real problem,” she says. “There is a real moral problem, and the studies out there prove it.”
Encouraged by the introduction of CANATICS (Canadian National Insurance Crime Services), which Tennyson calls “an essential step” to fighting fraud, insurers must be proactive to stay one step ahead of the organized fraud occurring – especially in the Greater Toronto Area.
“If you are going to fight fraud, you need very good data bases, like that of CANATICS,” she says. “If it is managed with the appropriate enthusiasm. In Massachusetts, they had great success with the community targeted fraud initiative. They found the fraud was localized and organized. Some areas were more problematic than others.”
By studying it and addressing the problem, says Tennyson, it has paid off in the reductions of claims and cost.
