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Posted on 10-15-2014
ONTARIO DRIVERS WILL NOT BE THANKFUL FOR PROPOSED CHANGES TO AUTO INSURANCE
We are writing with great urgency in regard to the Ministry of Finance’s recent proposal to drastically decrease the interest rate required of insurers on all disputed benefits under the Statutory Accident Benefit Schedule (SABS). If adopted, rates will be slashed from 12% per year, (or 1% per month compounded monthly,) to the Pre-Judgment rate, currently 1.3% per annum. This represents a ten-fold slash in the interest rate.
The regulation is scheduled for adoption in early November. We therefore request a meeting with you at your earliest opportunity.
The proposed amendment to O. Reg. 34/10 (Statutory Accident Benefit Schedule – Effective September 1, 2010) states the following:
“This proposed amendment would provide that where there is a dispute in respect of an insured person's entitlement to, or amount of statutory accident benefits, interest on overdue SABS payments is calculated at the prejudgment interest rate described in the Courts of Justice Act that is used for past pecuniary loss, and is payable from the date on which a mediation proceeding is commenced and ends on the date a settlement is reached or a decision is issued that finally disposes of the dispute.”
The genesis of the interest rate is rooted in consumer protection. The authors of the original SABS understood that insurers hold disproportionate financial might over claimants. Hence checks-and-balances needed to be built into the system to ensure that claimants were not abused. One such measure was the mandatory Insurer Examination (IE) process to ensure that insurers could not arbitrarily deny claimants’ legitimate medical and rehabilitation treatment. This consumer protection measure was eliminated in 2010 as part of a SABS reform that saw a 70% slash to Accident Benefits in order to prop up insurer profitability.
Instituting an interest rate for late payment by insurers was another consumer protection measure. Initially, the prescribed interest rate in S.51 was 2%. In 2010 this was halved to 1%.
The interest rate was originally designed to serve a dual purpose; being a punitive measure on the one hand, and a deterrent on the other. In both instances the interest rate was intended to punish insurers for exploiting their overwhelming financial might to inappropriately deny benefits or delay payment of benefits. This deterrent is vitally necessary because the deny-and-delay tactic is a strategy so often employed by for-profit insurers to pressure claimants
into a settlement on unfavorable terms. Our association has made numerous submissions to FSCO documenting this. Punitive measures such as a healthy interest rate are required to help equalize and level a playing field which is stacked in favour of insurers.
The current language in SABS S.51(1) and S.51(2) provides for payment of 1% per month compounded monthly on all overdue amounts as prescribed by the Regulation. This means that if payment of a benefit is disputed and subsequently found in favour of the claimant the benefit is treated as if it was due on the original application date, and interest applies as of that date. The intentional premise of this consumer protection measure was to create a disincentive for insurers to inappropriately deny a claim.
The following points outline the easily predictable consequences of the proposed reduction in interest rate for the period of time when claims are disputed:
The reduced interest rate creates an obvious operational advantage for insurers. Insurers derive much of their profitability by investing their un-utilized cash. Delaying benefits payments allows them to invest more of their funds and make a higher return. Because insurance companies are driven to make a profit for their shareholders, delaying payment of benefits plays to their advantage. The very low proposed “penalty” interest rate of 1.3% per annum will make the financial decision to delay payment an easy one. Insurers can safely yield a 2.5%- 3.0% return on the same capital if invested during the dispute time frame. Using actual return on investment of 2.64% in 2013 (according to OSFI) as an example shows that insurers will have an incentive to delay payment equivalent to a 1.34% rate of return, likely resulting in denial of every application for benefit. The financial incentive to deny every application for benefits will further increase when interest rates rise in the future.
With a further incentive to deny benefits, the number of disputes in the system will quickly balloon out of control. Considerable resources were recently spent by the government and Justice Cunningham in addressing the restructuring of the dispute resolution system in order to reduce the backlog in that system. Much of that work is included in Bill 15 which stands before the House. The proposed reduction in interest rate will not only nullify any gains, but will throw the dispute resolution system into a crisis the likes of which has never before been seen.
The combined effect of the proposed interest rate reduction (resulting in denial of benefits) and the removal of the right to sue, proposed under Bill 15, will shift all the power to insurers. Claimants will be left powerless and without any leverage or recourse whatsoever.
Framing the interest rate reduction as a cost saving is nonsense. Claimants who are not-at-fault are currently able to obtain plaintiff loans against a future tort settlement and pay for goods and services while the dispute is outstanding. In these cases the interest charged by plaintiff lenders is eventually paid out of settlement funds. However, the interest rate charged by plaintiff lenders is nearly double the 1% per month currently prescribed by the SABS. So while only half of the plaintiffs are able to sue under tort, their interest costs will be nearly double the current rate. Thus any interest savings gained under Accident Benefits will be more than offset by increase in tort settlements.
Claimants who are at-fault are not able to pursue the tort option, leading to potential interest saving for the insurers. However, the higher denial rate for benefits such as Income Replacement, Non-Earner, Med-Rehab and Attendant Care will lead to bankruptcies, lack of recovery or return to work, creating more pressure on publicly funded healthcare and social services. Insurers’ reduced interest costs for this population will merely be paid for by all tax payers.
Regardless of whichever way this is looked at, cost savings simply do not exist. To the contrary, we argue that the ultimate cost to the system will be higher.
Our own experience with the previous reduction in interest rate from 2% to 1% instituted in 2010 has been a grave one. Our membership, which invoices insurers for pre-approved med-rehab services, has seen a quick, significant and sustained spike in the delinquency of payment by insurers that began immediately following the change and lasting to this day.
We are also unsure as to the impetus behind this proposed amendment. The system continues to lack transparency and consequently no stakeholders are aware of exactly how much insurers pay out in interest costs for overdue benefits. Presumably, this is a significant amount or it would not be worth addressing by way of a regulatory amendment. The fact that this is a significant amount further proves and strengthens the point that insurers are already significantly delaying payment of legitimate benefits to their claimants, even with the currently higher interest rate. It is self-evident that reducing the interest rate will exacerbate the problem to the detriment of injured and vulnerable claimants.
Further, according to the General Insurance Statistical Agency (GISA), insurer’s profitability on Accident Benefits in the past two years has been higher than in any year in the 10 years prior to that. If insurer profitability is strong and the proposed change will be detrimental to claimants then why are any changes necessary in the first place?
In conclusion, we predict that this amendment, if passed, will have catastrophic consequences to claimants, perhaps more profoundly than many of the slashes we’ve seen over the past 20 years. This amendment will result in a further lack of access to Accident Benefits for claimants. The system will cease to deliver the very basic premise of what it is designed to do, and that is to protect all drivers, including those who are get injured. Consumers, who currently have little to no awareness of their auto accidents benefit entitlements, will continue to assume they are adequately covered by their auto insurance, and this innocent and misinformed assumption will have dire consequences for us all.
As the auto insurance regulator, the Provincial government has a legal and ethical responsibility to protect all drivers, including those who get injured. We respectfully ask the Ministry of Finance and our provincial government to acknowledge this responsibility and strike this proposed amendment.
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