Staring down the twin barrels of escalating claims costs and a mandate to deliver accessible, affordable vehicle insurance to BC drivers, the government-run Insurance Corporation of British Columbia finds itself under a $1.5 billion gun to adapt.
A report released in July 2017 by EY Consultants concludes that if ICBC fails to make sweeping changes in the immediate future, the corporation will be forced to raise annual premiums 30 percent by 2019 to remain financially viable. For the average driver that amounts to an increase from today’s $1,500 to over $2,000 in premiums within two years years.
That, according to ICBC Chair Joy MacPhail, is not the road the corporation intends to travel. “For decades ICBC has been very effective. We can return the corporation to being viable, fair, and affordable,” she says.
How exactly that occurs remains, so far, largely unanswered. The EY report, however, provides a road map.
The report details a number of causes for ICBC’s dire straits. Leading the hit parade are, at number two, rapid cost escalation of minor injury claims; and, at number one, legal costs.
Fully 24 percent of ICBC’s outlay goes to pay legal bills. That’s money, as Ms. MacPhail points out, that doesn’t go to care and restitution.
The fact that product change has not visited ICBC in a very long time ought to be a big tell. While other provinces have evolved their vehicle insurance regimes in response to escalating claims costs and concerns around affordability, BC maintains a litigation-based insurance model, so not-at-fault drivers can sue at-fault drivers for economic loss, and for pain and suffering, regardless of injury severity. BC is the only province not to have modified this adversarial model.
That model has exacerbated the impact of some nasty underlying trends—problems in and of themselves.
While it is true that the number accidents on BC roads has been rising, more alarming is that the number of claims being filed has been rising faster than the number of accidents.
ICBC data show that, since 2013, we’re seeing 20,000 more accidents per year in the province—an increase of 23 percent over four years. That’s a serious problem, given BC’s road considerable safety initiatives and new vehicle safety features such as sophisticated collision avoidance systems.
Vehicle repair costs have risen nearly a third over the past two years , partly because of the greater number of crashes, and partly because advanced, new, vehicle materials and an array of onboard technologies drive higher per-vehicle repair bills. In addition, the number of high-value vehicles, those with a sticker price over $150,000, has leapt 70 percent in only four years.
Perhaps the greater cause for concern is the fact that the rise in number of claims filed has surpassed the rate of increase in crashes. More claims are being filed per crash. Perhaps most alarming, the average settlement for minor injuries seems to be spinning out of control.
In 2000, an average minor injury claim paid out $8,220. By 2016, that amount had ballooned to just over $30,000. That’s a four-fold increase. That compares to only 25 percent increase over the same period in average settlement for serious and catastrophic injuries—from $38,014 in 2000 to $48,078 in 2016.
Of each minor injury claim, the amount paid out for pain and suffering has put the hurt on ICBC. From $5,004 in 2000 it has grown to $16,499 in 2016. Maybe people have just become more sensitive to discomfort. Or maybe not. By contrast, the average pain and suffering paid our for a non-minor injury amounted to $13,789 in 2000 and only $20,945 in 2016—a 52 percent increase compared to 330 percent in minor injury cases. Minor injury claim costs, which used to account for less than a third of all bodily injury claims costs, now make up 60 percent of the total.
The result of these trends: a growing gap between premiums collected under Basic insurance and claim costs has reached $560 million at present, and is projected to climb to $1.1 billion annually by 2019. Premiums collected, the second-highest in Canada, are not high enough to cover the cost of paying claims. Without action, those already lofty premiums could rise by 30 percent.
The rate-smoothing and government intervention required thus far to protect BC drivers from a 15 to 20 percent rate increase today has eroded ICBC’s financial condition to the point that EY Consultants call “unsustainable.”
According to the July report, “The average driver in BC may need to pay almost $2,000 annual total premiums for auto insurance by 2019, an increase of 30 percent over today’s rates, assuming current trends persist, the objective is to have ICBC’s rates cover its costs, and significant reform is not undertaken.”
“There is no indication that the underlying issues will correct themselves,” says MacPhail.
The EY report identifies three general areas of opportunity for reform.
First, it calls for an improvement in the effectiveness of BC’s road safety approach, and states that changing high-risk driver behaviours will result in fewer accidents on BC’s roads.
