Auditor General Insurance Regulation Dec 2011

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Auto InsuranceRegulatory Oversight

Chapter 3Section3.01

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Financial Services Commission of Ontario

BackgroundThe Financial Services Commission of Ontario(FSCO) is an arms-length agency of the Ministry of Finance responsible for regulating the provincesinsurance sector, including auto insurance. FSCOalso regulates pension plans, mortgage brokers,credit unions, caisses populaires, loan and trustcompanies, and co-operative corporations inOntario.

FSCOs mandate is to provide regulatory servicesthat protect the public interest and enhance publiccon dence in the regulated sectors through licens -ing, monitoring, and enforcement. FSCOs seniorof cial, the Superintendent of Financial Services,is responsible for the general supervision of theregulated sectors as well as the administration andenforcement of the Financial Services Commission of Ontario Act and other related statutes.

The most signi cant piece of legislation for auto

insurance is the Insurance Act, which establishesstandards for the auto insurance industry andempowers FSCO to regulate insurer behaviour andinvestigate complaints about unfair practices.

FSCOs high-pro le activities include ruling onapplications for premium-rate changes by Ontarios100 or so private-sector insurance companies. About 20 of these companies hold about 75% of the

market. Commission rulings must ensure that the

proposed premiums are justi ed based on factorssuch as an insurance companys past and expectedclaim costs, its operating expenses, and what wouldbe a reasonable pro t.

In addition, FSCO periodically reviews the statu-tory accident bene ts available to people injured inautomobile accidents. It provides dispute resolutionservices, such as mediation, to settle disagreementsbetween insurers and injured persons about theentitlement to and amount of statutory accidentbene ts. FSCO also administers the Motor Vehicle Accident Claims Fund, which compensates peopleinjured in automobile accidents when there isno insurer to cover the claim. The Fund is mainly

nanced by revenues from fees for drivers licenceregistrations and renewals.

In the 2010/11 scal year, FSCO spent a total of $59 million. Expenditures for FSCOs Auto Insur-ance Division were approximately $14 million, with95% of that amount going to salaries and bene ts.FSCO recovers all of its costs relating to the regula-tion of auto insurance from insurance companiesoperating in Ontario.

Auto Insurance in Ontario

Ontario has about 9 million licensed drivers and7.5 million passenger cars and trucks. In the past


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4Auto Insurance Regulatory Oversight

10 years, the number of people killed or injuredin motor vehicle accidents in the province hasdeclined by about 25%. In 2009, the latest year for which a breakdown exists, 535 people were killedin accidents and another 61,975 were injured. Approximately 60% of injuries were minor, includ-ing sprains, strains, and minor or moderate whip-lash, while 39% were moderate to major, includingfractures or internal organ damage. The remaining1%about 800 peoplesuffered catastrophicinjuries, such as severe brain impairment or para-plegia, or required amputation.

Auto insurance has been compulsory in Ontariosince 1979. In 1990, the province introduced amixed no-fault/tort insurance system, requiringthe payment of injury and property-damage claimsby the insurance company of each vehicle involvedin an accident, regardless of fault. Coverage levelsfor different types of injuries and death claims areset out in the Statutory Accident Bene ts Schedule(SABS) under the Insurance Act . However, peopleexperiencing serious injuries can also sue at-faultdrivers for damage in excess of SABS bene ts foreconomic loss and/or pain and suffering.

Despite the no-fault rules, Ontario law requiresinsurers to assign fault to a driver in an accident

as set out in regulations to the Act, which can leadto increases in that drivers premiums.

Ontario motorists are required to purchaseinsurance that includes:

standard SABS coverage for medical bene ts,attendant care, and disability income forpeople injured in an automobile accident as well as death and funeral bene ts for thosekilled in an accident regardless of who was atfault;

a minimum of $200,000 in third-party liability coverage for personal and property claims as aresult of lawsuits against the insured;

direct compensation coverage for damageto a vehicle owned by the insured caused by another driver (no fault); and

uninsured automobile coverage to protectagainst injuries and damage to a vehiclecaused by an uninsured motorist.

Consumers can increase their third-party liabil-ity and SABS coverage and also purchase otheroptional insurance, such as caregiver coverage. Additional voluntary insurance coverage for the vehicle is also available, including collision cover-age for damage to vehicles and comprehensivecoverage for theft, vandalism, and other perils suchas re, ood, or hail. For example, FSCO informedus that 99% of Ontario drivers in the ve years end -ing in 2010 purchased more than the mandatory $200,000 minimum third-party liability coverage.

In the 2010 calendar year, Ontario drivers paid$9.8 billion in auto insurance premiums. Thetotal number of claims in 2010 was approximately 584,000, with claims costs totalling $8.7 billion,broken down as follows:

$4.5 billion in SABS bene ts; $2 billion for third-party liability; $900 million in direct compensation for prop-

erty damage caused by other drivers; and

$1.3 billion for other property claims such ascollision and comprehensive damage.

Audit Objective and Scope

Our audit objective was to assess whether FSCOhad adequate systems and procedures in place withrespect to its auto insurance responsibilities to:

ensure compliance with relevant legislationand its own policies established to protect thepublic interest and to enhance public con -

dence in the auto insurance sector; administer the Motor Vehicle Accident Claims

Fund in the public interest; and

measure and report on the effectiveness of itsregulatory oversight.

Prior to our eldwork, we identi ed criteriato be used to address our audit objective. Senior


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2011 Annual Report of the Of ce of the Auditor General of Ontario46

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management at FSCO reviewed these criteria andagreed to them.

The scope of our audit included a review andanalysis of FSCOs relevant les, policies, and pro -cedures, as well as interviews with the appropriatestaff. We also held discussions with, and obtainedinformation from, a variety of organizations,including insurance companies, the Insurance Bur-eau of Canada (the national industry associationrepresenting some 90% of the private insurancemarket), and other stakeholders such as health-careproviders, consumers, and lawyers with an interestin auto insurance.

We researched auto insurance regulatory legis-lation and operations in several other North Amer-ican jurisdictions and visited the Manitoba PublicInsurance Corporation, the Insurance Corporationof British Columbia, the Alberta Superintendent of Insurance, and the Alberta Automobile InsuranceRate Board to discuss their perspectives on regulat-ing the auto insurance sector and the administra-tion of insurance operations. We also engaged onan advisory basis the services of an independentexpert with senior management experience in theinsurance sector.

We also reviewed recent audit reports issued by

the governments Finance and Revenue Audit Servi-ces Team related to FSCO and, as a result, we wereable to reduce the scope of our examination overthe Motor Vehicle Accident Claims Funds contract with an independent claims adjuster.

Summary

The responsibility of the government includes bal-ancing the need for a nancially stable auto insur -ance sector with the need to ensure that consumerspay affordable and reasonable premiums andreceive fair and timely bene ts and compensation when they are involved in accidents. The Super-intendent of Financial Services (Superintendent)is responsible for administering the legislation

and regulations that the government establishesto achieve these objectives. Claims payments arethe largest driver of the cost of auto insurancepremiums, and with the average injury claim inOntario of about $56,000 being ve times morethan the average claim in other provinces, Ontariodrivers generally pay much higher premiums thanother Canadian drivers do. Another reason claimscosts in Ontario are higher is because Ontarioscoverage provides for one of the most comprehen-sive and highest bene t levels in Canada.

Although the government has begun takingaction to address the high cost of claims in Ontario,the following observations outline some of thechallenges the Financial Services Commission of Ontario (FSCO) faces if it is to be more successful inproactively ful lling its role of protecting the publicinterest and enhancing public con dence in theauto insurance industry.

From 2005 to 2010, the total cost of injury claims under the Statutory Accident Bene tsSchedule (SABS) rose 150% even thoughthe number of injury claims in the sameperiod increased only about 30%. Moreover,the number of injury claims in 2009, atalmost 75,000, was 20% higher than the

number of people reported by the Ministry of Transportation as having been injured inautomobile accidents that year and FSCO hadnot analyzed the reasons for this signi cantdifference.

