Collateral Benefits Working Group Report February 13, 2001

March 2, 2001

The Honourable James F. Flaherty
Minister of Finance
7 th Floor, Frost Building South
7 Queen's Park Crescent
Toronto ON M7A 1Y7

Dear Minister:

Enclosed please find the report of the Collateral Benefits Working Group. This work was done at the request of Mr. David Young in his capacity as Parliamentary Assistant.

Contained in the report is a proposed model for the use of collateral benefits as rating factors, as well as implementation details.

Our group is available to meet with you at your convenience, if desired.

Yours sincerely,

Brigid Murphy, Chair of Working Group
Consultant
Dominion of Canada General Insurance

Natalie Dupuis
Vice-President, Underwriting
Coseco

Vin Bartens
Vice-President, Underwriting
The Personal

Lou Fiorino
Manager, P & C Underwriting
State Farm

Robert Carter
President and CEO
Insurance Brokers Association
Of Ontario

Beckie Scarrow
Strategy Leader, Personal Insur.
Royal/Sun Alliance

Collateral Benefits Working Group Report
February 13, 2001

Table of Contents

Mandate

Review the work done by the 1998 joint industry/government working group and recommend an implementation plan to allow insurers to voluntarily use rating factors to recognise the presence or absence of collateral sources in pricing automobile insurance policies.

Background

In 1998 the government reviewed the legislative provisions governing automobile insurance in Ontario. The work included creating a joint industry/government working group to examine whether to delete Section 16. (3) and (4) of O. Reg 664 under the Insurance Act. This regulation prohibits insurers from using consumer access to private sector health and disability insurance plans ("collateral benefits") as rating factors.

Most brokers and some insurers believe that the current pricing approach of restricting the use of collateral benefits for rating purposes gives group insurers an unfair advantage in the marketplace. They believe that group insurers target consumers with collateral benefits. In 1998, group insurers claimed that this was incorrect, and that their lower rates came from marketing efficiencies and other such factors.

At the request of Mr. David Young, then Parliamentary Assistant to Minister of Finance Ernie Eves, a second working group (Appendix A - membership list) was formed in late 2000 to review the earlier work and make recommendations on implementation.

This report contains the recommendations of that group. It discusses a proposed model; the impact on consumers, insurers, brokers, and providers of collateral benefits under such a model; and outlines the requirements for implementation.

Proposed Model

The Underwriting and Rating Factors Working Group, in their April, 1998 report to the (now dissolved) Auto Policy Committee, strongly recommended using a simple approach: "Any approach proposed should be simple, fair, verifiable and easily administered and understood; complex rules required to reflect differences in collateral benefits would confuse consumers and increase administration/delivery costs".

Accordingly, the working group recommends that the introduction of rating factors be patterned on the following model:

"Permit automobile insurers to use the presence or absence of collateral benefits under the following conditions:

  • to be used on a voluntary basis by insurers;
  • insurers that choose to provide a discount, must grant it to all qualified applicants and policyholders (i.e., they cannot refuse to give the discount to a qualified individual);
  • insurers should not be permitted to refuse or cancel coverage to those without collateral benefit coverage;
  • there should not be a cap on the amount premiums can go up or down;
  • insurers will likely introduce rating through discounts: one for those with income continuation benefits and one for supplementary benefits; i.e. new base rates will assume that all policyholders do not have collateral benefits;
  • the discount should apply to the accident benefits portion of the policy only;
  • rating should be based on the principal operator's access to collateral benefits for private-passenger vehicles only, i.e., motorcycles, snowmobiles, taxis, commercial vehicles, etc. are excluded;
  • insurers must rate on the basis of information provided on the application or renewal questionnaire unless this information is proved false or changes;
  • consumers should be required to provide the name of their collateral benefit insurer and their plan numbers (to allow for verification by the insurer if it wishes to do so);
  • questions on access to collateral benefits should be added to the auto insurance application for new policies and there should be a separate form for renewals of existing policyholders;
  • there should be no impact on a claim if there was misrepresentation or change in collateral benefit status. Insurers may require that any premium shortfall be paid but cannot deny a claim for this reason;
  • the date of implementation (i.e. when insurers who choose the new rating factors will be allowed to use them) should be the date that the regulation is filed."

Impact on Consumers

Premiums

There is insufficient data available to determine the exact impact and dislocation on consumers. Exactor Insurance Services, which supplied the actuarial analysis and which provides analysis for the Insurance Bureau of Canada, notes that it "looked at various sources of published information relating to Ontario, including the Canadian Life and Health Insurance Association data supplied in 1998, labour force and population statistics from Statistics Canada, the Ontario Road Safety Annual Report (published by Ministry of Transportation) and the Driver/Vehicle Class exhibit from the Insurance Information Centre of Canada." As well, Exactor used recent projections done for the 2001 accident year. However, "none of these sources of information, really provide a satisfactory data base off which to analyze these issues".

However, based on the data available, it is estimated that:

  • the per vehicle discount for those with disability income benefits would reduce average premiums by $39.68 and the per vehicle premium for those without disability income benefits would increase, on average, by $31.59. Most insurers will likely implement on a percentage basis, so the impact on an individual consumer will vary, depending on other risk characteristics. In addition, as the new rates will be applied to accident benefits, those with compulsory coverages only (i.e., no comprehensive and collision coverage) will see a larger proportional increase on their premiums;
  • the per vehicle discount for those with extended health care benefits would reduce premiums by $9.94;
  • the per vehicle premium for those without extended health care benefits would increase by $27.11;
  • if all insurers were to rate on this basis:
    • for disability income collateral benefits, an estimated maximum of 2.5 million vehicles would be rated lower and a estimated maximum of 1.8 million vehicles would be rated higher;
    • for extended health care collateral benefits, an estimated maximum of 4.1 million vehicles would be rated lower and an estimated maximum of 1.5 million vehicles would be rated higher;
    • it is anticipated that base accident benefit coverage premiums will assume no collateral benefits cover and that discounts will be given to those who do have benefits.

