INSURERS are hoping radical reforms proposed for Ontario’s financial services regulator in a review panel’s final report will begin to be implemented later this year.
The final recommendations, released to the public in late June, call for the creation of a new independent and integrated authority which would oversee, among other things, a potentially revamped system for regulating auto insurance rates.
The majority of the recommendations for the review of the mandates of the Financial Services Commission of Ontario, Financial Services Tribunal and the Deposit Insurance Corp. of Ontario are similar to those outlined in a preliminary position paper released last fall.
The review panel received nearly 50 submissions in response to that and after making appropriate adjustments believes the final proposals will be broadly supported.
“It became clear to us that the mandate of the agencies under review should be modernized and that significant changes in governance, structure and associated accountability mechanisms are necessary to improve mandate alignment,” the panel said in a letter to the province’s finance minister three months ago.
“With financial services and pensions sectors changing at a rapid pace, we need a regulator that is sufficiently independent, flexible, innovative and expert.
“We do not believe a thorough transformation could be accomplished within the current regime. So we have recommended a new, independent and integrated regulator called the Financial Services Regulatory Authority.”
The Insurance Bureau of Canada welcomed the panel’s final recommendations, which it said favourably align with the p&c insurance industry’s input.
“Given the rapid pace of change in the financial world, we believe the new regulator needs to be nimble and foster a strong, vibrant and innovative financial services sector,” said Kim Donaldson, the bureau’s vp for Ontario.
“The regulator must be an effective model for excellence for financial sector regulation in Ontario, with a mission to protect and promote a broad range of consumer interests in a manner that is pro-actively responsive to changing consumer needs, as well as adaptive to new and sometimes disruptive future technologies.”
The IBC noted the final recommendations are grounded in international regulatory principles and reflect recent innovations and best practices in financial services regulation.
It said it will encourage the government to move quickly to implement the panel’s 44 recommendations through the necessary legislative and regulatory channels and to announce them as early as this fall.
Of particular interest for p&c insurers are recommendations No. 6, which deals with discouraging fraud; No. 14, which concerns self-regulatory organizations; No. 18, the transfer of the province’s motor vehicle accident claims fund to the Facility Association, and No. 23, which addresses oversight of an auto insurance rate-setting process that many stakeholders say needs to be changed.
Panel members George Cooke, chair of OMERS Administrative Corp. and former ceo of The Dominion of Canada General Insurance Co.; James Daw, former financial columnist at The Toronto Star, and Lawrence Ritchie, partner at Osler, Hoskin and Harcourt, noted in their final report that while they question whether the current process for regulating rates is in the best interest of consumers or the sector, the issue technically fell outside of their mandate.
“We have not been asked to review the auto insurance system, its legislation, or its regulations.
“However, our mandate did include the requirement to comment on ‘Whether the agency is carrying out the activities and operations as required in its mandate.’
“When it comes to the regulation of auto insurance rates, FSCO is not ultimately protecting the public interest or enhancing confidence in the sector.
“We do understand, however, that FSCO is bound by its current legislative and regulatory framework.”
The panel said that of all the issues raised by auto insurers during consultations for the review, the current process for reviewing and approving rate changes was the most frequently cited source of dissatisfaction.
It notes that in Ontario, insurers must seek prior approval before they can adjust rates — up or down. FSCO’s actuaries and staff are required to review each insurer’s data and assumptions regarding claims costs, expenses and investment income to ensure that proposed rates are just and reasonable, “and neither excessive nor so low that the lack of revenue would impair a company’s financial solvency.”
It’s a process that can take several months to complete.
“Industry representatives, however, seem to have the impression that FSCO actuaries and staff go beyond rate approval and engage instead in rate setting,” the panel said.
“Several insurers argued that FSCO officials routinely defy the analysis done by the insurers’ larger teams of professional actuaries without a sound basis for doing so. Those who highlighted this concern stated this practice is especially evident when FSCO is directed at the political level to seek broad rate reductions.”
For example, the report cites an August 2015 submission from an insurer that said it uses 10 trillion price points in Ontario auto insurance.
“Company executives insist these price points have been developed over time by a team of more than 40 actuaries. However, we heard that when rates are submitted to FSCO, FSCO staff would scrutinize, recalculate and dispute the figures, in many cases without providing a sound actuarial rationale. We were told that FSCO would then impose a rate based on its in-house calculations.”
