Updating Insurance Regulations

IBC’s Executive Director, Policy, Ryan Stein had an opportunity to discuss an interesting side effect of the COVID-19 pandemic. The pandemic highlighted aspects of insurance regulations that are not only begging to be modernized, but that are ready for rapid transformation.

This article, originally published online by MSA makes a compelling case for how we can advance auto insurance in Canada by 25 years, in as little as 25 days, and why this is important.

We can advance auto insurance by 25 years in 25 days

Crisis and opportunity

Rahm Emanuel, the former mayor of Chicago and chief of staff to President Barack Obama, said during the last financial crisis that we should “never allow a good crisis to go to waste. It’s an opportunity to do the things you once thought were impossible.” Emanuel recently reiterated that phrase to encourage significant changes to the U.S. health care system and economic policy in response to the COVID-19 pandemic.

The Ontario government recently acted on Emanuel’s advice by rapidly modernizing court proceedings to facilitate virtual hearings and electronic filings. Ontario Attorney General Doug Downey stated, “We’ve modernized the justice system 25 years in 25 days.” Notably, even though the COVID-19 pandemic pushed the government to modernize the court system, the changes are permanent.

We can fix long-standing issues

The pandemic has revealed some of the antiquated aspects of the court system, and it has shown aspects of auto insurance regulation that are begging to be modernized. No aspects of auto insurance are begging for modernization more than rate regulation – especially the rules governing usage-based insurance – and the distribution of insurance documents, such as those that still need to be mailed or delivered in person.

Rate Regulation

Since the realities of the pandemic set in a few months ago, insurers have been applying rebates or re-rating policies to provide consumers with financial relief and to reflect that many people are not driving as much. Several insurers have also reduced their rates or deferred planned rate changes.

Meanwhile, the provincial regulators have been diligently trying to undo decades of rate regulation and documentation requirements, on a temporary basis, so that insurers can provide relief in a matter of days or weeks instead of the several months it usually takes to get rate changes approved and then to implement them. Ontario’s regulator issued guidance to help insurers provide rebates to their customers or reduce rates for new or renewed customers in response to the pandemic. The other provincial regulators have not issued guidance but have indicated that they will make it easier for insurers to provide relief to their customers.

This insurer and regulator response to the pandemic shows that the amount someone drives, including any sudden changes in driving habits, should influence his or her premium. However, Canadians cannot buy auto insurance policies for which the monthly premium automatically reflects their changing driving habits. Consumers in the United States and Europe can buy such policies.

In parts of the United States and Europe, consumers can buy pay-per-mile insurance for which they pay a monthly base rate and an additional amount that reflects how much they have driven that month, based on data collected by an app on their cellphone or a device installed in their vehicle. Consumers can then monitor their driving so they can control their premiums. If a person takes a two- or three-week vacation one month and doesn’t drive as much, the driver will pay less for insurance that month than for the previous month when he or she drove to work five days a week.

In Canada, the regulators in Alberta, Ontario, Nova Scotia, and Newfoundland and Labrador allow usage-based insurance, but only as a discount factor on a traditionally set premium. They do not allow pay-per-mile insurance. This means that consumers can buy insurance, get charged a regular premium and get a discount if they seldom drive and/or drive safely, according to the data collected by the app or in-vehicle device. While valuable to many consumers, this type of offering is far from charging a premium that fluctuates based on how much the person drives.

While, technically, pay-per-mile insurance is not prohibited everywhere, as the New Brunswick and Prince Edward Island regulators have not published rules on it, it makes little sense to invest in the technology, product development and distribution of a pay-per-mile insurance offering when some of the largest private-sector insurance markets explicitly prohibit it.

Changing the usage-based insurance rules for auto insurance has always been a feat many considered impossible. Insurance premiums based on people’s actual driving habits sound nice, but have been too scary for regulators to allow. It is a challenge to convince them to move away from the stability and familiarity of the traditional approach of using proxies to assess risk – such as driving experience, gender and where the vehicle owner lives – and to produce an annual premium that can be split into uniform monthly instalments.

Insurance Bureau of Canada (IBC) conducted a survey two years ago that showed 66% of Canadian auto insurance customers believe that premiums based on driving performance or vehicle usage are a fair way to price auto insurance. In addition, 60% stated they would be willing to share some of their personal information, if it meant their auto insurance premiums would be lower.

