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Explaining auto insurance rates to clients

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Explaining auto insurance rates to clients

How can brokers make their clients feel like they aren’t overpaying for auto insurance? In the current environment, it’s tough.

Brooke Smith on July 18, 2018

GETTY IMAGES / DIGITAL VISION

Many Ontarians drive carefree on the province’s roads and highways. However, that freedom comes with a price: auto insurance rates. Just recently, the Financial Services Commission of Ontario (FSCO) reported that the average increase in insurance rates in the first quarter of 2018 was 2.23% across the whole market. That’s up from the fourth quarter of 2017, in which rates increased by an average of 1.03%.

While insurers and brokers are, in part, in business to make a profit, one recent—and controversial— study has shown that the profit has been excessive. In an April 2018 report prepared for the Ontario Trial Lawyers Association (OTLA), Dr. Fred Lazar, associate professor in economics at York University’s Schulich School of Business, indicated that auto insurers made $1.5 billion in pre-tax profits in 2016. That’s a 57% increase (or $534 million) since 2012. As Lazar wrote, “The automobile insurance companies in Ontario that have been profitable have been very profitable during the past years. Their average ROEs [return on equity] have been 14.9% in 2012, 17.5% in 2013, 18.9% in 2014, 16.8% in 2015 and 16.3% in 2016.”

If the numbers are accurate—and a number in the insurance industry vehemently deny these soaring profits, most notably the Insurance Bureau of Canada—then how do brokers explain increasing rates to their clients without having them feel they’re being overcharged?

Tom Reikman, chief distribution officer with Economical Insurance, says it’s up to insurers and brokers to educate clients on why rates increase, and they can do this in a number of ways: through social media, news articles and policy renewal mailings. “We also try to give as much information to our customer service representatives in brokers’ offices so they’re armed to respond to those questions,” he says. Even the broker associations, he continues, “spend a considerable amount of time and effort making sure brokers are up to speed—not only lobbying what they deem to be the necessary changes to make the product more affordable, but also making sure their members are aware of what’s going on.”

37%
of drivers admit to using their phone behind the wheel.

Source: Travelers Canada

Claims related to distracted driving increased by 23% in the past two years.

Source: Aviva Canada

$547 million
The amount that auto insurance fraud costs Ontarians annually.

Source: Aviva Canada

But what, exactly, is going on? Rates are really driven through two areas, says Reikman. While he notes that insurers need to create a less expensive product for consumers, “a lot of that’s tied into the escalating costs on the accident benefits side, and they just seem to go up and up.”

Then there’s the physical damage side. There are costs to indemnify the same type of claim, inflation, and the rising cost of repairs to damaged automobiles. “Newer vehicles are significantly more expensive to repair,” Reikman says—take windshields, for instance. “Windshields have sensors in them now, so it’s no longer putting in a new windshield. You have to put the new windshield in and then reprogram it so those sensors are accurate. There’s additional cost related to that.”

Henry Hamm, director of personal insurance at RSA Canada, agrees, adding that cars also have many more safety features. “While this integration makes manufacturing more efficient and cost-effective, it has the inverse impact on repair costs. As a result, physical damage coverage is showing an industry-wide deteriorating loss ratio trend,” he says.

Vehicle repair times take longer, too, thus increasing the cost of a rental car while the insured’s vehicle is being repaired. And, Hamm continues, more vehicles are being written off due to the time/cost needed to repair them.

But it’s not just technological advances in car parts that are driving up costs. Driver use of technology is becoming increasingly costly to insurers—namely, distracted driving. “Right now, we’re definitely seeing rates impacted by technology—people using their phones in their cars,” says James Clarkson, agent/ owner of State Farm in Hamilton, Ont.

Fraud also plays a role, as money is leaked from the system by malevolent individuals. According to the Insurance Bureau of Canada, auto insurance fraud costs drivers in Ontario an estimated $1.6 billion per year. That means $236 of a driver’s auto insurance premium pays for fraudsters’ illegal actions.

