Red Flags Raised over Insurer Financial Data
In response to complaints that insurance industry financial details are impossible to pin down, the Ministry of Finance commissioned a report on transparency and accountability in the sector but perhaps surprisingly chose the accountants for the Insurance Bureau of Canada to prepare it.
On April 14, the interim report became the first of three reports from financial consulting firm KPMG LLP as part of the auto insurance cost- and rate-reduction strategy. It will deliver the annual reports in August of each year of the strategy.
Only months earlier, however, KPMG had done work for the Insurance Bureau of Canada to support its position that profitability is low despite the reforms of 2010. A year before that, KPMG had done work for the same organization to support a very large estimate of the cost of fraud to the insurance industry.
“How can you hire the IBC’s accountant and financial advisers to do a report that is supposed to be independent?” asks Adam Wagman of Howie Sacks & Henry LLP.
“Not only don’t they try to steer away from the apparent conflict, they dig right into it by repeating conclusions formed as part of doing work for them. How can that possibly be right?”
Nick Gurevich, president of the Alliance of Community Medical and Rehabilitation Providers, echoes that sentiment. “The selection of the consultant is unusual given how much work they have done in the past for the IBC. They are clearly a very capable global accounting firm with a stellar reputation, but there are plenty of comparable accounting and consulting firms that could have done it without such ties to the IBC.”
In response to the concerns, KPMG would only say it was the government that requested the report and it’s only obligation was to it.
Wagman suggests the province’s auditor general would be a truly independent party.
“I can’t imagine the auditor general coming out with an interim report that parrots the recommendations of one stakeholder. Whether or not I like what they would have to say, I would accept that they have done it independently.”
The report itself is highly technical and repeats insurer arguments as to why there’s uncertainty in the figures without making any attempt to independently ascertain what they are. “I read it until my brain began to bleed,” says Wagman.
“If the goal is transparency and accountability, then I ask: transparent and accountable to whom? I don’t think there’s anyone in government who would understand it either. The 10 actuaries in the province might understand what they’re talking about, but it reeks of bias and lack of objectivity.”
He continues: “The purpose, dating back to the budget, was to look at the financial and economic impact of the reforms. Is there one mention of profitability? To the extent that it does talk about return on equity, it refers back to the report last year about insurance performance. There are no actual dollar figures and they fail to mention that those findings came out in a report commissioned by the IBC.”
Gurevich suggests the report in general lacks objective verification. The information relied on comes from financial statements and survey results prepared by the insurance companies and the General Insurance Statistical Agency as well as certain financial and return assumptions provided by the Financial Services Commission of Ontario.
“All you see is a regurgitation of information provided by the insurance industry without KPMG going in and verifying it independently. Much of the report refers to estimates and what the figures could be or might be.”
Gurevich believes the lack of certainty was the catalyst for commissioning the report in the first place. “The entire point of this process is to assist the government and members of the opposition who feel they don’t have a good grasp on the financial state of the industry. What was needed was an objective third party to go in and verify and test the numbers to tell them what the actual numbers are given that the insurance industry has a vested interest to produce overly conservative figures to generate more cost-cutting measures. It is disappointing that the report didn’t do what it was supposed to do.”
Specifically, the insurer information points to an improvement in the calendar-year claim ratio of 18 per cent from 2010-11, 23 per cent from 2010-12, and approximately two per cent from 2012-13 with the 2013 claim ratio being 74 per cent. Despite this, KPMG concludes the industry is still not at the break-even point.
Wagman says the percentages tell the story rather than the conclusion. “See the loss ratios. They are dropping like a hot-air balloon. If you look at how the numbers have gone, it’s been very good for them. Nobody can say otherwise. To not even be at the break-even point, they must have mismanaged their book of business so badly it boggles the mind.”
The report also repeats insurer estimates of a decrease in accident benefits of 46 per cent that Gurevich says is highly suspicious. “We have seen a decrease close to 82 per cent in medical rehabilitation benefits, 77 per cent of attendant-care benefits, and almost 99 per cent of housekeeping and caregiver benefits. That insurers claim they are only seeing a 46-per-cent decrease is very suspect. The benefits are just not there, so it doesn’t make any sense.”
The interim report acknowledges that KPMG sought no other input apart from insurance industry players and declines to make recommendations until it has sought input from other stakeholders “who may have a different perspective to share with the government.”
Wagman says he almost laughed out loud at that point. “It’s almost tongue-in-cheek to say others may have a different perspective. They clearly know full well that others have a very different perspective.”
Wagman also feels that by repeating the insurers’ recommendations and then discussing them at length, the report gives credence to them. “If they needed to do more work to study the current financial viability of the industry, why list the recommendations of insurers? It’s a very shotgun approach.”
Gurevich suggests insurers have good reason to paint a very bleak picture of their financial position. “This data should be carefully scrubbed, verified, and tested and not just be a repetition of what the insurers say. The nine million drivers and 65,000 accident victims each year who will rely on the findings deserve much more than just taking the insurance industry’s word at face value.”