Renewing or applying for insurance

It is expected that insurers will issue renewals without the discount. Consumers will have to return the information requested by the insurer in order to qualify for the discount.

Impact on Insurers

Insurers that choose to introduce the new rating factors will be required to manage the dislocation effect on premiums, change programming systems, and prepare marketing material.

Dislocation is expected to be minimised by a gradual (6 months to two years) transition by insurers to the new rating because:

  • rating on this basis will be optional; some companies will choose not to differentiate
  • for marketing reasons, some companies may choose to phase in the discount over more than one year so as not to upset and/or lose customers and brokers
  • the competitive pressure in the market has lessened
  • programming systems and preparing marketing and support documentation will take time

Impact on Brokers, Agents, Direct Writers

Brokers may be called upon to assist consumers in determining if they qualify for the discount, verify information, and explain why some quotes (in the case of a company that does not adopt the rating factors) do not contain the discount.

Agents may be called upon to assist consumers to determine qualification, and verify the information provided.

Direct writers will have to provide the information over the telephone or through the mail.

Impact on Collateral Benefits Insurers

A member of the working group contacted the life and health sector and reported that, although a small number of collateral benefits insurers have introduced auto accident exclusions in their policies, the vast majority have not for competitive reasons and because auto accident claims are not a major component of overall claim costs. The concern that this would occur on a large scale has proven to be unfounded.

Requirements for Implementation

There are several steps required for implementation:

  1. Amend regulation

    Delete Section 16. (3) and (4) of O. Reg 664 under the Insurance Act.

  2. FSCO to authorise new form and new auto application

    • Incorporate the following questions on the application for auto insurance, and in a new form:

      • Does the principal operator of this vehicle have in force valid coverage under an income continuation plan for loss of employment income? (i.e. short-term and long-term disability plan)

        Yes______No______If yes, Insurer and Plan reference number_______

        Does the principal operator of this vehicle have in force valid coverage under an extended health care plan?
        (i.e. supplementary medical, rehabilitation, Attendant Care Benefits)

        Yes______No______If yes, Insurer and Plan reference number_______

        Principal Operator
        signature_______________________Date__________

  3. FSCO to prepare guidelines and issue bulletin to industry

Guidelines and/or a bulletin to the industry will be needed in order to clarify as to how the implementation will be conducted.

Communication Issues

Policyholders and those applying for private passenger automobile policies must be made aware of the availability of the discounts.

Each insurer adopting the rating factors should be required to, along with submitting a rate filing for approval with the Financial Services Commission of Ontario, outline their method of ensuring that their policyholders will have the opportunity to apply for the discount.

Appendix A

COLLATERAL BENEFITS WORKING GROUP
MEMBERS (December, 2000)

Chair:
Brigid Murphy
Consultant
Dominion of Canada General Insurance
165 University Avenue, 5th Floor
Toronto ON M5H 3B9
Tel: (416) 947-2579
Fax: (416) 362-1493
bmurphy@thedominion.ca
 
Members:
Insurance Bureau of Canada
Lou Fiorino
Manager, P & C Underwriting
State Farm
Tel: (416) 290-4333
Fax: (416) 290-4035
lou.fiorino.c7ra@statefarm.com
Beckie Scarrow
Royal/SunAlliance
Tel: (416) 366-7600 ex.2666
Fax (416) 366-7511
beckie_scarrow@royalsunalliance.ca
Canadian Association of Direct Response Insurers
Natalie Dupuis
Vice-President, Underwriting
Coseco Insurance
Tel: (905) 507-5582
ndupuis@hbgrpins.com
Vin Bartens
Vice-President, Underwriting
The Personal
3 Robert Speck Parkway
Mississauga, ON L42 3Z9
Tel: (905) 306-5343
Fax: (905) 306-5272
vin.bartens@thepersonal.com
Broker Representative
Robert J. Carter
President and CEO
Insurance Brokers Association of Ontario
90 Eglinton Avenue East, 2nd Floor
Toronto ON M4P 2Y3
Tel: (416) 488-7422
Fax: (416) 488-7526
bcarter@ibao.com
 
Financial Services Commission of Ontario
Darlene Hall
Director
Automobile Insurance Analysis Division
5160 Yonge Street, PO Box 85
North York ON M2N 6L9
Tel (416) 590-7291
Fax (416) 590-7070
Dhall@fsco.gov.on.ca
Willie Handler
Sr. Manager
Auto Insurance Policy & Special Projects
5160 Yonge Street, 17 th Flr., PO Box 85
North York ON M2N 6L9
Tel (416) 590-7271
Fax (416) 590-7070
whandler@fsco.gov.on.ca
Ministry of Finance
Ed Mulvihill
Senior Manager
Industrial & Financial Policy Branch
250 Yonge Street, Ste. 3001
Toronto ON M5B 2N7
Tel: (416) 326-9225
Fax: (416) 327-0941
mulvihed@fin.gov.on.ca
Cathryn MacFarlane
Senior Policy Analyst
Industrial & Financial Policy Branch
250 Yonge Street, Ste. 3001
Toronto ON M5B 2N7
Tel: (416) 326-9086
Fax: (416) 327-0941
macfarlc@fin.gov.on.ca
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