If it weren’t for the Ontario automobile insurance market, the Canadian P&C industry would have had a much stronger balance sheet in 2000. For the past three years, the province has grappled with a growing number of claims, which are seriously eroding the profitability of business in this sector. The pattern for 2001 is clear: Ontario premiums are rising and several other provinces may catch the bug.
By and large, P&C insurers can celebrate their performance in fiscal 2000. A marked increase in direct premiums written, better control of administrative costs, growth in net earnings after taxes, the list goes on. Fortunately, the stock market had wind in its sails. The SCOR Report was the first to show how Canadian insurers’ investment income ballooned in 2000. Tracking the performance of 85 Canadian P&C insurers, SCOR reported that their investment income jumped from $1.9 billion in 1999 to $2.4 billion in 2000.
But once again in 2000, underwriting results deteriorated, triggering losses of $1.19 billion last year compared with $733 million in 1999. Why? Everyone points the finger at the Ontario auto insurance market where the variance between premiums collected and claimed has grown steadily for the past three years.
Tom Stafford, Royal & SunAlliance manager for Quebec, summed up the market situation in a nutshell: “It’s a fiasco! We sold too many premiums, too cheaply for the number and value of claims,” he lamented, barely hiding his disappointment.
He sees this situation as even more consequential because Ontario auto insurance, “the cash cow of the industry,” single-handedly represents 50% of the entire Canadian P&C market. When Ontario has a cold, the whole P&C industry sneezes! The bottom line: “all companies active in this market were affected,” Mr. Stafford said.
At Royal & SunAlliance, the Ontario “virus” was reflected in the cost of claims, which increased from 73.4% in 1999 to 76.0% in 2000. This engendered an underwriting loss of $103 million, and a $14 million decline in net earnings, which totalled $94 million at the end of the fiscal year.
The main problem with Ontario, Mr. Stafford pointed out, is its different regulations. “You can’t just increase premiums, then submit the changes to the government. First, you need government permission. There is a whole procedure to follow and it’s a long one.” (See side-bar IBC criticizes Ontario).
Yves Brouillette, President and CEO of ING Canada, believes that Ontario is behind the biggest letdown of the year. “A major disappointment,” he noted. The Canadian giant exceeded the $2 billion cap on premiums for the first time, making it one of the 20 largest financial institutions in the country. It finished the year with net earnings of $119 million, but the underwriting loss of $58 million left a bitter aftertaste. “It is far greater than what we expected,” said Mr. Brouillette.
The Ontario auto insurance market is the main culprit, he said, particularly the medical costs associated with bodily injury. “In Ontario, a large portion of the health care is not covered by the public plan,” Mr. Brouillette explained. “When there are car accidents, we have to cover these costs, and the increases have been staggering.”
Mr. Brouillette attributes this phenomenon to economic growth. More activity means more traffic and therefore more accidents. In fact, medical costs leapt significantly in Ontario compared with the rest of the country. Mr. Brouillette evaluates this increase at 8% to 10% for the past three to five years, versus an increase of 2% to 3% elsewhere in the country. While the cost of claims has risen steadily, the price of insurance premiums has remained stable. “Bodily injury in Ontario represents over 50% of the total amount of claims each year. It was inevitable that this would cause a disequilibrium.”
For his part, Chairman and Chief Executive Officer of AXA Canada, Jean-Denis Talon, places part of the blame on insurers themselves. “(In Ontario) heated competition between insurance companies led everyone to lower prices. We’re talking 15% to 20% in the space of three years!”
On top of that, some Ontario regulations seemingly invite abuse, several industry players report. “The benefits system is quite generous, and this may lead to fraudulent conduct that is more frequent than elsewhere,” confirmed Mark Yakabuski, Vice-President for Ontario of the Insurance Bureau of Canada. “Under the no-fault system, if someone is a victim of an accident and is not insured, the insurance company of the other party will cover the cost.”
This system is particularly costly, in Mr. Talon’s view, and leaves insurers with a good deal of contingencies. “Even if the company writes well, it remains exposed to risks and abuse that it cannot foresee.” He gave an example: if someone insured by AXA is walking on the sidewalk and is hit by a car whose driver is uninsured, AXA pays the bill.
Whatever the case, AXA, ING and Royal & SunAlliance are all determined to stop the hemorrhaging by filing a request with the Ontario government to increase premiums. Royal & SunAlliance already obtained the superintendent’s approval for an increase in one category of automobile. Other vehicle classes may also be targeted. Royal believes that this upward trend in Ontario will spark premium hikes countrywide. The ING president added: “Premiums can and must increase in Ontario, but the prices for each province are established based on local results.”