Werner's Blog — Opinion, Analysis, Commentary
Towards care-based automobile insurance in British Columbia

British Columbia's auto insurer ICBC reached a critical point when in fiscal years 2017/18 and 2018/19 deficits exceeded one billion dollar each (ICBC Annual Report 2018/2019). There are only two directions to go from there: either fundamental reforms are brought in to control costs, or the higher costs will get passed on to motorists as dramatically higher insurance premia. The prospect of automobile insurance becoming increasingly unaffordable for many motorists has already prompted ICBC and BC's provincial government to start implementing important cost control measures in 2019. However, the problems run deeper and require a structural fix. Today's announcement from BC's provincial government gets to the root cause of the problem: BC's adversarial system of settling accident claims. The system is broken and needs major repair. The plan to introduce care-based automobile insurance in BC in May 2021 is bold and ambitious, but it is also the only sensible way to put out for good what BC's Attorney General famously called a "dumpster fire".

‘Litigated injury claims are responsible for the cost escalation that has driven ICBC into deep financial deficit.’

The source of exploding costs is easy to see. There are three main drivers of insurance costs: accident frequency, claims frequency, and claims cost. Accident rates in BC have increased slightly (crash statistics) but not dramatically, as there are more cars on the road along with a growing population. Improvements to road safety and improved traffic laws enforcement are urgently needed. However, worsening road safety is is not the main driver of ICBC's exploding costs. I had already pointed out this fact in my August 2017 blog, How to fix car insurance in British Columbia, in response to the July 2017 report ICBC Affordable and effective auto insurance – A new road forward for British Columbia from consulting firm Ernst & Young. This report identified the key problems that have driven ICBC into deficit, summarized as follows:

  • The number of claims being filed is going up faster than the number of accidents. This increase is driven by minor injury claims.
  • Average settlements for minor injuries have increased dramatically over the past 15 years, with a four-fold increase from 2000 ($8,220) to 2016 ($30,038). Pain and suffering awards have risen significantly, driving the increase in the size of claims for minor injuries.
  • Claim costs for minor injuries have increased from 30% to almost 60% of total bodily injury claims costs since 2000. In total, minor injury claims benefits account for one-fifth of total ICBC expenses.
  • About one quarter of total ICBC expenses are for legal costs.

The dire financial situation prompted major policy changes that were introduced last year. Since April 2019 anyone involved in an accident receives improved accident benefits. However, pain and suffering payouts for minor injuries are capped at $5,500. There are also limitations on the use of expert witnesses in court cases involving minor bodily injuries. Another major change introduced at the same time is the use of Civil Resolution Tribunals (CRTs), which can handle disputes up to $50,000 in a streamlined fashion. CRTs can expedite the process of reaching a settlement. It is model that has already been used successfully for dealing with other small claims and strata property disputes. Since September 2019 insurance rates reflect driving record more fully. Bad drivers will pay more and good drivers will pay less; driving offenses will lead to increased premia. These are important steps in the right direction of aligning insurance premia with actuarial risk. If bad drivers are penalized with higher premia, the less they drive. Actual driving record is the best place to start, much better than estimated risks based on other types of information.

These reforms are showing the first signs of success, as indicated in early results for fiscal year 2019/2020. However, trial lawyers have challenged the reforms in court. They stand to lose the most. When a claim is settled, trial lawyers pocket between 20% and 30% of the proceeds, depending on their particular fee schedule. Bodily injury claims in fiscal year 2018/2019 were around 3.1 billion dollars. Much of this is litigated, so it is easy to see that a quarter of three billion dollars is an immensely profitable business for trial lawyers. Of course, they are rather unhappy about the prospect of losing most of this business. On the other hand, if a quarter of ICBC's total cost is due legal expenses, reducing that share dramatically will save BC motorists hundreds of million dollars in insurance premia. If the trial lawyers prevail, insurance premia in BC will rise significantly.

‘Care-based auto insurance in BC is the only realistic option to put a lid on exploding claims costs.’

