Because of a flawed government formula, Ontario drivers paid out between $3 billion to $4 billion more than they should have on auto insurance premiums between 2001 and 2013, according to a study released Friday.
In 2013 alone, Ontario drivers may have over-paid by $840 million, according to the study by Fred Lazar and Eli Prisman, economics professors at the York University Schulich School of Business.
The study was done for the Ontario Trial Lawyers Association, a group representing Ontario’s personal injury lawyers.
Ontario’s no-fault benefits were significantly reduced by the government in 2010 and profits in the industry have increased considerably since then.
The 2010 cuts resulted in the maximum for medical and rehabilitation benefits for most victims reduced to $3,500 from $100,000. For serious injuries the maximum was reduced from $100,000 to $50,000.
As a result, in just one year – between 2010 and 2011 – industry payments to accident victims for no-fault benefits fell 50%.
How Profitable Is The Auto Industry?
At the heart of the report’s controversial findings is the question of the appropriate measure that should be used to set the allowable profit for auto insurance companies.
The report suggests that there is significant room to reduce rates by as much as 7.9 per cent based on 2013 data about profit in the insurance industry if the right profit measure is used.
The study looked in detail at how the Financial Services Commission of Ontario (FSCO), which regulates auto insurance on behalf of the Government of Ontario, calculates the allowed profit in the industry.
The authors of the report found that a KMPG study which the FSCO used to set a return on premiums rate for the industry was flawed, as it underestimated industry profitability.
The FSCO sets a return on premium benchmark of six per cent in the auto industry. That is the equivalent of a 12 per cent return on equity, the study said.
The report recommends that return on equity is a more appropriate tool than the return on premiums to measure industry profitability. The report suggests Ontario should set a return on equity of 5.7 per cent, about half the level it is now.
The study also looked at 18 companies that dominated the auto insurance sector in Ontario and found they had returns on equity (ROE) of 14.9 per cent in 2012 and 17.5 per cent in 2013. This is considerably above the ROE allowed by the province and three times the report’s recommended profitability level.
Promised 15% Premium Cut Never Came
In 2013, the Ontario government promised to reduce auto insurance premiums by 15 per cent in response to NDP threats to defeat the Liberal budget and force an election.
At that time, a law was passed mandating that a 15% premium cut be implemented over two years. However, two years later premiums have only come down 6%.
In response to the report, NDP consumer critic Jagmeet Singh said the Liberal government is letting consumers down.
“The government has the ability to reduce the rates and time and time again they have not,” Singh said outside the press conference. “We have the most expensive auto insurance in Canada.”
The Insurance Bureau of Canada (IBC), the lobby group for the auto insurance industry, predictably shot back at the Trial Lawyers’ report.
According to Ralph Palumbo of the IBC, “If the lobbyists and well-heeled lawyers want to know who is driving up insurance costs, they need to take a look in the mirror. Personal injury lawyers and their sky-high fees are putting justice out of reach for too many Ontarians. Perhaps it is time that lawyers also reduce their fees to further reduce costs to consumers.”