A J.D. Power and Cambridge Mobile Telematics survey of U.S. auto insurance customers conducted during March and April of this year showed that, as the pandemic has continued, consumers have become more willing to buy usage-based insurance.

  • Of U.S. consumers who expect their driving habits to return to normal following the pandemic, 38% indicated they were more willing to buy usage-based insurance.
  • Of U.S. consumers who expect to be driving less following the pandemic, 51% are more willing to buy usage-based insurance. 

There is no doubt that Canadians’ interest in usage-based insurance has grown as well. However, the rules on the books prohibit the technology that would allow consumers to buy insurance for which the premium fluctuates based on how much they drive.

Distribution of Insurance Documents

Over the past few years, the regulators in Ontario, Nova Scotia, and Newfoundland and Labrador have allowed consumers to choose to receive their proof of auto insurance digitally. Alberta’s regulator went a step further by allowing consumers to choose to receive all insurance documents digitally. This made Alberta the first province where consumers can elect to have a fully digital insurance experience.

Allowing consumers to receive their proof of auto insurance digitally may not seem like a big deal. It is just one document. Providing the option for consumers to receive this document digitally is a major convenience for people wanting to manage their financial services online. These consumers may also want the option to receive and manage their claims forms and other notices online. 

IBC’s 2018 survey of auto insurance customers in Canada found that almost two-thirds wanted the option of receiving their insurance documents digitally. Also, 69% stated that they perceived digital insurance documents to be convenient. 

There is no doubt that this interest in digital insurance documents has grown during the pandemic, as people have used their phones and tablets to manage almost everything online. J.D. Power and Cambridge Mobile Telematics’ recently conducted survey of U.S. customers showed that during the second week of April, 33% of customers stated that online access and the ability to manage their policy on a 24/7 basis were more important to them. This is a significant increase from the 18% of customers who made this statement at the beginning of the pandemic.

Let’s get started

While the pandemic caused the Ontario government to act and seemingly do the impossible by modernizing its court system, the problems and inefficiencies plaguing Ontario’s courts had been around for years. Those changes solved problems, and that is why the changes the government implemented were made permanent. I believe that with insurers, governments and regulators working together, we can also do the impossible and modernize auto insurance by 25 years in 25 days and create a better experience for consumers.

The first steps are easy.

  • Amend the usage-based insurance rules in Ontario, Alberta, Nova Scotia, and Newfoundland and Labrador so that insurers can develop, and consumers can buy, pay-per-mile insurance.

    Regulators would ensure that pay-per-mile insurance offerings are fair for consumers, as they do with traditionally set premiums.

    Canadian consumers deserve the same options and control over their premiums that U.S. and European consumers enjoy. Not everyone would buy pay-per-mile insurance. But for many consumers, such as people who do not drive often, it would provide considerable value.

  • In all provinces that require mail or in-person delivery of certain insurance documents, update the insurance laws to indicate that consumers can choose to receive their insurance documents digitally.

    Regulators would ensure that consumers continue to receive documents according to existing insurance laws and that insurers abide by the consent requirements in the provincial e-commerce laws.

    Consumers who want a digital insurance experience should have that option. And insurers are ready to provide it.

The second step is to take a bird’s-eye view of rate regulation and assess whether the multi-month timelines, thousands of pages of actuarial justification and regulatory approvals are really needed in competitive markets.

The majority of U.S. and European jurisdictions have moved away from the type of rate regulation that is common in Canada, without jeopardizing their ability to oversee the market and enforce the rules. Consumers have benefited from better price competition and product offerings. These U.S. and European jurisdictions haven’t looked back.

We can make the impossible possible

Our focus should not be solely on making auto insurance better for consumers during the pandemic. That is not the impossible that Rahm Emanuel spoke about and it’s not what the Ontario government accomplished when it modernized its court system. The focus should be on addressing the long-standing consumer problems the pandemic has brought to light so that when people buy auto insurance in Canada, the product offers more options, better prices, more convenience and more competition.

Ryan Stein is the Executive Director of Auto Policy and Innovation at Insurance Bureau of Canada, the national industry association representing 90% of Canada’s private property and casualty insurance market.