Auditor General’s 2022 Report – FSRA Value-for-money audit

A Missed opportunity to hold industry to account

The Auditor General’s report on the “value for money” audit of the Financial Services Regulatory Authority of Ontario (FSRA) provides a rare glimpse into the workings of the Ontario provincial auto insurance regulator and the often byzantine world of auto insurance rating, pricing and claims handling.

The last such review of auto insurance oversight was undertaken a long time ago, in 2011, so this review was well overdue given that much has changed in the intervening years with reductions in coverage and the growth in insurer profitability.

A review by the Auditor carries a lot of weight. As an objective and impartial officer of the legislative assembly, the office of the auditor is one of the few observers that brings a unique, fresh, unjaded perspective and focus to her task. The auditor’s recommendations and observations can reverberate for some time, so it is imperative that the report be thorough and thoughtful. Our analysis is that, despite considerable time and staff resources devoted to the task, the report unfortunately falls short in some significant and obvious ways.

OTLA had occasion to raise some of these concerns with representatives of the office of the Auditor General in a meeting in December 2022.

One of the first points raised in the auditor’s review is that Ontario has a particular problem with persistently high auto insurance premiums. This affordability problem is well established, and the auditor’s report would not be the first and will not be the last to comment on it.

It’s easy to focus on premiums. Most of us will never be in a collision and anyone who drives must pay insurance premiums and will find that they are paying ever-increasing amounts for the privilege of carrying a little pink slip of paper in their wallets or purses.

This is where the full weight of the office should have been used to more fully explore and explain that, as the classic definition of insurance holds: “the premiums of the many will pay for the claims of the few.” Insurance: it’s more than just the premiums, right?

So, yes, we are paying high premiums but are consumers getting value for their money? Are consumers paying no more than is necessary to maintain a vital, healthy and, yes, profitable insurance sector? Are insurance companies and their bloated and dated sales and distribution channels through company-owned “brokers” and “agents” meeting the needs of consumers in 2022?

It was refreshing to see some mention of broker commissions and the lack of clarity on this point from a consumer perspective. At least, the auditor was aware of that.

But it would also be beneficial to explore the possibility that there could be substantially more competition and lower costs to consumers if the restrictive model and distribution channels for insurance sales were open to banks and any other financial services entities that met the minimum standards.

There is no legitimate public policy reason to continue to protect and shield the broker network, but that point is not explored either.

And, on the issue of insurer profitability, surely the auditor has something to say; some cautionary note about the excesses of the industry.

The auditor does note, only in passing, that insurance profitability hit a worrisome high in 2020 when, according to figures reported by FSRA itself, return on premiums was 27.6 percent.

The standard profit benchmark that the regulator observes is “5 cents of profit for every premium dollar.” In 2020, for every dollar in insurance premiums, insurance companies actually made 27.6 cents in profit or, more than 5 times the permitted profit provision, and not including whatever they earned from investment income.

Total auto insurance premiums for “private passenger vehicles” in Ontario in 2020 were $12.9 billion, which means that the industry’s profitability from their Ontario auto insurance business alone was $3.56 billion. Not only is there very brief mention of profits, the report also fails to acknowledge or report on available data from 2021 and even the preliminary data that the industry has reported from the current year, 2022. This is a serious shortcoming, as is the stunning omission of “profit” as the second highest industry cost, after claims. On this point, insurers get a hugely inexplicable pass from the auditor.

In addition, in this report that is allegedly about the role of the regulator, there is actually no discussion about what the regulator does to approve rates that produced this record profitability and the responsibility to perhaps monitor the sector or, at the very least, act in the public interest to report on the financial performance of insurance companies.

Beyond what we pay for in premium dollars, what does the report have to say about claims? And, is there any concern in the report for what happens to injured people? Where is the acknowledgement that some of those “premium-paying consumers” will be injured and will have to rely on their insurance coverage?

Unfortunately, there is insufficient regard for those consumers and for others who are injured.  And, when those injured consumers are referenced, it’s in the most unfortunate, unflattering and unfair ways: Consumers, we are told, are incentivized to maximize their claims. Or, that their lawyers “are hired to dispute payments and benefits offered by insurance companies.”

It is hard to think of a way of describing what happens in a typical insurance claim that is more sympathetic to the perspective of an insurance company and less concerned with the plight of an injured person.

The reality, of course, is that injured people turn to legal representatives because they are at a severe disadvantage when dealing with their own insurance companies. Insurance companies commonly deny benefits to their own customers and, because the insurance system is so complicated, those customers need legal advice and assistance to advance their legitimate claims against well-funded insurance company legal departments. Disputes start with a denial from an insurer and lead to further denials and lengthy delays in receiving treatment. Claimants need legal assistance to counter the power of the insurance company and their defence lawyers. Plaintiff lawyers provide much-needed access to justice to assist people at a most-vulnerable and difficult time of their lives when they are dealing with sometimes very serious injuries, loss and significant personal hardship and, when they are only concerned about getting back to some semblance of their lives.

One would have hoped that the auditor might have something more to say about the perspective of injured claimants and how, for example, they have coped over the years with the dramatic reductions in coverage particularly in the last 12 years and how insurance premium dollars do not go as far as they once did. What about the worrying new trend to make mandatory coverages, such as direct compensation property damage, now an option to add? Where is the concern for minimum consumer protection?

It is also unfortunate that in its treatment of auto insurance premiums and claims, the auditor relies heavily on the observations and recommendations from David Marshall’s 2017 report.

That 2017 report made a number of recommendations for insurance but was flawed by incomplete and outdated data, as well as simple errors concerning interprovincial auto insurance comparisons and the basic breakdown between no-fault and tort, and a fundamentally simplistic reliance on just premium data alone without regard for underlying claims, insurance industry financial data and profitability.

It is incumbent on the office of the auditor to ensure that updates are better informed and guided by a more thorough and thoughtful approach that balances the interest of the private insurance sector with the needs of drivers and injured accident victims.