Most critically, a re-design of the current insurance product is required. This is where the bulk of the savings will come from. New product design would aim to alter claimant behaviour, reward safer driving, increase fairness, and keep costs and premiums under control.
Yet both those measures will take time. So EY recommends a set of additional interim measures that could be initiated by ICBC in the near term to provide an incremental impact to the future performance of ICBC and BC’s auto insurance system and lay a platform to ultimately enable successful reform.
First, ICBC could save up to $250 million annually by reducing high-risk driver behaviour. The provincial government has already started by going after what is generally thought to be a growing problem—distracted driving. More than 25 percent of all car crash fatalities in B.C. occur due to distracted driving. “More people are now killed through distracted driving than through impaired driving. We need to raise public awareness of that fact,” MacPhail says.
In November, the government announced that distracted driving will now be considered a high-risk behaviour under the ICBC Driver Risk Premium program. A driver with two distracted driving tickets in a three-year period could see their financial penalties rise as much as $2,000. The higher premiums are expected to go into effect for distracted driving convictions beginning March 1, 2018.
Another initiative, recently in the news, the intersection camera program will also get a revamp. The 140 cameras deployed at the province’s most accident-prone intersections only catch red-light-running drivers for six hours of the day. The EY report recommends doubling the number of cameras and operating them full time. Along with variable speed limits and point-to-point speed systems, the corporation could see an annual improvement in revenues of $150 million.
ICBC could find another $100 million annually through the hiring of 100 new full time employees for the Integrated Road Safety Unit program, “Safe Work” programs, and road infrastructure countermeasures such as rumble strips.
The bigger, and more complex challenge is product redesign, long overdue according to MacPhail. “In the past decades virtually every other jurisdiction has made changes. We can learn from their experience,” she says.
Outcomes exist on a continuum ranging from an adversarial, tort-based system, like the one we have in BC today, to a no-fault, comprehensive care approach. Along that continuum are various “hybrid” approaches.
While moving to a pure no-fault, comprehensive care system looks to be off the map, the adversarial model currently in place no longer delivers optimal outcomes in terms of ICBC’s mandate. Broadening access to private insurance providers also appears to be a non-starter.
Other than those two polarities, a range of measures remain on the table. MacPhail points out that product redesign, still in early days, will rely on consultation with, and input from, all stakeholders. That includes brokers.
At this stage, planning for effective forums for that consultation has just begun. “The next step is…for government and the corporation to discuss with stakeholders and the public the options for change to design a solid, better product at more affordable rates,” MacPhail says.
There is, however, the general direction set by the EY report—and more specific measures the Corporation can engage in to meet the mandate of delivering effective and affordable insurance.
“I am not prepared to accede the point that we are going to see a rate change,” MacPhail says.
Accordingly, the EY report presents a guideline for product redesign.
Under BC’s current adversarial system, the focus by the claimant tends to be on maximizing the award as opposed to the effectiveness of treatment. There are no caps on benefits awarded by the courts. First-party accident benefits are typically low, leaving at-fault drivers with limited benefits to access.
Under hybrid systems, caps on certain benefits, such as pain and suffering, may be introduced to help control costs and ensure premiums remain affordable. These caps typically only apply to minor injuries. Discussion with MacPhail indicates that such caps would seem to have become a serious consideration—particularly given the alarming rise in number of minor injury claims and the burgeoning payouts on each claim.
Co capping payouts on minor injury pain and suffering claims appears to be a likely target. But hard-lining the market is only a partial solution. The best outcome would be a change in client behaviour over time.
According to MacPhail, a dysfunctional number of clients make the call to a lawyers before they even file a claim with ICBC.
“A substantial number [of clients] automatically go to legal. We need to do everything we can to make sure we can deliver more quickly to people who have been in a car crash. We need to talk about how we can work with them to settle without having to go to a lawyer,” she says.
Further along the spectrum, a comprehensive care model shifts the focus completely from cash awards to care and treatment for injured claimants. Richer accident benefits are available allowing both at-fault and not-at-fault drivers to obtain care, providing them the best opportunity to return to their pre-accident condition. Benefits are available immediately after the accident, as required, enabling faster return to function.
Yet, ultimately removing a victim’s right to sue for damages, especially in serious injury cases, is not something MacPhail would like to see. “People involved in catastrophic claims should always be able to sue,”she says.