Between 2008 and 2009, SABS bene ts pay -ments rose 37% in the Greater Toronto Area(GTA), compared to 23% in other Ontariocities and just 14% in rural areas. Accordingto FSCO this may be attributable in part to

the concentration of plaintiff representor andhealth-care provider communities in the GTA. Accordingly, GTA vehicle owners pay higherpremiums than motorists in other parts of Ontario.

FSCO had not routinely obtained assur-ances from insurance companiesnor hadit conducted any regular on-site compliance


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reviews to ensurethat they have paid theproper amounts for claims or that they havehandled claims judiciously. Without suchassurances, the risk exists that consumers willnot be treated fairly. There is also a risk thatunnecessarily high claims costs could result inthe need for insurers to raise premiums andmay also help insurers obtain approval fromFSCO for higher premium increases. FSCO hasrecently initiated action to address this.

Industry estimates peg the value of autoinsurance fraud in Ontario at between 10%and 15% of the value of 2010 premiums, or asmuch as $1.3 billion. Unlike many other prov-inces and American states, Ontario does nothave signi cant measures in place to combatfraud. The government and FSCO are await-ing the recommendations of a government-appointed anti-fraud task force expected infall 2012.

In approving premium rates for individualinsurance companies, FSCO allows insurers areasonable rate of return, which was origin-ally set at 12.5% in 1988, based on the bench-mark long-term bond rate of 10%, and revisedto 12% in 1996. However, that pro t margin

has not been adjusted downward since thattime, even though the long-term bond ratehas been about 3% for the last couple of yearsand is projected to remain at a relatively lowlevel for some time. Furthermore, FSCO needsto improve its documentation supporting itspremium-rate-change decisions and approvalsto ensure that it can demonstrate that it treatsall insurers requests consistently and thatpremium-rate changes approved are just and

reasonable. Increasing demand and restraints on resour-

ces have caused signi cant backlogs in FSCOsmediation services for claimants in dispute with insurers, with resolutions taking 10 to 12months rather than the legislated 60 days. Italso did not capture information that wouldallow it to assess the reasons why the number

of applications for mediation has sharply risenby 135% over the last ve years, withabout half of all injury claims ending up inmediation. Demand for mediation is high-est in the GTA, where 80% of all mediationapplications originate, even though the GTA accounts for just 45% of automobile accidentsinvolving injuries.

FSCO does not yet have any meaningfulmeasures of its success in meeting its mandateto oversee auto insurance or of its customerservice performance that could be publicly reported in its annual report and on its website.

We considered FSCOs rst comprehensivereview of the statutory accident bene ts, which wascompleted in 2009, to have been a good measureto assess automobile injury claims, although webelieve that such reviews should be conducted when circumstances warrant doing so rather thanonly at the legislated ve-year frequency. As a resultof the rst review, the SABS was changed by thegovernment in September 2010. FSCO advised usthat it was too early to determine if the changes hadmitigated the signi cant recent growth in the aver -age claim cost and stabilized premiums.

Related areas that the government and FSCOneeded to address include the following:

The Motor Vehicle Accident Claims Fund had$109 million less in assets as of March 31,2011, than it needs to satisfy the estimatedlifetime costs of all claims currently in thesystem. This unfunded liability is expectedto triple by the 2021/22 scal year unlessthe revenues are signi cantly increased. Forinstance, the government would have to

double the $15 fee currently added to every drivers licence renewal to eliminate theunfunded liability.

All provinces, including Ontario, requirethat insurers, rather than taxpayers, pay forthe health-care-system costs of automobile-accident victims. The amount of assessmentFSCO collects annually from insurers on behalf


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of the Ministry of Health and Long-Term Careto cover these costs has not increased since2006, even though health-care spending inOntario has increased by about 25% andmedically-related statutory accident bene tcosts have increased by almost 120% over thesame period. If Ontarios health-care assess-ment per registered vehicle were raised to theaverage of other provinces, the cost to the tax-payers of covering these health-care expenses would be reduced by more than $70 million,but such a move would likely add almost $10to the annual insurance premium for each vehicle in Ontario.

Detailed Audit Observations

STATUTORY ACCIDENT BENEFITSCLAIMS COSTS

Past Reforms

Ontarios auto insurance program has undergonenumerous changes since the introduction of a mixedno-fault/tort insurance system in 1990, with legisla-tive reforms enacted in 1994, 1996, 2003, 2006, and2010. These changes were made largely to addressboth the signi cant growth in the cost of Statutory Accident Bene ts Schedule (SABS) payouts and theresulting increase in insurance premiums. In each

case, however, the legislative reforms provided only temporary relief from higher premiums. As a result, we noted that Ontarios auto insurance system has ahistory of increasing claims costs, which insuranceproviders ultimately pass on to drivers throughhigher premiums. In our view, more timely changescould have been made and are still needed to con-trol claims costs and premiums.

In 2003, the government amended the Insurance Act to require the Superintendent of Financial Ser- vices (Superintendent) to undertake a review of theeffectiveness and administration of auto insuranceat least every ve years and make recommenda -tions for improvement to the Minister of Finance.In 2008, FSCO undertook the rst statutory ve- year review, which led to a report to the Ministerof Finance and to legislative changes in the SABSin September 2010. By that time, however, claimscosts had already risen rapidly between 2005 and2010, as shown in Figure 1. From 2005 to 2010,total claims costs in Ontario increased by 61%, from$5.4 billion to $8.7 billion. FSCO informed us thatthe primary cause for this escalating trend wasincreased SABS bene ts costs, not the increase inthe number of accident claims. Indeed, the injuriesclaim costs rose 150%, even though the number of injury claims increased by only 30% over the sameperiod.

OVERALL FSCO RESPONSE

FSCO welcomes the Auditor Generals recom-mendations. While the effectiveness and admin-istration of Ontarios auto insurance regulatory regime by FSCO is generally sound, the auditrecommendations will strengthen the oversightof the auto insurance system.

The government has a challenging task inbalancing the need for a nancially stable autoinsurance sector with the needs of consumers.FSCO supports the government in meeting thischallenge by administering auto insurance legis-lation and regulations. FSCO plays an importantrole in ensuring that the pricing of auto insur-ance in Ontario remains reasonable throughits rate regulation process and that individualsinjured in auto accidents are treated fairly.

In 2009, FSCO completed its rst com -prehensive ve-year review of Ontarios autoinsurance system, which it presented to the gov-ernment. The review assessed several systemicproblems and, as a result of the rst review, thegovernment made signi cant regulatory chan -ges in September 2010. FSCO continues to work on implementing a range of additional longerterm projects announced by the government aspart of its 2010 reforms.


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When we analyzed the $8.7 billion in totalclaims costs for 2010, we found that SABS bene tscosts accounted for $4.5 billion, or more than half the total. That compares with 2005 SABS bene tscosts of $1.8 billion, or one-third of the total. Com-pared to the 150% increase in the SABS portion of total claims costs between 2005 and 2010, the other

claims-costs components, including third-party liability and collision, rose by a more modest 16%,to $4.2 billion from $3.6 billion.

Over the same ve-year period, the averageSABS bene ts cost per claim rose 92%, to $56,092from $29,189. In its statutory ve-year review,FSCO identi ed signi cant cost increases of between 103% and 505% in the key bene t com -ponents of the SABS, as illustrated in Figure 2.

FSCO attributed the cost increases of SABS

bene ts to what it called over-utilization,especially before the reforms of September 2010.Previously, there were few limits on treatment andassessment expenses, and those that existed werehigher than needed. We were informed that providers of legal and health-care services may havebene ted from the lack of properly de ned limits by over-treating and over-assessing patients.

For example, the Insurance Bureau of Canadareported that as much as 30% to 40% of every dollar spent in 2007 to treat automobile-accidentclaimants in Ontario went to examinations andassessments by regulated health professionals priorto initiating bene ts and treatment. According toFSCO, this level of assessment activity was inconsis-tent with that being incurred by the other provinces.

