The long and winding road (of cap legislation)
By Anne E. Kleffner and Norma Nielson | May 18
The recent experience of insurers writing automobile insurance in private, tort provinces has been generally favourable and to a large extent reflects the benefits associated with a number of auto insurance reform measures that were adopted in 2003 and 2004.
Despite differences in automobile insurance systems across the country, consumers generally desire the same outcome: fair premiums, prompt settlement of claims in an amount that provides access to needed medical care, and fair compensation for other types of losses.
In order to improve the overall performance of the system—financial health for insurers and fair compensation and pricing for consumers—the root causes that led to the problems in 2003 needed to be addressed. At that time the Atlantic Provinces and Alberta were under pressure to respond to increasing claim costs that caused dissatisfaction among consumers, financial difficulties for companies, and political challenges for governments.
Reason for reforms
The reforms adopted as a result of these pressures addressed a number of areas, including compensation, pricing and underwriting.
Although they varied somewhat across provinces, a number of reforms were similar, including a cap on pain and suffering awards for minor injuries, introduction of prior-approval rate regulation, and restrictions on criteria that insurers could use for underwriting.
Alberta, Nova Scotia, New Brunswick and PEI all adopted a cap on “pain and suffering” awards to people who sustained minor injuries in a car collision ($2,500 in the Atlantic provinces, $4,000 in Alberta).
Newfoundland and Labrador took a different approach and imposed a $2,500 deductible for pain and suffering awards.
Alberta also modified the Diagnostic and Treatment Protocols Regulation to ensure access to cost-effective medical treatments and to ensure access without insurer prior approval; the province also increased Section B Automobile Accident Insurance medical benefits from $10,000 to $50,000.
At this time, provinces also mandated rate reductions and most introduced rules that prevented insurers from denying or cancelling coverage based on age, marital status, age of car, not-at-fault accidents, and a number of other factors.
Result of reforms
With a few years of experience since the introduction of the reforms and based upon the performance of insurers and the satisfaction of consumers, there is evidence of the effectiveness of the reform measures adopted, particularly improved access to medical treatment, caps on non-economic losses for some injuries, and a pricing system that is perceived to be fairer. For example:
- 86% of Alberta brokers, who participated in a recent IBAA survey felt automobile insurance reforms have been beneficial for consumers;
- In a 2008 report, the Alberta Auto Insurance Rate Board found that auto insurers’ experience could have supported a premium decrease of 5% had the product remained unchanged, while removing the non-pecuniary damage cap would support a premium increase of about 20% (in the end, the Alberta Auto Insurance Rate Board took a split-the-difference approach and approved an increase of up to 5%);
- Premium reductions have saved consumers in Alberta and Atlantic Canada $1.13 billion and $1.17 billion, respectively;
- Facility market shares have decreased. For example:
- The December 2008 market share for Alberta was 0.3%, compared to a high of 4.2% in 2004;
- New Brunswick has fallen from a high of 6.8% in 2003 to 1.5% in 2008;
- And PEI has fallen from 8.4% in 2004 to 2.0% in 2008.
Despite the success of the reforms, consumers and insurers may face significant changes in the near future. The Morrow v. Zhang decision that concluded that Alberta's $4,000 cap on non-pecuniary damages violated the Charter of Rights and Freedoms is expected to have a significant impact on insurers’ claim costs. However, the Nova Scotia Supreme Court decided that province’s minor injury cap is constitutional and does not violate the Canadian Charter of Rights by discriminating against accident victims.
There appear to be two key areas of disagreement in the courts’ decisions:
- The Alberta decision found that province’s Minor Injury Regulation to be “demeaning to the dignity of that group,” further stating that it “confirms prejudices that soft tissue injuries are generally faked or exaggerated.” In contrast to that finding, the decision in Hartling v. Nova Scotia found that any stigmatization or marginalization that may occur, while quite possibly a by-product of the adversarial (tort) system, does not result from the auto insurance reform legislation. Justice Goodfellow further noted that any such stigmatization pre-dates insurance reform and “through the process of education, etc., is ever-diminishing.”
- The Alberta decision identifies explicitly that “other jurisdictions that have adopted definitions of ‘minor injury’ … have not imposed caps that apply exclusively to soft tissue injuries.”
Appeals have been filed and the conflicting decisions will ultimately have to be rationalized by the Supreme Court of Canada.
Courts contribution
At the moment there appears a reasonable possibility that with guidance from the courts, it will be possible to define “minor injury” in a way that will withstand constitutional challenge. But that is far from certain.
Should the courts eventually overturn the minor injury cap, it does seem certain Canadians will experience a period of rapidly increasing prices which, in turn, will eventually lead to another round of dissatisfaction among consumers, pricing challenges for insurers, and renewed difficulty for regulators.
If faced once again with this pressure for change, a number of alternatives still exist that could be considered in an effort to keep premiums affordable while providing insurers a fair return. Including:
- Improve the system of coordination of benefits in order to reduce the time and effort required to verify the existence of other sources of compensation and to eliminate over-compensation.
- Develop a standardized approach to compensating service providers in the medical system, when these services are used by accident claimants—similar to the approach used in provincial workers’ compensation systems.
- Set first-party benefits at a level that reduces the transaction costs associated with third-party liability claims without increasing aggregate costs.
- Encourage and facilitate an efficient mechanism for dispute resolution.
Each and every round of political pressure on the auto insurance system causes a significant drain on the time, energy, and financial resources of the insurance industry. It also gives rise to new calls for public insurance. If the reforms from 2003 and 2004 survive the current challenge, our vision would be a system where insurers work with governments to better monitor the health of the system to encourage stability and increased consumer understanding. Changes, such as those listed above, represent possible ways to keep costs under control while still providing fair compensation.
Anne Kleffner is an associate professor and Norma Nielson is a professor and chair of Insurance & Risk Management at the University of Calgary.
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