While all of the 2019 reforms are heading in the right direction, several elements are susceptible to reversal through court challenges. The better solution is also bolder: move BC fully to a care-based automobile insurance system, away from the tort-based process that involves costly and slow litigation. So what exactly is care-based automobile insurance? Care-based insurance models offer significant advantages to the insured. The focus is on restoring health and ensuring that injured parties receive help throughout their recovery process. Need is determined by medical professionals the same as it is by workers' compensation boards (WorksafeBC in British Columbia) for work injuries. Because there is no litigation involved, benefits are available promptly. Litigation is also a very inexact way to determine needs, because settlements are reached based on expectations of future needs, not actual needs. Once a case is litigated, the payment will not change if the injured person's situation worsens (needing more help) or improves (needing less help). Care-based insurance allows the insurance program to focus their effort on those who need it most, and do so generously. A significant share of the money saved from avoiding litigation (roughly a quarter of all ICBC expense) and from capping inflated payouts for minor bodily injuries can be devoted to improving the care for those most in need of help, those with major injuries and reduced ability to earn income in the future. Also, more investments into road safety programs will be highly welcome once ICBC's cash crunch fades into history.

‘Care-based auto insurance focuses on the injured throughout their entire recovery process and protects them from hardships.’

How is care-based insurance different from tort-based insurance? The current litigation system relies on the liability of the at-fault drivers. Not-at-fault parties can thus recover damages from the at-fault drivers. This is the reason why motorists require so-called "third-party" liability insurance for causing accidents that injure others. In addition, automobile insurance across all of Canada also has elements of no-fault insurance of injuries to oneself, called "first-party" coverage. The insurance pays benefits to the injured party regardless of whether the driver was at fault. If this "no-fault" concept is expanded to apply to third-party liability, the regime is typically referred to as a pure no-fault regime. However, the notion of "no fault" is also misleading as it seems to imply that there are no consequences to being at fault. In fact, the main objection that is brought against care-based insurance regimes is that only adversarial claims settlement makes "bad drivers pay" and makes them bear the consequences of risky driving behaviour that leads to accidents. The claim is that no-fault insurance leads to higher accident rates. It is true that some no-fault jurisdictions had higher accident rates, but this was not the result of the no-fault system but instead was the result of these jurisdictions failing to penalize bad drivers through higher insurance rates. Since September 2019, someone at fault causing an accident will still end up with significantly higher insurance premium, so the argument that "no fault" means "no consequence" is simply not true.

Opposition to care-based auto insurance will come from many vested interests. Trial lawyers stand to lose the most, as their lucrative business model would be in jeopardy. When trial lawyers advertise their services on the back of transit buses with themes such as "only we can get you justice", you can tell that the business model has lost its traditional modesty and has become a blatant cash grab. Doubtlessly, some voices will now try to derail the reforms and try to portray ICBC as cold-hearted and stingy because the new regime will no longer lead to deluxe settlement packages. While there is no question that trial lawyers do their very best to represent their clients effectively, they have fallen victim to their own success. Their success in convincing courts to grant more and more generous awards has driven the process into a spiral of cost inflation. All of us who pay for automobile insurance pay dearly for this settlement extravaganza. It is high time to put a full stop to it.

Opposition will also come from other corners. Some will claim that only private insurance can fix the cost spiral problem, even though the aforementioned problems have absolutely nothing to do with public provision, but with the claim settlement regime. Whether automobile insurance is provided publicly or privately is a question that is entirely separate from the claim settlement regime. I have discussed the private versus public debate in my recent blog The strong case for public automobile insurance. The compelling rationale for keeping automobile insurance public is its unique ability to focus on road safety and internalize the benefits from road safety measures, which in turn can get passed on to motorists as lower insurance premia.

The proposed changes to BC's automobile insurance regime will be much less dramatic than some critics will probably portray them as. Manitoba, Saskatchewan, and Quebec already enjoy variations of a care-based insurance model, and they have some of the lowest automobile insurance rates in Canada. BC will join these provinces in good knowledge that the care-based insurance model works very well indeed. It's a new social contract, but one that is fairer and more economically responsible than the previous adversarial litigation regime.

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© 2020  Prof. Werner Antweiler, University of British Columbia.
[Sauder School of Business] [The University of British Columbia]