FSCO further informed us that a dramatic costincrease in SABS bene ts in the Greater Toronto Area (GTA) was a major contributor to the overallincrease in accident bene t costs in the provincebetween 2008 and 2009. Over that single year,SABS bene ts costs rose 37% in the GTA, comparedto 23% in other Ontario cities and just 14% in ruralareas. Accordingly, GTA drivers on average pay sig-ni cantly higher premiums than motorists in ruralOntario.

2010 Auto Insurance ReformsSABS bene ts increase for more severe injuries. Asa result, the government and FSCO need to ensurethat the de nitions of injuries are clear, so thatinsurance companies and claimants can agree onthe associated bene ts for the level of health careand amount of compensation to which claimants

Figure 1: Ontario Average Premium and Claim Cost,20052010 ($ per insured private passenger vehicle)Source of data: General Insurance Statistical Agency*

average premiumaverage claim cost

600

800

1,000

1,200

1,400

1,600

2005 2006 2007 2008 2009 2010

* The General Insurance Statistical Agency is a not-for-pro t corporation es-

tablished to compile auto insurance statistics on behalf of Superintendentsin provinces where there is private-insurer delivery of auto insurance. Sta-tistics reported include private passenger vehicles and exclude commercialvehicles.

Figure 2: Increases in Ontarios Statutory Accident Bene ts Costs by Type of Bene t, 2005 and 2009 ($ million)Source of data: Financial Services Commission of Ontario

20052009

+505%

+319%

+103%

+294%

+129%

0

200

400

600

800

1,000

1,200

caregiver housekeeping attendant care

examinationand

assessments

medical


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are legally entitled. Where uncertainty exists,claimants may seek, typically with the assistanceof legal professionals and health-care providers, tocategorize their injuries as more severe to maximizebene ts and compensation.

Following FSCOs statutory review of the SABS, which included public consultations, the govern-ment announced in November 2009 a package of 41 reforms that it said would provide more con-sumer choice and premium stability. The reforms would achieve these goals by controlling claimscosts, responding to medical over-assessments andover-treatment of minor injuries, and simplifyingthe administration of the SABS, as well as makingcertain enhanced bene ts optional at additionalpremiums. The reforms aimed at controlling claimscosts included:

introduction of a broader de nition of minorinjuries, called the interim Minor Injury Guideline, to replace the existing minor-injury guideline, called the Pre-approvedFramework;

introduction of an overall $2,000 limit on thecost of all automobile-accident-injury assess-ments and a $3,500 minor-injuries-bene tslimit on the cost of all treatment services and

assessments combined;

lower standard medical and rehabilitationbene ts for moderate to major injuries, along with lower coverage for attendant care andincome replacement bene ts; and

elimination of housekeeping, home mainten-ance, and care-giving bene ts for all butcatastrophic claims.

No signi cant changes were made for claim -ants with catastrophic injuries, who continue to be

eligible for a lifetime maximum of $1 million formedical treatment and rehabilitation, and anotherlifetime maximum of $1 million for attendant care.

Regulations to implement the new reforms took effect on September 1, 2010. At the time of ouraudit, FSCO and insurance industry representativestold us it was too soon to say if the reforms hadbeen effective in limiting claims costs and stabil-

izing premiums. Most insurers we spoke with saidit would take at least two years to determine theimpact of the reforms.

However, FSCO said that it expected some of thereforms to lead to lower claims costs. For example,before 2010, under the Pre-approved Framework,only whiplash and whiplash-associated injuries were classi ed as minor injuries. As a result, fewerthan 20% of injuries fell within this lower-costframework. Under the new interim Minor Injury Guideline, minor injuries now include sprain, abra-sion, laceration, strain, or minor whiplash. FSCOinformed us that it expects 50% to 60% of all SABSbene ts claims to fall under this new de nition, which caps total payouts for minor injuries at$3,500.

Some insurance companies have publicly voicedconcerns about claimants seeking bene ts to whichthey are not entitled. A common insurer complaint was that some health-care providers repeatedly sought for their clients approval from the insurerfor treatment plans exceeding the $3,500 limit forde ned minor injuries under the interim MinorInjury Guideline. FSCO informed us that it was notsurprised by this development, because it expectedconsumers and their representatives to test both the

system and the resolve of the insurance companies.If an insurance company suspects that a claim-

ants condition meets the de nition of minor injur -ies, it can ask the claimant to undergo examinationby the insurers health-care professional. Forexample, one insurer said in an industry publicationthat it tracked approximately 500 claimants injuredafter the September 2010 rule changes and foundthat one-third of those who initially requestedhigher treatment bene ts were placed under

the $3,500 limit because an insurer-requestedexamination determined that their injuries metthe de nition of a minor injury. Another insurerreported that medical examinations undertaken atits request determined that 80% of claimants whoinitially sought compensation beyond the $3,500cap were in fact not entitled to it.


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FSCO informed us during our audit that it willmonitor how all stakeholders, including insurersand health-care providers, apply the interim MinorInjury Guideline, and that their compliance with thenew guideline is essential to lower the cost of acci-dent bene ts and ultimately stabilize premiums.

According to FSCO, consumers need a betterunderstanding about treatment and rehabilitationoptions, as well as the risks of over-treatment. Although the Ministry of Finance recommendedthat health-care providers and insurance companies work together to improve consumer awareness andexpectations regarding treatment and outcomes aspart of the reforms to the SABS, no such action hadbeen taken at the time of our audit.

FSCO also indicated that it expects to replacethe interim Minor Injury Guideline in 2013 or 2014 with a more comprehensive evidence-based treat-ment protocol for such injuries, which will focus onmore ef cient and effective treatment outcomes.

Ongoing Due Diligence ClaimsManagement

The insurance industry assesses its nancial healthin large part by a measure it calls the incurred loss

ratio. The ratio is determined by dividing aver-age claims costs per vehicle by average premiums. According to FSCO, any ratio with a value higherthan 80% of total claims expenses compared tototal premium revenues may well result in a loss foran insurance company when other administrativeand overhead costs (minus investment income)are factored ina situation that probably cannotcontinue for an extended period. Ontarios incurredloss ratio has recently worsened, rising to 93% in

2010 from 66% in 2005.In addition, according to FSCOs records, the

incurred loss ratios among the top 40 Ontario auto-mobile insurers ranged from 65% to 176% in 2010.This may indicate that some insurers are better ableto manage and limit their claims costs and insurancerisks than others. Indeed, several stakeholders weinterviewed said that insurance companies did not

always apply standard due diligence in adjusting orquestioning bene t claims under the SABS.

FSCO informed us that it had expected theinsurance companies to respond to its September2010 reforms by more proactively challenging ques-tionable claims. However, FSCO advised us that itsoon identi ed actions by certain insurers as well ashealth-care providers that were inconsistent withthe intent of the reforms. As a result, FSCO issued abulletin in March 2011 reminding insurers of theirresponsibility to challenge questionable or inappro-priate claims. According to the bulletin, FSCO wasaware that a small group of service providers andrepresentatives were continuing to abuse the sys-tem. The bulletin goes on to say that insurers areexpected to have and use policies and proceduresthat comply with best practices and legislativerequirements when adjusting all claims.

Following a government announcement in theMarch 2011 Budget, FSCO made it a strategic prior-ity in June 2011 to assess how well insurance com-panies implemented the September 2010 reforms toensure that consumers are being treated fairly andin accordance with the Act. FSCO intends in futureto conduct compliance audits of insurance compan-ies that appear higher-risk, although no dates have

been set. FSCO last assessed insurance companiescompliance with the SABS bene ts using a self-assessment questionnaire to all insurance compan-ies in 2006. On the basis of the responses, it made

eld visits to some insurers and reported on itsndings in September 2007.

