Report: Ont. drivers might have overpaid $5B on insurance over five years
Ontario insurance companies are potentially making billions in pre-tax income off motorists who are generally overpaying for coverage, according to a report commissioned by the Ontario Trial Lawyers Association.
Report author and economics professor Fred Lazar, of York University’s Schulich School of Business, suggests insurers might have raked in approximately $5 billion in pre-tax income from 2011-2016, including an estimated $1.5 billion in 2016. Those 2016 profits represent an estimated 60 per cent increase over those from 2011, Lazar says.
“Given the levels of excessive profitability, consumers almost certainly have paid too much for their insurance coverage,” Lazar writes in the report, which was released Tuesday by the OTLA. Lazar adds that the overpayments amount to approximately $143 per insurance policy per year in the province.
“I estimate that in the last five years alone, overpayments may have totaled $5 billion,” Lazar said in a news release. “This represents 9.5 per cent of total premiums paid during the same amount of time.”
Lazar calculated the potential pre-tax profits by examining auto insurers’ financial performance, including their return on equity. However, he says it’s difficult to be certain because these companies “do not report publicly the equity allocated to their auto insurance operations in Ontario, the net investment income attributable to such operations, or their actual operating expenses.”
Speaking at a news conference on Tuesday, Lazar said change in the system needs to come “through the political side.”
NDP MPP Wayne Gates pressed the provincial government to stop the “gouging” of Ontario families on Tuesday, during question period at Queens Park.
“Why did the premier deliver a 60 per cent increase in the profits to insurance companies, instead of delivering 15 per cent in savings for Ontario families?” he said.
Finance Minister Charles Sousa said the government is aware of “alarming costs that do in fact exist in our system,” and is taking steps to “increase consumer protection, combat fraud and ensure those injured in an accident get the care they need when they need it.” He also pointed to the establishment of the Financial Services Regulatory Authority as a major step toward tackling the situation.
Sousa also pointed out that the report was commissioned by the OTLA – a group of lawyers that also add to the costs in the system.
“It’s about care and not cash, which is what we’re trying to avoid in the abuse of the system,” he said.
Sousa says the province has reduced insurance rates by as much as 11 per cent. However, that still falls short of the 15 per cent target the Liberals set in the 2013 budget, which was supposed to have been achieved by August 2015. Premier Kathleen Wynne described that target as a “stretch goal” in January.
“We have to do better,” Sousa said on Tuesday.
Lazar and fellow Schulich professor Eli Prisman published an older version of the report in the journal Risk Management and Insurance Review in 2015. Lazars says he was approached by the OTLA to update the report with data from 2015 and 2016.
According to Lazar’s updated estimates, Ontario drivers may have overpaid by as much as $9.2 billion between 2001 and 2016.
The OTLA says the findings point to a need for greater transparency in the province’s auto insurance industry. The organization is also calling for the issue to become a topic of discussion during the province’s election campaign.
The OTLA describes itself as a “champion and advocate for the rights of those who have suffered injury and loss through the wrongdoing of others.” Its membership consists of plaintiff lawyers and their staff.
“This update is just another example of how Ontario’s auto insurance system is in need of a complete rethink,” Claire Wilkinson, president of the OTLA, said in a news release.
Steve Kee, a spokesperson for the Insurance Bureau of Canada, told CTVNews.ca that Lazar’s report contains “some very inaccurate claims and assumptions.” He cited IBC numbers indicating the industry’s return on equity is 6.6 per cent, not 15.9 per cent as it’s recorded in Lazar’s report. He also says insurers paid out $1.03 for every $1 earned in auto insurance premiums, and that total claims costs have increased by an average of 4.5 per cent annual, or 19 per cent between 2012 and 2016.
“We do agree with OTLA that the insurance system needs to be reformed for the benefit of consumers, but to claim that excessive insurer profits is the cause is simply false,” he said.
Lazar acknowledges in the report that his overpayment estimates “can be challenged,” although he suggests the overpayment estimates might be higher if insurers’ operating costs are less than the 25 per cent used in his model.
With files from CTV Toronto