Regulation: Can the industry get better results for consumers?
Insurance companies have to meet different regulatory requirements in
each province in which they do business and, in addition, they are all
subject to federal solvency regulation. This system, which requires insurers
to file their rates for approval by provincial regulators annually, to
report on a variety of information depending on the jurisdiction, and
to prepare for any number of regulatory hearings, is time-consuming and
costly for both insurers and regulators.
A more streamlined system of regulation that harmonizes rules, where
possible, between jurisdictions, would reduce the time and expense required
of the parties involved. This would benefit consumers because, in the
end, it is consumers who pay the extra costs, either as part of their
insurance premiums or as part of their taxes.
Solvency regulation
Because the insurance industry in Canada is so competitive (more than
200 companies), there is always a small risk that some of the smaller
insurers will run into financial difficulties that would jeopardize their
ability to pay claims. (Even in the unlikely event of a bankruptcy, policyholders
are protected by the Property and Casualty Insurance Compensation Corporation
– PACICC –
which will pay most claims on behalf of a bankrupt insurer.)
In order to reduce the risk of bankruptcies, the Office of the Superintendent
of Financial Institutions (OSFI), the federal insurance regulator, administers
the Minimum Capital Test (MCT). The MCT requires insurance companies to
have a certain amount of money (i.e., capital) on hand for every insurance
policy they sell.
Although the MCT is a very good idea for making sure claims will be paid,
the government tends to be overly cautious in determining the actual amount
of capital required. Canada has the strictest capital regulatory requirements
in the G7 nations. By requiring too much money to back up policies, OSFI
inadvertently reduces competition by making it more difficult, especially
for smaller insurance companies, to seek new business.
Market conduct self-regulation
The best way to ensure that consumers are treated fairly is to have
a competitive
insurance system with many different choices and well-informed consumers.
In this kind of environment, companies will have a vested interest in
dealing fairly with their customers and keeping premiums as low as possible.
Companies that do so will win customers away from those that don’t.
Competition in any market is driven by healthy returns and financial
stability. Excessive regulation, particularly in the setting of premiums,
creates a vicious cycle that sees premiums held down artificially, leading
to unhealthy returns, reduced competition and, ultimately, problems for
consumers trying to find affordable insurance. More efficient regulation
will allow for a healthier, more competitive insurance market, and stable
premiums.
When it comes to well-informed consumers, the insurance industry has
taken some important steps. Most significantly, in 2005, insurers and
their intermediaries (brokers and agents) issued the “Code
of Consumer Rights and Responsibilities,” 
which is posted prominently in insurance offices and on insurer websites.
In a number of jurisdictions, and even on this website, insurers have
also provided information about shopping around for insurance.
By becoming smart insurance buyers, consumers can be the best regulators
of the insurance market.
In January 2006, IBC introduced Standards of Sound Marketplace Practice.
This is a voluntary industry code that ensures the insurer is working
to achieve better public policy outcomes for consumers.
Risk-based regulation
Canada’s home, car and business insurers acknowledge that governments
must continue to have a role in insurance, in order to protect the interests
of consumers and maintain the public’s confidence in the system.
To this end, insurers have been working with regulators in all Canadian
jurisdictions to come up with a more efficient way to regulate the industry.
What insurers propose is a risk-based regulatory system, which allows
the insurance market to operate with very little day-to-day government
involvement. In this kind of system, regulators work with insurers to
set standards for market conduct, and then track a number of key indicators,
such as consumer complaints, to determine how well individual companies
are sticking to the standards. If the key indicators suggest that a company
is high-risk for not meeting the standards, the regulator investigates
further and takes any necessary action. In this way, insurance companies
that deal fairly with their customers are free of excessive government
intervention, and governments are able to devote their attention to the
few non-compliant companies that warrant it.
Click here for more information about the role of regulators in the insurance industry.
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