Auto Insurance in Other Provinces

All Canadian provinces have laws requiring man-

datory auto insurance. Three of them (BritishColumbia, Saskatchewan, and Manitoba) deliverinsurance through government-owned insurancecorporations. In Quebec, the government insuresagainst injuries and death while private insurerscover property damage, liability, and personalinjury in accidents outside the province. Private-sector insurance companies serve the remaining six


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provinces, including Ontario. Manitoba, Saskatch-ewan, and Quebec have no-fault insurance systems.Ontario and the six other provinces have a mixedno-fault/tort system in which bene ts are availableto injured accident victims from their own insurerregardless of fault, and people have the right to sueresponsible parties for further damages.

Although Ontario has one of the lowest per-capita rates of automobile-accident deaths andinjuries in the country, it also has the highest aver-age premium in Canada, as illustrated in Figure 3, which also shows that most other provinces gener-ally experienced lower premium increases over thelast ve yearsand some actually had premiums

decrease. Claims costs are another key comparisonbecause they constitute the largest cost of any autoinsurance system. Figure 4 shows that Ontario hasthe highest average total claim cost per insured vehicle of any province.

Although health-care costs and income replace-ment and standard accident bene ts levels vary somewhat across Canada, it could also be arguedthat the average bene t claim cost for automobile-accident injuries should be reasonably similarregardless of whether the comparison is madebetween the GTA and other cities or betweenOntario and other provinces. However, althoughin 2005 accident bene ts cost the same (about

Figure 3: Provincial Comparison of Average Premiums, 200620101 ($ per insured private passenger vehicle)Source of data: General Insurance Statistical Agency and provincial insurance corporations

0

200

400

600

800

1,000

1,200

1,400

1,600

BC AB SK MB ON QC2 NB NS PEI NL

20062007200820092010

1. Differences in each provinces auto insurance coverage and other factors will impact premiums. This comparison does not attempt to adjust for any of thesedifferences.

2. Quebec not available 20062009.


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$30,000 per claim on average) in the GTA and therest of the province, by 2009 the GTA cost per claimhad risen to $60,500about one-third higher thanthe $45,900 cost per claim for the rest of the prov-ince. In addition, as Figure 5 indicates, on averageOntarios claims costs under the SABS are signi -cantly higher than the statutory accident bene ts

claims costs incurred by other provinces, with mostprovinces paying out less than 25% of Ontariosbene ts. This is at least partly due to Ontario acci -dent bene ts and the limits on payouts under theSABS, which are generally as high as or higher thanmost other provinces, as illustrated in Figure 6.

Figure 4: Provincial Comparison of Average Total ClaimCosts, 2010*($ per insured private passenger vehicle)Source of data: General Insurance Statistical Agency and provincial insurancecorporations

* Saskatchewan and Quebec not available.

0

200

400

600

800

1,000

1,200

1,400

BC AB MB ON NB NS PEI NL

Figure 5: Provincial Comparison of Average Costs per Claim for Statutory Accident Bene ts,20062010* ($)Source of data: General Insurance Statistical Agency and provincial insurancecorporations

* British Columbia not available; Saskatchewan and Quebec 20062009 not available.

2006

2007

2008

2009

2010

0

10,000

20,000

30,000

40,000

50,000

60,000

AB SK MB ON QC NB NS PEI NL

RECOMMENDATION 1

In order to ensure that the Financial ServicesCommission of Ontario (FSCO) can effectively monitor Ontarios auto insurance industry, par-ticularly claims costs and premiums, and recom-mend timely corrective action to the Minister of Finance when warranted, FSCO should:

implement regular interim reviews of theStatutory Accident Bene ts Schedule tomonitor trends such as unexpected escalat-ing claims costs and premiums between thelegislated ve-year reviews, in order to takeappropriate action earlier, if warranted;

monitor ongoing compliance with theinterim Minor Injury Guideline, expedite the work to develop evidence-based treatmentprotocols for minor injuries, and identify andaddress any lack of clarity in its de nitions of injuries;

implement its plans as soon as possible toobtain assurance that insurance companiesare judiciously administering accident claimsin a fair and timely manner; and

examine cost-containment strategies andbene t levels in other provinces to determine which could be applied in Ontario to controlthis provinces relatively high claims costsand premiums.

FSCO RESPONSE

Ontarios auto insurance system is complex andFSCO agrees that the system would bene t frommore frequent reviews.

In addition to the ve-year review, FSCOconducts a legislated review every three yearsof the risk-classi cation and rate-determination


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FRAUD IN AUTO INSURANCE

Ontarios Experience

It is a federal Criminal Code offence to defraud orattempt to defraud an insurance company, withconviction carrying large nes and/or a prison term

regulations. As well, FSCO participates in areview of the adequacy of the Statutory Acci-dent Bene ts every two years. FSCO believes

these three statutory reviews could be combinedinto one comprehensive review that takes placeon a more frequent basis than every ve yearsand will communicate this to the Ministry of Finance. As part of a more comprehensive andfrequent review, FSCO would also examine costcontainment strategies and bene t levels inother provinces and would provide this analysisto the government.

FSCO believes that the development of an

evidence-based treatment protocol for minorinjuries is an important step in ensuring thatthe treatment provided to individuals injuredin auto accidents in Ontario re ects the currentmedical science. FSCO will be issuing a Requestfor Proposal for consulting services to developa new treatment protocol and will be requiring

Figure 6: Provincial Comparison of Maximum Statutory Accident Bene ts, as of June 2011*Source of data: Financial Services Commission of Ontario and each provinces auto insurance provider or regulator

Ontario Maximum Range of Maximum Bene ts Range of Maximum Bene tsBene ts with Other Provinces with Other Provinces with Publicly

Bene t Type Private Insurers Private Insurers Operated Insurance

medical $50,000 for 10 years($1 million over lifetimefor catastrophic injury)

$25,000 for four years to$50,000 for four years

$150,000 over lifetime to unlimitedbene t over lifetime

attendant care $36,000 for two years($1 million over lifetimefor catastrophic injury)

included under medical bene ts included under medical bene ts to$4,142 per month with no lifetime limit

income replacement partial disability

70% of gross incometo a maximum of $400/week, maximum104 weeks

$0 to $250/week for up to 104weeks

between 75% of gross income (to amaximum of $300/week for 104 weeks)and 90% of net income (up to $83,000)

income replacement full disability

partial disabilitypayments continued for

lifetime

$400/week for up to 104 weeksto $250/week continued for

lifetime

partial disability payments continued for lifetime

death bene t $25,000 to spouseand $10,000 to eachdependent

spouse: $10,000$50,000each dependent: $1,000$6,000

spouse: between $5,000 plus $145/weekfor 104 weeks and $415,000each dependent: between $1,000 plus$35/week for 104 weeks and $54,817

* Includes lowest and highest maximum statutory accident bene ts provided by the group. Only Ontario and provinces with publicly operated no-fault insurance have catastrophic injuries bene ts; however, tort compensation is available in B.C. and the provinces with private insurers, as well as in Ontario.

that this work be completed in two years insteadof the planned three-year time frame.

FSCO also recognizes the importance of

making insurance companies more accountablefor the administration of statutory accidentbene ts claims in a fair and timely manner. Dur -ing the summer of 2011, FSCO introduced a newrequirement that insurance companies provideCEO attestations that they have controls, pro-cedures, and processes in place to ensure com-pliance with legislative requirements around thepayment of such claims.


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of up to 10 years. Auto insurance fraud can involveclaimants in a legitimate minor accident whomisrepresent the injury or damage to get highercompensation; service providers who claim forunnecessary services or for services not rendered;and staged accidents and faked injuries. Accordingto the Insurance Bureau of Canada and FSCO, asigni cant amount of fraud involves false claims forphysical injury and accident bene ts authorized by health-care service providers.

It is impossible to give a precise gure for the value of auto insurance fraud in Ontario, but recentinsurance industry estimates indicate that theproblem is serious and suggest that fraud-relatedcosts may have accounted for between 10% and15% of auto insurance premiums in 2010, or upto $1.3 billion. Stated another way, fraud-relatedcosts account for up to 15 cents of every dollar of premiums paid.

