Leading up to the provincial election, the Liberal government, Conservative party 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.
Here in Ontario
Ontarians purchase insurance one of three ways: directly from an insurance company; from an agent who sells a single insurance company’s products; or through an insurance broker who sells products from a number of insurance companies throughout the province.
Here in Ontario it’s a common misconception that insurance companies set auto insurance rates, but it’s the responsibility of a regulatory agency tied to the Ministry of Finance – the Financial Services Commission of Ontario, or FSCO. Their objective is to share the cost of claims proportionately across accident and claim patterns – an ongoing challenge shared by approximately 60 insurance companies across the province. Typically, the higher the risk, the higher the premium. This is risk-based pricing.
Why Ontario Drivers – and GTA Drivers – Pay More
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: A Review of the Auto Insurance System in Ontario.
Insurance fraud has been widespread in the GTA for many years. Everything from the benefits your policy provides if you’re in an accident, to the cost of fixing your damaged car, to the cost of escalating your claim is taken advantage of by our health care system, the auto repair industry and our legal system.
It’s been estimated that fraud in Ontario drives up premiums by as much as 15%. Fraud costs insurance companies hundreds of millions of dollars every year, which is then passed on to its policyholders.
The Price of “Fairness”
The average cost for consumers to insure their vehicle in Ontario is $1,500 a year. There are three regions – all around the GTA – that on average pay a higher premium.
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 – a win! – 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. The GTA has the most vehicles on the road, witnesses the greatest number of accidents and sees the most claims come through the system compared to the rest of the province. It’s also generally the regions with the highest car insurance rates that are subject to the greatest fraudulent activity. Collectively, this is the basis of risk-based pricing.
Where your car lives is one of the strongest predictors of the probability a claim will be made. If we assume insurance companies in Ontario are financially stable, then removing this variable from the rating equation could satisfy some consumers within the GTA, but only two outcomes are possible: consumers outside the GTA will inevitably cover the cost; or insurance companies’ financial stability will decline.
If location is removed from rate setting, 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 rates are a balancing act where consumers pay for their possibility of risk. What data and logic tell us: it’s much riskier to drive in the GTA.
The End of Consumer Choice
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 – if possible – recoup the cost from other products lines.
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 we should all be advocating for and expanding in the future.
Back on Track
Insurance brokers across Ontario are working hard to advocate for affordable coverage and appropriate benefits to properly protect our clients. To effectively lower rates, the party that wins June 7th needs to:
- Keep location – an objective variable – within rate setting for car insurance. Cap the maximum proportion each variable can carry and work closely with the new regulator, the Financial Services Regulatory Authority or FSRA, to reassess rating territories and ensure boundaries are an accurate reflection of claim patterns.
- Implement efficiencies and cost-savings solutions outlined in a recent study by Ontario’s adviser on auto insurance – Fair Benefits, Fairly Delivered – including a network of independent examination centres and standard treatment plans for minor injury from car accidents.
- Transition from our current system regulated by FSCO to one regulated by the new regulator, the FSRA. A new regulator can expand enforcement and allow the industry to appropriately set and police regulation changes.
Ontario’s next leader 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 safeguard the financial stability of our insurance companies and benefit all consumers in Ontario.
A version of this op-ed ran in the Financial Post.