Law Times

Law Times • January 11, 2016 Page 11 www.lawtimesnews.com Auto insurance special advisor starts in February OTLA report attacks insurers' low profit figures BY JUDY VAN RHIJN For Law Times R esponding to widespread disappointment with the transparency pro- cess that was meant to clarify insurer profits, and the lack of political will to address the is- sue, the Ontario Trial Lawyers As- sociation has released an updated independent financial report that confirms allegations of overcharg- ing and dubious accounting tactics by insurers. e resulting furor is destined to land on the desk of the newly appointed special advisor on auto insurance. Government efforts to recon - cile the insurance industry's claims that they cannot afford lower pre- miums and need further restric- tions on benefits despite major reforms in their favour have done nothing to resolve the transpar- ency issue. e government's se- lection of KPMG, the Insurance Bureau of Canada's accountants, to prepare the "transparency reports," which were meant to end the con - fusion, made the whole effort un- acceptable to victim advocates. Maia Bent, president of the On- tario Trial Lawyers Association, was one of those who was seri- ously disappointed with the ap- parent sabotaging of the transpar- ency initiative. "E-mails obtained [through the Freedom of Informa- tion Act] reveal that the govern- ment knew prior to retaining them that KPMG was in a conflict of interest due to the fact that KPMG acted for insurance companies and the IBC in rate-filing applications. Even knowing this, it went ahead. " ose e-mails include a request that KPMG prepare a letter stating its objectivity and mitigation strat - egy to avoid a real or perceived conflict of interest, and to put in place controls, or "ethical walls," "to avoid any conflict given some of your team's involvement in current insurer rate filings." Since the KPMG reports were issued in December 2014, OTLA has been advocating with the government to stop the erosion of benefits, and hearing back that the insurance companies are not profitable. "at was based on the KPMG report, which was quite flawed," says Bent. "eir reports are the foundation for a lot of the government's most recent legisla - tive changes removing benefits. It seems to believe it needs to stop benefits to achieve the 15-per cent premium reduction." OTLA's next step was to lobby the government to hand the matter to the auditor general. When this didn't happen, the association took matters into its own hands. "We approached the Schulich School of Business [at York University] and retained Dr. Fred Lazar and Dr. Eli Prisman," states Bent. "ey are of the highest calibre in terms of qualifications independence." eir first report was released in March 2015 and caused a media storm when they claimed that On - tarians had overpaid for their auto insurance by between $3 billion and $4 billion from 2001 to 2013, with the situation worsening aer 2010. "ey were very critical of the KPMG report," says Bent. "ey didn't understand their methodol - ogy and were unable to replicate their results. ey found that this industry has had a free ride for 20 years. It has been allowed to make too much money for too long." Bent explains that in the first report, the professors looked at individual companies. "What they saw was that the companies that are profitable are very profitable. A few companies on paper show low profitability, and these swing the numbers down. When they drilled deeper, there was a lot of concern about the validity of those compa - nies. According to the basic law of economics, they would normally leave the marketplace, but instead they are attracting more capital." e report alleged that "there is a logical inconsistency at work, and KPMG did not address this. Sec - ondly, by not looking at individual company performance, KPMG ignored the fact that many compa- nies have been quite successful in generating attractive ROEs." Professors Lazar and Prisman have now released an updated re - port, which includes the figures for 2014. It finds an average return on equity of 18.9% in 2014, almost twice the ROE of 11% prescribed by the Financial Services Commis - sion of Ontario. e report says that the profit benchmark should be no more than 5.5 per cent given today's low interest rate environ - ment. e update also found that consumers likely overpaid $1.5 billion in the last two years for auto insurance. is includes over pay- ments of $700 million (or about $100 for each insurance policy) in 2014 on top of the $840 mil- lion ($120 per policy) in 2013. Once again, they removed the chronically unprofitable compa- nies from the equation. "ey are potentially loss leaders for the huge multinational companies, with ac- counting practices being used to make them look unprofitable," ex- plains Bent. "With the latest data from 2014, there is the same trend. e insurance industry made twice as much as they should have been permitted to in 2014." Bent believes that the two in - dependent reports show that there is no need for further cuts in ben- efits. "e insurance industry is extremely healthy. It's continuous lobbying for more cuts is simply to strip money away from innocent victims. e government keeps taking away benefits and hoping the excess money will be passed on, but it isn't being passed on. Profits are increasing." OTLA is still pressing for more outside involvement. "I hope that the auditor general will step in and review this," says Bent. "An inde - pendent financial investigation is long overdue." e Ministry of Finance's cur- rent position is that the auditor general's role, as set out in the Audi- tor General Act, does not include reviewing the operation of private companies. It considers that a re- view of the profitability of auto insurance companies operating in Ontario is not within the scope of the auditor general's mandate. Bent takes issue with this find - ing. "e Ministry of Finance's cur- rent denial of oversight authority is inconsistent with the fact that the ministry had previously considered asking the auditor general to review auto insurance as an independent project. A document obtained through the Freedom of Informa - tion Act reveals that the ministry's office of economic policy set this out as a viable option on June 10, 2013, before it retained KPMG to do its costs and premiums study." Until the government takes meaningful action, OTLA intends to continue receiving updates on the issue. "We would like to keep getting yearly updates as long as the system continues to be broken. We need proper data and analy - sis to put before the government. e difficulty is that the message is so complex. We go to speak to government officials and there are very few who clearly understand this issue. Unfortunately, they are working from a very superficial understanding of the economics. We need to address that." ere is some hope that David Marshall, the newly appointed spe - cial advisor on auto insurance, will take some leadership on the issue. He is due to start work in February, but it is not yet clear what his man - date will be. "We simply don't know what he'll do," says Bent. "We are hop- ing he's going to be looking at insur- ance company internal procedures and finding savings and efficiencies. We certainly hope he will consider the report very seriously." LT FOCUS 'The government keeps taking away ben- efits and hoping the excess money will be passed on, but it isn't being passed on. Profits are increasing,' says Maia Bent. YOUR ADVANTAGE, in and out of the courtroom. TF: 1.888.223.0448 T: 416.868.3100 www.thomsonrogers.com Since 1936 Thomson, Rogers has built a strong, trusting, and collegial relationship with hundreds of lawyers across the province. As a law firm specializing in civil litigation, we have a record of accomplishment second to none. With a group of 30 litigators and a support staff of over 100 people, we have the resources to achieve the best possible result for your client. Moreover, we are exceptionally fair when it comes to referral fees. We welcome the chance to speak or meet with you about any potential referral. We look forward to creating a solid relationship with you that will benefit the clients we serve. Every time you refer a client to our firm, you are putting your reputation on the line. It is all about trust well placed. TRUST Thomson, Rogers Lawyers LEONARD KUNKA | ALAN FARRER | CARR HATCH Untitled-3 1 2016-01-07 3:04 PM York University business professors estimate that consumers overpaid for insurance by $1.5 billion. Drs. Fred Lazar and Eli Prisman

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