Another indicator of possible fraud in the systemis the recent signi cant discrepancy in the numberof injury claims reported by the General InsuranceStatistical Agency compared to the number of injur-ies reported by the Ministry of Transportation. Overa one-year period in 2009, the number of injury claims increased 13% and the average cost of claims

rose 32%, although the number of reported injuriesin Ontario from automobile accidents decreasedby 1%. Moreover, there were almost 75,000 injury claims led20% more than the 62,000 injuriesfrom automobile accidents actually reported at thetime of the accidents. Before 2009, the numberof injury claims was below or slightly above theMinistry of Transportation reported injuries. FSCOhas not analyzed the reason for these signi cantdiscrepancies and increases, and whether they may

be partly attributable to fraud.Our discussions with insurance industry repre-

sentatives in Ontario and other provinces indicatedthat the problem of fraud is worse in Ontario thanelsewhere in Canada, and it has been growing sincethe mid-1990s. Even a decade ago, the InsuranceBureau of Canada reported that Ontario had the

highest fraud rate of the nine provinces that partici-pated in a 2001 study.

Insurers and their customers are the victimsthrough increased premiums when auto insur-ance fraud is perpetrated. However, the decisionto investigate fraud is left to each insurer. Most, if not all, insurers as well as the Insurance Bureau of Canada have their own investigators. FSCO, on theother hand, has had a minimal role in fraud identi-

cation, investigations, and prosecutions.If an insurance company decides to take action

against someone it suspects of fraud, it may contactFSCO directly or pass information on to the Insur-ance Bureau of Canada for further review andanalysis. The Insurance Bureau of Canada may inturn forward the case to FSCO.

FSCOs Investigations Unit, which comprisesnine investigators who are primarily former policeof cers, is responsible for investigating all nancial-services companies and individuals regulated by FSCO and not just automobile insurers. As a result,the units investigation of fraud against individualauto insurance companies is not its primary activity.FSCO relies on the Insurance Bureau of Canada orinsurance companies to provide the informationand evidence necessary to launch an auto insurance

fraud investigation and win a successful conviction.FSCO itself has no jurisdictional authority to pros-ecute fraud under the Criminal Code; that author-ity belongs to the Ministry of the Attorney General.FSCO does have the authority under the Insurance Act to prosecute provincial offences such as health-care fraud in the auto insurance sector through the Provincial Offences Act . It may take action on any of the following offences:

charging for services not provided; charging, paying, and/or accepting referralfees; and making a false or misleading statement to an

insurer in order to obtain payment for goodsand services.

Fines range from a maximum $100,000 on arst conviction to a maximum $200,000 for subse -

quent convictions. FSCO investigators have limited


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VM

ability to collect information from a health-careprofessional or clinic owner. Therefore, FSCO relieson insurance companies to provide the evidencethat is needed to prosecute. In contrast, FSCO hassigni cant authority over insurance companies, which are required by law to furnish FSCO withfull information. FSCO advised us that because theburden of proof is high and its investigative powersare limited, its chances of winning a prosecutionagainst a clinic owner are relatively low.

We noted that despite the recent increase inpublic awareness of health-care fraud, there hasbeen no increase in the number of cases beingforwarded to FSCO. FSCO received 16 complaintsagainst health-care professionals and clinic ownersbetween 2008 and the rst half of 2011 but hadobtained convictions only against three health-careclinic owners between 2007 and 2010, resulting in

nes totalling $202,000.More recently, insurance companies have begun

to deal with fraud in civil rather than criminalcourt. In 2010, several insurers sued selected healthclinics over alleged fraud related to auto insuranceclaims. One insurance company alleged it paid outat least $1.2 million to three clinics owned by thesame individual for medical services that were never

provided. Other legal action alleged that invoices were submitted from health-care clinics totallingover $1 million for treatment allegedly provided by persons who did not work at the clinic or who hadleft prior to the treatment being billed. At the timeof our audits, these suits, some seeking restitutionfor several million dollars, were still pending.

Anti-fraud Measures outside Ontario

The Insurance Bureau of Canada issued a reportin February 2011 on Preventing Auto InsuranceFraud in Ontario to the Ontario Minister of Finance. In it, the Insurance Bureau concluded thatfraud is a serious problem in Ontario and recom-mended several measures to help address the issueand reduce claims costs. We noted that the majority of these recommendations re ected actions taken

by U.S. jurisdictions over the past decade to curbfraud. The recommendations included:

establishment of a bureau of insurance fraudinvestigations and prosecutions under the Insurance Act that would be administered by FSCO;

increased criminal and civil penalties forfraud;

civil immunity for persons or organizationsreporting suspicious activity;

mandatory noti cation of health-care fraudconvictions to relevant professional collegesand the Ministry of Health and Long-TermCare;

creation of a joint Ontario government-insur-ance industry fund to nance fraud investiga -tions and prosecutions, and to provide cashrewards to people providing informationleading to a conviction of insurance fraud;

mandatory criminal background checks forany director, of cer, or owner of an independ -ent health clinic before granting a license tooperate; and

establishment of a public-education campaignon insurance fraud.

All 50 U.S. states have enacted laws de ning

insurance fraud as a speci c crime, and 41 haveestablished Insurance Fraud Bureaus. Insurersin these jurisdictions must comply with fraud-reporting requirements before regulators willconsider their applications for premium increases.Twenty states require insurers to forward all suspi-cious claims to a state Insurance Fraud Bureau.Other anti-fraud measures taken by one or moreU.S. states include:

rewards of up to $25,000 for informationabout fraudulent acts;

public education and advertising campaignssuch as Virginias fraud awareness websitewww.stampoutfraud.com and Pennsylva-nias www.helpstopfraud.org .

a requirement that accident reports list allpassengers involved in an accident and not just the driver; and


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withholding bene ts from anyone convictedof insurance fraud.

We found in our discussions with two govern-ment-operated insurance corporations in otherprovinces that their monopoly offered severaldistinct advantages in the ght against fraud,including:

their ability to publish an annual top-10 list of auto insurance frauds in their province;

operation of a special unit composed of former police of cers to investigate allegedfraudulent claims, along with funding forCrown prosecutors dedicated to handlinginsurance fraud; and

employment of extensive data-mining tech-niques and fraud analytics of claims data toidentify potential fraud. Each corporationmaintains a central database of all claims inthe province, making it possible to identify unusual claims or trends that require furtherinvestigation.

FSCO, by contrast, is a regulator rather than aninsurer and thus has no rst-hand knowledge of auto insurance fraud in this province. Informationabout the occurrence and extent of fraud in theauto insurance sector is proprietary information

belonging to insurance companies. Insurers inOntario have historically been reluctant to acknow-ledge publicly any incidences of fraud, or to sharethis information with government organizations,including FSCO. Most of the recommendations inthe Insurance Bureau of Canadas report are beyondFSCOs ability to implement without governmentapproval. In its 2011 Budget, the governmentannounced measures to address auto insurancefraud. One measure included the establishment of

an auto insurance anti-fraud task force. Task-forcemembers were appointed in July 2011 with a dead-line to issue a nal report with recommendations by fall 2012. In addition, the government announcedthe recently-created Health Claims for Auto Insur-ance (HCAI) system will be used to detect potentialfraud. FSCO and insurance companies establishedHCAI on February 1, 2011, an online database and

billing portal requiring health-care providers tosubmit billings for injury claims centrally beforethey are forwarded to insurers for payment.

RECOMMENDATION 2

To reduce the number of fraudulent claims inOntarios auto insurance industry and thereby protect the public from unduly high insurancepremiums, the Financial Services Commissionof Ontario (FSCO) should use its regulatory andoversight powers to:

help identify potential measures to combatfraud, including those recommended by the Insurance Bureau of Canada and thosein effect in other jurisdictions, assess their

applicability and relevance to Ontario,and, when appropriate, provide advice andassistance to the government for their timely implementation; and

ensure development as soon as possible of anoverall anti-fraud strategy that spells out theroles and responsibilities of all stakehold-ersthe government, FSCO, and insurancecompaniesin combatting auto insurancefraud.

