Analysis
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BC Politics

ICBC Claim Changes Won’t Fix Insurer’s Woes

Limits on pain and suffering awards, other reforms a useful start, but big problems remain.

By Richard McCandless 7 Jun 2018 | TheTyee.ca

Richard McCandless, a retired B.C. government senior manager, was an intervener in the BC Utilities Commission’s reviews of the rate increase requests for both the Insurance Corporation of BC and BC Hydro. More information is available on his website.

I did not sign up for politics to work on car insurance.” David Eby, May 7, 2018.

Few of us have a deep understanding of the details of auto insurance, but the financial crisis at ICBC required Attorney General David Eby, the minister responsible, to become a reluctant quick study.

In May, the Attorney General achieved legislative approval for the most comprehensive changes to ICBC’s insurance scheme since the founding of the Crown corporation 45 years ago.

His objective was to reduce the cost of the compulsory basic insurance program, thereby avoiding the huge increase in insurance premiums that would have been necessary to avoid insolvency. The legislature, despite solid opposition from unrepentant and unapologetic Liberal members, approved the changes, with the Green Party supporting the government.

There is no question that a modification of the tort model, wherein the injured party can sue for compensation for loss of enjoyment of life (pain and suffering), was necessary to reduce the cost of claims and eliminate the requirement for a significant rate increase.

However, it appears that the annual savings will be insufficient to rebuild ICBC’s capital reserves (equity) to provide an adequate buffer against future insolvency.

ICBC’s slide to insolvency

The financial crisis at ICBC began some five years ago when the cost of basic injury claims began to increase rapidly, spurred on by the rising number and cost of minor soft tissue injury (whiplash) claims.

The annual growth in claims expenditures required a significant increase in those basic premium rates to achieve a break-even operating result and to maintain a sufficient capital reserve to cover future claims.

The Liberal government’s unwillingness to reduce claims costs by changing the full tort insurance model, or to allow a rapid increase in basic insurance rates, exacerbated the crisis. Through a 2014 “rate smoothing” directive to the BC Utilities Commission (BCUC), the nominal regulator of basic insurance, the government deliberately adopted an unsustainable policy of subsidizing basic rates by depleting the basic and also the optional capital reserves.

Within weeks of the NDP forming government in July 2017, a report from Ernst & Young and ICBC’s 2016/17 annual report were released, and the public learned that both the basic program and the once-profitable optional program had suffered major losses, lowering the capital reserves to approximately half of the safe level.

Double-digit increases in both injury and vehicle damage costs were the primary reasons for the $600 million combined operating loss. The Ernst & Young report highlighted the rapid loss of the capital reserve and provided a range of options, from caps on pain and suffering to a full no-fault model, to reduce claims costs.

ICBC’s growing losses during the fall provided the impetus to adopt a “no-fault lite” mode and a streamlined claims adjudication process. The Attorney General outlined the details of the planned changes to the basic insurance model in early February, a few days before ICBC announced a shocking $1.3-billion projected loss for 2017/18. In keeping with ICBC’s reluctance to provide program-level information, the forecast did not differentiate between the basic, which is compulsory, and the optional programs.

What’s changed?

The changes are designed to reduce injury claims costs and stop the financial red ink. This is to be accomplished by limiting the cost of pain and suffering awards, removing the incentive to litigate less serious injury claims by increasing the scope and dollar limit for no-fault accident benefits (rehabilitation costs, wage loss, home care and related coverage) and by resolving disputed claims valued up to $50,000 faster and at less cost through a revamped Civil Resolution Tribunal (CRT).

The new model preserved the tort option for injuries that result in more serious impairment, but imposed a $5,500 cap on pain and suffering awards for “minor” injury claims. As the last province to abandon the full tort model, B.C. benefited from the experiences of other provinces which had already capped pain and suffering awards. Regulating the definition of a minor injury provides flexibility, and the CRT process encourages self-representation by the claimants.

The B.C. branch of the Canadian Bar Association, the Trial Lawyers Association of British Columbia and the affiliated organization Rights Over Arbitrary Decisions for British Columbians (ROAD BC) vigorously opposed the partial abandonment of the tort model, stating that the government was placing the burden of reducing ICBC’s costs on innocent victims injured in collisions.

The trial lawyers argued the government should make higher-risk drivers pay much more, and ICBC should find other savings to eliminate the budget shortfalls. They believe the changes are unconstitutional, which suggests an early court challenge.

Eby was confident the changes are legally sound and he defended the limitation on pain and suffering by asserting that the alternative was unaffordable rate increases. He also stated that the government would be making high-risk drivers pay more though, in reality, ICBC’s revenue from penalties on high-risk drivers resulting from traffic convictions is very small compared to vehicle insurance revenue.

ICBC’s financial crisis also prompted the Insurance Bureau of Canada (the lobby group for the private insurers) and the Canadian Taxpayers Federation to call for privatization of the compulsory basic insurance, claiming competition would somehow result in lower prices.

However, even if ICBC’s monopoly was abolished, no profit-oriented insurer would contemplate entering the basic market without limits on pain and suffering, or without major rate increases (and preferably both).

Are the changes enough to restore ICBC’s finances?

There is no question that our public auto insurer was facing insolvency because of the growth in injury claims costs under the tort liability model. The NDP government decided that capping the pain and suffering payments, together with a simplified dispute process for claims of lesser value, would lower claims costs enough to avoid a $400 rate increase and to fund enhanced no-fault accident benefits (which in turn would reduce the number of claims).

Unfortunately, ICBC does not provide detailed information on its compulsory basic insurance or its optional program in its public reports or its three-year service plan forecasts. In addition, little analytical information was provided to support the assertion that the new “no-fault lite” model will achieve the $1 billion in annual savings as outlined in ICBC’s most recent three-year forecast. Since the $5,500 cap will not take effect until April 2019, we will not know if the changes to the model are producing the required savings for two to three years.

The ICBC forecast also shows that the government is not attempting to rebuild the depleted capital reserves over the next three years. Using ICBC’s latest forecast, and including the changes to the basic model, I have estimated that by the end of the 2019/20 fiscal year, ICBC’s combined capital reserves will be approximately $5 billion below the satisfactory level. To eliminate the gap would require the addition of about $1 billion for the next five years in the form of a 20 per cent surcharge on both the basic and optional rates.

The government’s plan avoids any suggestion that it will reimburse ICBC for the costs of administering drivers licences, traffic enforcement and provincially mandated programs, such as the seniors discount. If the government paid $200 million for these services, the capital surcharge could be lowered to 12 per cent.

Operating with dangerously low capital reserves leaves the government open to criticism from the private insurers that ICBC has a pricing advantage for the optional program (because the private insurers must maintain a higher capital reserve), and increases the risk of a taxpayer bailout if there are adverse financial conditions.

Time will tell if the changes achieve the intended objectives or whether the answer to affordable premiums lies in the full adoption of a no-fault insurance scheme.  [Tyee]

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