The EY report presents specific measures across the spectrum from simply capping pain and suffering for minor injuries to fundamentally changing the system to a comprehensive care model.
A cap on minor injury pain and suffering payout of $7,000 to $9,000 combined with maximum medical payments of $300,000 and a $600 per week wage benefit would reduce the basic rate gap by $758 million. Premium revenue would still need to rise to make up revenue shortfalls, but not by the double digit amounts required were no action undertaken.
To keep premiums in line with inflation, minor injury pain and suffering payouts would be capped at $5,000 to $7,000. Weekly wage benefits would be a maximum of $900 and medical payments would max out at $450,000. There would also be more stringent rules for litigated claims, and the introduction of an independent, third party dispute resolution system.
A third scenario, freezing premium increases for five years, would see minor injury pain and suffering payouts capped at $4,000 to $6,000, a weekly wage benefit maximum of $1,200, and maximum medical and rehab costs, payable only as accident benefits and not as lump sum cash payouts, at $600,000.
To achieve a reduction in basic premium, the corporation would have to change the system from the current adversarial nature to a comprehensive care model. The result would be a significant enrichment of accident benefits to both not-at-fault and at-fault drivers without going through litigation.
There would be no benefits for pain and suffering, and the right to sue would be available only in cases of criminal negligence.
While there’s little doubt that enhanced road safety and product reform must be undertaken to materially impact claims costs and assist with achieving financial sustainability without requiring significant premium increases, these changes are not quick fixes. Financial benefits would not be realized until implementation is complete in 18–24 months. The EY report sets out other interim measures that will have an incremental impact to the future performance of insurance and lay a platform to enable successful reform.
Changes the corporation has made in technology, administrative systems and internal financing have already produced more than $100 million in savings but, the growing rate gap has chewed through that. There are, however, a number of outstanding initiatives still to be implemented that could deliver in excess of $150 million in savings within a one-to-two-year period.
Basic rate design has not changed since 2007, and no longer reflects risk and cost. Higher-risk drivers will likely face higher penalties going forward. With fairness as the underlying principle, higher premiums paid by high-risk drivers, including those drivers who choose to drive high-value luxury vehicles, will reduce claims costs and promote a cultural shift toward safer driving. According to EY, “ICBC needs to change its pricing and risk model to clearly identify and penalize higher-risk drivers and conversely improve the reward system for those who drive safely.”
The operation and funding mechanism of RoadSafetyBC as well as the regulatory oversight regime are both in the scope of change. ICBC is currently regulated by the BC Utilities Commission. The current system is based on a utility model that was not designed initially for regulating auto insurance. The corporation needs a less expensive and less bureaucratic approach to competitive pricing with an enhanced ability to respond to customer requirements and changing market conditions.
Successful implementation of leading Quality Assurance and Fraud Mitigation programs could generate approximately $30 to $60 million in annual savings, and strategic sourcing initiatives could provide savings of over $150 million over the next five years.
Looking past the immediate crisis, a number of other factors come into play. Increasing sophistication of crash avoidance systems, fully autonomous vehicles, and movement away from individual ownership toward car share and an expansion of fleet operations will fundamentally change the nature of vehicle insurance.
The concept of mobility pricing also awaits review. TransLink defines mobility pricing as the suite of fees and charges for using everyday transportation services. These include things like transit fares, bridge tolls, road usage charges, and fees for any other services involved in the movement of people and goods. A Mobility Pricing Independent Commission has been established to undertake research, extensive consultation, and to ultimately make recommendations on a coordinated approach to pricing transportation in the Metro Vancouver region.
Daniel Firth, who worked on introducing congestion taxes in Stockholm and London, is the executive-director of the commission. The Vice Chair of the Commission happens to be Joy MacPhail.
“ICBC is very interested in supporting changes that will lead to reduced congestion,” MacPhail says. The commission is expected to make a final recommendation to TransLink’s board of directors in spring 2018.
As for the expansion of private insurance, it appears to be a non-starter. MacPhail notes that where there is optional insurance available through private insurers, some 80 percent of ICBC customers choose ICBC over private providers for that optional coverage.
In light of potential changes to ICBC coming in the near future and over the long term, MacPhail recognizes the important role brokers play. “I know how valuable our brokers are on so many level. Any changes will have to be done in consultation with them,” she says.