FSCO RESPONSE

FSCO shares the Auditor Generals concernsabout fraudulent auto insurance claims. TheMinistry of Finances Auto Insurance Anti-FraudTask Force will identify measures to combatfraud. FSCO supports and is working with theTask Forces steering committee and workinggroups. FSCO will implement any changes inregulatory responsibilities arising from the Task

Forces recommendations.

RATES FILINGS AND APPROVALS

All automobile insurers are required under the Insur-ance Act and the Auto Insurance Rate Stabilization Act to obtain approval from FSCOs Superintendent


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VM

of Financial Services for the premiums they chargeand for any changes to the authorized rates. TheSuperintendent is required to reject any application where rates:

are not just and reasonable in the circum-stances; or

would impair the nancial solvency of theinsurer; or

are excessive in relation to the nancial cir -cumstances of the insurer.

Proposed premium rate changes by insurers areultimately a business decision based on factors thatinclude past and anticipated claims costs, operatingcosts, and pro t levels. Insurance companies are notrequired to submit rate applications at any speci cinterval; instead, they submit when they determinethat an adjustment, increase, or decrease is appro-priate. The main type of ling, a major ling forprivate passenger auto insurance, must be certi edby a quali ed actuary, a business professional whouses mathematics to provide expert assessmentsof the nancial impact of risk and uncertainty asit relates to insurance premiums, expected claims,and reserves.

Approval of Rates

In order to determine whether the proposed rate is justi ed, FSCO conducts its own actuarial reviewsusing benchmark assumptions. FSCO informedus that, in so doing, it recognizes that actuariesuse a degree of acceptable professional judgmentin determining assumptions in their assessmentsand may come to different conclusions. FSCOalso considers other factors, such as the actuariesassumptions that cause differences, rate stability

for consumers, and the actual rates charged in themarket compared to other insurers, in determining whether the proposed rate is justi ed and reason -able. As a result, FSCO may approve an insurersproposed rate increase even if it is up to threepercentage points higher than FSCOs calculatedrate. During the audit, we noted that this practiceof permitting a three-percentage-point margin was

not documented in FSCOs ling policies, althoughit subsequently added this practice to its ratesapproval policies when we brought this to FSCOstaffs attention.

Between 2006 and 2010, FSCO reviewed andapproved 293 major lings, as follows:

approval of the full request in 65% of lingssubmitted by automobile insurers;

approval of a lower-than-requested rate in25% of lings; and

approval of a higher-than-initially-requestedrate in 10% of lings.

It is important that FSCO be consistent in itsgranting of approvals; otherwise, it may provide acompetitive advantage to one insurer over anotheror may be seen as providing unequal treatment tocompanies and consumers. It is also important, par-ticularly when FSCOs conclusions are signi cantly different from those of the insurers actuaries,that FSCO clearly document the rationale for itsdecisions in order to demonstrate fairness and con-sistency. We noted that for approvals granted for alower-than-requested rate, in some instances therate approved still exceeded FSCOs calculated rateby more than 3% and the reasons for the approvals were not adequately documented. In one case, the

le did not clearly indicate why an insurer receivedpermission for an increase that was eight percent-age points higher than indicated by FSCOs ownactuarial determination. In this case, we estimatethat the additional percentage increase allowedcould result in additional annual premium incomeof $25 million for the insurer.

In the cases where FSCO authorized a higher-than-initially-requested rate, we also generally found inadequate documentation to justify FSCOs

decision to grant a higher-than-initially-requestedincrease. For example, we were informed that FSCOapproved a rate higher than initially proposed by an insurer on grounds that the insurer had or couldhave nancial solvency issues, and it was importantto protect the companys clients over the long termby granting a higher premium than had initially been requested. However, we noted that FSCO


16/23


requested the insurer to increase its rates eventhough there were no nancial solvency concernsidenti ed by the Of ce of the Superintendent of Financial Institutions, a federal regulator. Theinsurer agreed to the request. FSCO had no formalpolicy on approving the rates of companies with

nancial solvency concerns or on providing guid -ance on if and when companies should be asked toresubmit their lings for a higher rate increase thaninitially requested.

We acknowledge, however, that according toFSCO, no auto insurance companies operatingin Ontario have declared bankruptcy since 2002or defaulted for nancial reasons on their claimspayouts.

Review of the Pro t Provision

When determining whether to approve a rate ling,FSCO conducts its assessment by factoring in a rea-sonable pro t for the insurance company based ona 12% return on equity (ROE). A study conductedin 1988 set the ROE at 12.5% based on its relation-ship to the long-term Canada Bond rate, which was10% at the time. The ROE was last changed to 12%in 1996, and we were advised that FSCO has not

since conducted a comprehensive review of whatit considers a reasonable pro t for insurance com -panies operating in Ontario. Given that long-termCanada Bond interest rates were substantially lowerat the time of our audit, standing at about 3%, havebeen low for some time, and are forecasted to stay low for some time, the current 12% ROE could behigher than appropriate, assuming that FSCO stillconsiders the long-term bond rate to be an appro-priate benchmark. In any case, given that it has

been 15 years since the 12% ROE was established, we believe that a reassessment is long overdue.

Approved Premium Rate Implementation

To inform consumers of approved premium ratechanges, FSCO publicly reports on a quarterly basisall insurers rate ling approvals, listing the overall

average percentage rate change to the authorizedrates. Consumers renewing their auto insuranceat the same time might attempt to compare theiractual rate change to their insurers approved ratechange as published by FSCO, but it is unlikely thatthe overall average approved rate change wouldbe exactly the same because premiums also re ectsuch variables as the claims experience of the groupclassi cation and location. As a result, consumersare unsure if the new rate they are paying is inkeeping with that insurers overall rate approval.

Consumers can complain to FSCO if they arepaying an incorrect rate, and FSCO will follow up with a review of the complaint and the approvedrates on le. An investigation will take place where warranted. FSCO informed us that betweenthe 2005/06 and 2009/10 scal years, only veof the 22 incorrect rate application cases that itinvestigated were initiated by the public and othersources, while the remaining 17 were self-reportedby insurers. We were advised that when FSCOestablishes that there has been an error, it fol-lows up to ensure that the consumer has receiveda refund and any applicable interest, and may conduct an on-site review of the insurer to assessprocedures and the accuracy of approved rates.

In the four-year period from 2005/06 through2009/10, FSCO levied four nes against insurancecompanies totalling approximately $250,000 forrate errors. Such errors can have a signi cant nan -cial impact on consumerswe noted examples of overbilling that totalled between $1 million and$11 million.

For all rate approvals, FSCO requires insurers toupdate their rate manuals and provide FSCO witha certi cate signed by a senior of cer attesting that

they will charge the approved rates and changetheir information systems accordingly. However,FSCO did not have any procedures for periodically checking that insurers were charging the approvedrates. FSCO had not considered the option of requir-ing insurance companies to provide attestationsfrom third parties, such as their auditors, that theapproved rates were actually being applied correctly.


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VM

DISPUTE RESOLUTION SERVICES

According to FSCO, the mandate of its DisputeResolution Services Branch is to provide a fair,timely, accessible, and cost-effective process forresolving claimant disputes with insurers involving

the entitlement to and/or the amount of statutory accident bene ts. Common examples of disputesmediated include those in which applicantsseek greater medical bene ts, higher income-replacement compensation, more in housekeepingand/or home-maintenance costs, or attendant carebene ts.

Mediation through FSCO is a legislated manda-tory rst step under the Insurance Act , and neitherparty can proceed to FSCOs arbitration process

or court unless mediation occurs rst. Mediationservices are free for consumers, but the insurancecompanies pay $500 for each hearing.

The Insurance Act requires that mediation becompleted within 60 days of the ling of the appli -cation unless both parties agree to an extension.FSCOs internal service standards require that amediation application be assigned to a mediator within three weeks of receipt and that a mediator

le within seven days following the mediationprocess a report that lists issues settled and any thatremain in dispute. These services are intended tohelp insurance companies and claimants resolvedisputes quickly and cost-effectively and to ensurethat entitled claimants receive any medical bene tsand compensation owing within a reasonable time.