In a June 2015 written submission, another insurer provided an example of the cost and burden of this approach and argued that the practice leads to higher costs for consumers:
“In Ontario today, the high cost of rate filings is a cost of doing business that is passed on to consumers,” the insurer said.
“The most straightforward filing — a ‘simplified’ filing — typically requires a 100-page submission, while a filing following product reform is much more detailed and may average up to 600 pages.
“Moreover, the administration of Ontario’s rate regulation system is excessively cumbersome and slow. For example, it took over seven months for our usage-based insurance offer-ing to be approved although the product was already in use in other markets.”
The panel said a common view expressed by industry stakeholders was that Ontario’s tight control on auto insurance rates has fallen out of step with trends in many other jurisdictions and that the practice runs counter to a large body of academic research.
“Indeed, various academic studies would suggest that, in a variety of regulated industries, strict rate controls could limit competition and consumer choice and thus lead to higher prices.”
And the report noted there is an added risk that undue interference in the marketplace could impede innovative uses of new technology and thus postpone improvements in public safety and consumer protection — such as usage-based insurance technologies, which reward safe driving habits and can be used to more accurately and fairly define risk-classification.
“We have also heard concerns that the current process of rate approvals requires the creation and maintenance of huge databases of actuarial information related to claims costs, price points, risk criteria, etc., that some feel are irrelevant for purposes other than rate approvals.
“Collecting and maintaining this data has created a significant burden on the industry in terms of both time and resources.”
The panel said all of the industry representatives who wrote or spoke to it called for less-rigid rate regulation.
The former commissioner of the New Jersey Dept. of Banking and Insurance reported that roughly 80% of drivers there received a rate reduction after the state stopped requiring prior approval of rate changes and switched to a fileand-use system — the type of system Ontario’s auto insurance industry is lobbying to have.
“Another significant issue, one that representatives of other financial sectors have raised, is that FSCO’s involvement in auto insurance rate regulation overburdens its resources.
“We heard consistently that, during peak periods, FSCO becomes so overburdened with auto insurance that resources from other areas are redeployed to assist. Representatives of the other sectors made this point and noted that they have experienced service and/or regulatory gaps as a result.”
The panel members said that in their view, “FSCO’s hands are tied without legislative changes implemented by the government.”
In its preliminary position paper, the panel set out three possible approaches for addressing the following question as it pertains to the regulation of auto insurance: ‘Whether all or part of the functions of the agency are best performed by the agency, or whether they might be better performed by a ministry, another agency or entity:’
1. Continue rate approvals within FSRA as practised today;
2. Remove this function from FSRA and transfer it to a formal rate-setting board, or
3. Give FSRA authority/responsibility for rate regulation, leaving the approach to be determined through its rule-making authority.
“The feedback we received suggested that there is broad support for the third option.
“Those who disagreed seemed to regard prior approval of rates as a substitute for adequate regulatory investigation and enforcement.
“But, if the FSRA we envision did provide a much more proactive regulatory approach with a stronger focus on consumer protection, it might change the minds of those wedded to the status quo.”
The panel said that before the FSRA could set new rules for how rates are to be regulated there would need to be amendments to legislation, “which would go a long way in de-politicizing the process.”
It said an effective, well-governed and transparent regulator with rule-making authority would be in a position to introduce a less rigid approach, removed from political influence.
“Modernizing the rate approval process through a transparent and accountable rule-making process would be a major win for consumers.
“They could benefit from a faster, more efficient and less costly system.
“We would strongly urge that FSRA’s board of directors be directed to undertake a review of the rate approval process prior to setting a rule.
“We are confident that, after such a review, FSRA would be in a position to implement a less costly, less time-consuming, and more transparent process that would benefit consumers and the health of the sector.”
The current president of the Insurance Brokers Association of Ontario said that while his members support the bulk of the recommendations, auto insurance rate regulation changes should be approached with caution.
“The IBAO believes that this issue should not be considered until the new regulator is in place and can demonstrate that enforcement and consumer protections are robust and muscular,” Doug Heaman, of Advocate Insurance Group in Kitchener, Ont., told Thompson’s following the release of the report.