We found that FSCO was unable to meet itsservice standards due to the large volumes of mediation applications led and its limited staff resources. In the 2010/11 scal year, no mediations were completed within 60 days of ling, and mostapplications were dealt with between 10 and 12months after the date of ling. It also took approxi -mately 15 weeksinstead of threeto assign anapplication to a mediator. However, once the medi-ation process was completed, the mediators met therequirement of issuing a report within seven days in95% of cases.

RECOMMENDATION 3

To ensure that the Financial Services Commissionof Ontario (FSCO) fairly and consistently author-izes auto insurance company premium rate chan-ges while protecting consumers, FSCO should:

update and document its policies and pro-cedures for making rate decisionsparticu-larly for applications that differ from its ownassessmentsand for properly assessing ratechanges in light of actual nancial solvency concerns of insurance companies;

review what constitutes a reasonable pro tmargin for insurance companies whenapproving rate changes, and periodically revise its current assessment to re ect sig -ni cant changes; and

establish processes for verifying or obtainingassurance that insurers actually charge only the authorized rates.

FSCO RESPONSE

FSCO operates one of the most robust premiumrate approval processes in North America andfully supports further strengthening of its pro-cess. In particular, FSCO acknowledges the needto update policies and procedures to supportdecisions regarding rate lings.

As part of deciding if rates are just andreasonable, FSCO determines whether the ratecharged is adequate to cover all claims costs andexpenses. In addition, case law requires a bal-ancing of interests in the interpretation of justand reasonable.

Last year, FSCO also identi ed the need tocomplete a review of an appropriate pro t provi -sion. It will nalize the process and retain a con -sultant to provide expert analysis on this issue.

FSCO ensures that consumers are issuedrefunds where an insurer has charged theincorrect rate. FSCO plans to enhance its cur-rent processes for verifying or obtaining assur-ances from insurers that they are charging only authorized rates.


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FSCO attributed the delays to the dramaticincrease in mediation applications over the last

ve scal years. Figure 7 shows that the numberof mediation case hearings increased by 135%during this period, while the number of mediationapplications pending increased by 645%. FSCOinformed us that it expected the mediation backlog would continue to increase, because it was pro- jecting more than 36,000 new applications in the20011/12 scal year, up 18% from 2010/11.

FSCO has implemented measures over the lastve years to improve its productivity and help

address the growing backlog of mediation applica-tions, and it is now completing 50% more cases with no staff increases. In addition, changes to theregulations under the Act imposed a new require-ment in September 2010 stipulating that an appli-cant may not le for mediation if he or she failedto attend an insurers medical assessment (40% of applicants have historically failed to attend suchassessments).

At the end of our eldwork, FSCO informed usthat it was seeking approval to hire external media-tion service providers to supplement its own work-force and help address the existing and anticipatedbacklog caused by government hiring restrictions

which do not allow it to take on more staff.The current rate of injury claims that result in

mediation stands at about 50% of all claims. Webelieve that this high rate could indicate signi cantdissatisfaction by claimants with the handlingof claims by insurers and/or lack of clarity fromFSCO in the guidance and manner in which statu-tory accident bene ts are administered. It couldalso suggest, in part, that a burgeoning industry providing legal consulting services to claimants

is encouraging them to challenge insurers forincreased bene ts and compensation through themediation process. This may be the case particu-larly in the Greater Toronto Area, where about 80%of all mediation applications originate, even thoughonly 45% of automobile accidents involving injuriesoccur in the GTA.

FSCO and the insurance companies we spoke to

cited several factors they said led to the increasingdemand for mediation, including over-utilization of bene ts, the impact of recent legislative changes,people seeking more compensation during tougheconomic times, and the fact that 99% of claimants who dispute their insurers decision about theirclaim use a legal service and seek monetary settle-ments instead of health-care and support bene ts.It is also possible that insurance companies arebeing tougher in assessing claims as they respondto their growing incurred loss ratios and decliningrevenues from interest-bearing investments duringthis recent economic downturn, and to pressurefrom FSCO on insurers to ght fraud.

The actual reasons for the higher numberof mediation cases cannot be determined fromthe information FSCO captures. Although FSCOcaptures mediation details in individual reports,there is no attempt to evaluate and summarize thisinformation because it is considered to be con den -tial. Therefore, FSCO does not regularly assess thenature of the disputes, the initial positions of theparties, the details of solutions to resolved matters,and the details of those that were not resolved. Thisinformation would help FSCO identify matters of frequent dispute and systemic issues.

We found that FSCO tracks the disputed issuesat mediation only by bene t type. From 2006 to

Figure 7: Growth in Mediation Applications,2006/072010/11Source of data: Financial Services Commission of Ontario

mediation applications receivedmediaton hearing/cases closed

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2006/07 2007/08 2008/09 2009/10 2010/11

mediation applications pending


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VM

2010, FSCOs records indicated that the top issuesin dispute were medical bene ts, cost of examina -tions, housekeeping and/or home maintenance,attendant care, and income replacement. However,this information is not suf ciently detailed topermit an investigation of the root causes of casesthat go to mediation. We were advised that FSCOconsulted with its mediators on possible improve-ments to the system, policies, and guidelines toreduce backlogs in 2007 and 2009, but no regularprocess existed at the time of our audit to obtainmediators opinions on possible systemic problemsand possible improvements and clari cations toSABS guidelines and policies to reduce the demandfor mediation.

PERFORMANCE MEASURES

In its annual business plan submitted to the Minis-ter of Finance, FSCO established three performancemeasures for its regulatory responsibilities over theauto insurance industry, as follows:

average number of days taken to approve private automobile premium-rate applications,compared to its target of 45 days;

percentage of mediation reports completed within seven days of conclusion of mediation,compared to its target of 94%; and

weighted ratio of administrative costs to dol-lars paid out of the Motor Vehicle AccidentClaims Fund, compared to its target of 28%.

In the ve scal years ending in 2010/11,FSCO generally met these publicly stated targets.However, in our view, these targets do not reporton its success in protecting the public interest withrespect to auto insurance or provide useful insightinto its regulatory oversight responsibilities andactivities. As well, there are no performance targetsregarding the nancial health of insurance compan -ies. In particular, the targets include no benchmark-ing of the cost-effectiveness of auto insurance inOntario. In addition, the target established formediation services does not re ect the overalltimeliness of service levels. As discussed in a previ-ous section, FSCO generally meets the seven-day

RECOMMENDATION 4

To ensure that the Financial Services Commis-sion of Ontario meets its mandate to providefair, timely, accessible, and cost-effectiveprocesses for resolving disputes over statutory accident bene ts, it should:

improve its information-gathering to helpexplain why almost half of all injury claim-ants seek mediation, as well as how disputesare resolved, and to identify possible sys-temic problems with its SABS bene ts poli -cies that can be changed or clari ed to helpprevent disputes; and

establish an action plan and timetable forreducing its current and growing backlog toa point where it can provide mediation services in a timely manner in accordance withlegislation and established service standards.

FSCO RESPONSE

FSCO captures information about disputessubmitted for mediation, collects aggregatestatistical information, and compiles reports onpro les of applications received, types of bene -

ts mediated, workload analysis, processingtime, and whether mediation fully or partially settled disputes, or failed to settle them. FSCO

will look at additional data collection that mightassist in identifying ways to reduce the highdemand for dispute resolution services.

FSCO has implemented a number of meas-ures and initiatives that have increased pro-

ductivity and has managed to close 50% moreles during the last ve years. Since completion

of the audit eld work, additional initiativeshave been developed and will be implementedthrough the fall and winter. FSCO has engagedthe Ministry of Finance in developing an actionplan to address the backlog.


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target for issuing a report following a mediation.However, it is of greater importance to consumersto note that FSCO takes between 10 to 12 months tocomplete a mediation hearing once an applicationhas been received, instead of the legislated require-ment of 60 days.

The Financial Services Commission of Ontario Act requires FSCO to le its annual report within areasonable time after the close of each scal yearto the Minister, who then tables it in the Legisla-tive Assembly. As of July 2011, however, FSCOsannual report for the year ending March 31, 2010,had not been tabled by the Minister of Finance andthus had not been made public. We also noted thatFSCO does not report publicly on its performance.For example, it does not make public its annualbusiness plan, and its latest annual report does notinclude objective and outcome-based performancemeasures, targets, or details about its accomplish-ments in meeting stated goals and targets.

We did note, however, that FSCO does makepublic its Statement of Priorities as required underthe Financial Services Commission of Ontario Act. Init, FSCO sets out its proposed priorities and initia-tives to meet changing economic and marketplaceconditions in the coming year as well as its accom-

plishments from the previous year.

MOTOR VEHICLE ACCIDENT CLAIMSFUND UNFUNDED LIABILITY

The Motor Vehicle Accident Claims Fund (Fund)is generally considered the payer of last resort.

It compensates victims of automobile accidentscaused by uninsured motorists, drivers of stolen vehicles, or hit-and-run drivers, when no otherautomobile or liability insurance is available to pay a claim. Victims can apply to the Fund, which paysstatutory accident bene ts and any tort judgments.The Fund operates under the authority of the MotorVehicle Accident Claims Act and is administered by FSCO. The Fund also contracts with an independ-ent adjuster to investigate claims and handle statu-tory accident bene t claims payments. Paymentsby the Fund rose from $17.9 million for 553 claimsin the 2006/07 scal year to $21 million for 585claims in 2010/11.

According to FSCOs consulting actuary, asof March 31, 2011, the Funds assets were sub-stantially less than what is needed to satisfy theestimated lifetime costs of all claims currently inthe system, resulting in an unfunded liability. AsFigure 8 indicates, the Funds unfunded liability was $109 million as of March 31, 2011, but FSCOforecasts that it will grow to $323 million by the2021/22 scal year unless the Fund receives signi -cant additional revenue.

The Fund is supported primarily by a fee on theissuance or renewal of each Ontario drivers licence, which works out to be $15 paid every ve years. In2010/11, the Fund received $28.7 million in fees.

RECOMMENDATION 5

In order to provide the public, consumers,stakeholders, and insurers with meaningfulinformation on its auto insurance oversightand regulatory activities, the Financial ServicesCommission of Ontario should report timely information on its performance, includingoutcome-based measures and targets that moreappropriately represent its key regulatory activ-ities and results.

FSCO RESPONSE

FSCO agrees that the public, consumers, andstakeholders should be provided with more

meaningful information on its performance inthe oversight of the auto insurance system. Inits 2011 Statement of Priorities, published inJune 2011, FSCO indicated that it will developimproved performance measures and establish

standards against which it can be judged in allof the sectors it regulates. The existing measures will be reviewed and updated.


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VM

Figure 8: Motor Vehicle Accident Claims Fund Actual and Projected Unfunded Liability, 2000/012021/22($ million)Source of data: Financial Services Commission of Ontario

actualprojected

0

50

100

150

200

250

300

350

RECOMMENDATION 6

To ensure that the Motor Vehicle AccidentClaims Fund (Fund) is sustainable over thelong term and able to meet its future nancialobligations, the Financial Services Commis-

sion of Ontario should establish a strategy andtimetable for eliminating the Funds growingunfunded liability over a reasonable time periodand seek government approval to implementthis plan.

FSCO RESPONSE

We acknowledge the Auditor Generals ndingsregarding the unfunded liability of the Motor

Vehicle Accident Claims Fund (Fund). FSCOscurrent 10-year projections suggest that thecurrent positive cash balance should adequately provide for the Funds statutory payment obli-gations to claimants for at least the next eight years through to the 2019/2020 scal year. Cash

ow studies are done annually and the next

The fee was last increased in September 2004 by $10 on a drivers licence ve-year renewal. Ourdiscussion with management noted that there is noplan or timetable in place to eliminate the unfundedliability in a reasonable amount of time. We estimatethat the Fund would need an additional $30 millionper yearthat is, double the current annual fee rev-enuefor the next 10 years to eliminate the existingand projected unfunded liability. This could requireFSCO to seek Ministry of Finance approval for doub-

ling the current $15 drivers licence renewal fee.


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OTHER MATTER

Assessment of Health-system Costs

The Insurance Act was amended in 1996 to requireall automobile insurers operating in Ontario topay an annual assessment of health-system coststo recover the costs to the province of providingmedical care to people injured through someoneelses fault. The government of the day initially setthe assessment at about $80 million a year for theentire industry to help defray costs incurred by theMinistry of Health and Long-Term Care that oughtto be paid by insurers. FSCO is responsible for col-lecting the assessment from insurers, with eachinsurer paying a pro-rated share of the total.

In 2005, our audit of the recovery of healthcosts resulting from accidents led us to concludethat the Ministries of Health and Finance did nothave satisfactory policies and procedures in placeto monitor the adequacy of the initial $80-millionannual assessment. Subsequently, the governmentincreased the annual assessment in September2006 to about $142 million.

The Health and Finance Ministries reportedin our 2007 follow-up that they had established a

joint working group that year to conduct furtheranalysis to ensure that future assessment amountsadequately cover the cost of health care providedto individuals injured in automobile accidents. Theministries also said at the time that it would takesome time to develop the appropriate mechanism.

However, the Ministry of Finance informed us thatno progress had been made in this area as of July 2011 and that the government was not consideringany increase in the assessment.

We also noted that overall health-care spendingby the Ministry of Health and Long-Term Care hasincreased by about 25% since the assessment waslast adjusted in the 2006/07 scal year. In addi -tion, medically-related SABS bene ts costs haveincreased by almost 120% over the same period,although some of the medical costs, such as physio-therapy and massage therapy, may be unrelatedsince they may not normally be covered by theMinistry of Health and Long-Term Care.

We compared Ontarios assessment of health-system costs to those of other jurisdictions andfound that Ontarios is among the lowest in Canada when measured on a per-registered-vehicle basis,as illustrated in Figure 9. If Ontarios assessmentper registered vehicle were raised to the average of other provinces, the assessment would increase by 50%, or about $70 million, to $214 million. Assum-ing that the insurance industry was successful inpassing this cost on to vehicle owners, this change would likely add almost $10 to the insurance pre-mium for each vehicle in Ontario.

one will be done in August 2012 to re-assess the10-year cash ow projections.

In the past, the government has taken appro-priate and timely steps to address the Fundsneeds. FSCO will continue its regular engage-

ment with the Ministry of Finance on the Fundsevolving nancial status to ensure that statutory payment obligations to Fund claimants are met.

Figure 9: Provincial Comparison of Assessments of Health-system Costs on Auto Insurance Industry, 2011($ per registered vehicle)Source of data: Of ce of the Auditor General of Ontario, provincial nanceministries, and Public Accounts

0 5 10 15 20 25 30 35 40 45 50

NB

QC

AB

SK

PEIMB

NL

NS

ON

BC


23/23


VM

RECOMMENDATION 7

In view of the fact that it has been ve yearssince the last review of the assessment of health-system costs owed by the auto insurance sectordespite the signi cant increase in health-carecosts related to automobile accidents over thesame period, the Financial Services Commissionof Ontario should work with the Ministry of Finance, the Ministry of Health and Long-TermCare, and the insurance industry to review theadequacy of the current assessment amount.

FSCO RESPONSE

FSCO agrees with the Auditor Generals recom-

mendation that health-care assessments paid tothe government by auto insurance companies would bene t from more regular review. Theresponsibility for initiating the review rests with the government. FSCO will ensure thatthe Ministry of Finance is aware of the auditorsrecommendation and will support the Ministry of Finance in any future review as requested.

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Auditor General Insurance Regulation Dec 2011

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