Aviva Canada did its own study of fraud throughout 2017. It studied 10 different auto claims and found that nine involved fraud, and that an average of 57% of total repair costs invoiced to Aviva were fraudulent.

“Windshields have sensors in them now, so it’s no longer putting in a new windshield. You have to put the new windshield in and then reprogram it so those sensors are accurate.There’s additional cost related to that.”

About three years after Clarkson opened State Farm 11 years ago, the office was targeted by fraud. “We saw it first-hand. I don’t know to what extent it’s happening now because we don’t actually experience it in our office any longer,” he says. But the money doled out because of fake accidents, repairs and assessments adds to increasing rates.

Much ado about rates

Despite the factors that may increase rates, some insurers say their rates have recently decreased. Before State Farm Canada was purchased by Desjardins, Clarkson says, rates were quite high. “We were competitive,” he says. “For most of our customers, we were a very good price, but getting new customers was very difficult.” Since the purchase in 2015, however, 80% of Clarkson’s clients from his office alone have seen significant rate reductions. “I have clients who, what they’re paying today for the same policy that they’ve had with us is as much as half what they were paying.” The reason, he says, was the difference in the way the two companies rated risk. Which is yet another issue.

Rating risk now has become individualized for the major insurers, Reikman says. “There’s so much backend data supporting the rating models and how the models define each individual risk, you literally have to look at each risk on its own. There could be one risk that gets a renewal and it could go up 3%, but the next client’s renewal—because something has occurred or there’s some enhanced or new data— could go up 6% or 7%,” he says.

“We’re a heavily regulated industry in terms of oversight from the government,” Reikman continues, “but it has to balance [not only] the needs of the consumers, but also the needs of the companies to be able to make an adequate profit.”

An adequate profit—not excessive. For Claire Wilkinson, president of the OTLA, it’s about transparency. “We shouldn’t have had to hire an economist in order to understand the profit that [Ontario insurance] companies make,” she says. “Auto insurance is mandatory. It’s not like home owners’ or life insurance, which are optional. We have very little information about how these how rates are arrived at or what the profits actually are,” she says “There is a responsibility, in my view, on the part of the government to make informed decisions about understanding what the true profit levels are within the industry. But, currently, that’s not required.”

Again, whether you believe the profits are excessive or not, the rate increases are also at a time when victims’ accident benefits have been reduced. “It was great before, when you could get all the coverage [medical and rehabilitation and attendant care for catastrophic injuries was $2 million; as of June 1, 2016, it was reduced to $1 million] without having to purchase optional benefits,” says Wilkinson. “But now, that’s been taken away, so if you want to get the expanded levels of coverage, you have to purchase optional benefits.” While she knows brokers do send out information on these optional coverages, very few of her clients are aware of them. “People are looking at it and saying, ‘Oh, it’s optional; I don’t want to pay more money’ and then discard it.”

Wilkinson returns to the OTLA study. “It would suggest there’s enough money in the system that we didn’t need to erode these benefits the way they’ve been eroded in order to still provide coverage.”

Clarkson agrees that clients need to be informed about optional benefits. However, similar to Wilkinson’s experience, in the last few years he says a “very small” percentage of his clients have bought the optional coverage. “You have to provide the option, but people are so price-focused that oftentimes they’re putting their coverage at jeopardy to save money,” he says.

“There’s so much back-end data supporting the rating models and how the models define each individual risk, you literally have to look at each risk on its own.”

Brokers helping clients

Unfortunately, rates are high, and may still increase, if the latest FSCO report is anything to go on, but brokers can encourage their clients to be proactive. Clarkson encourages them to shop around. “Customers need to be in contact with their insurance company and just ask the simple question, ‘Is there anything I could do to lower my rates?’” He points to options such as changing deductibles, signing up for telematics and staying with the same insurer to get a loyalty discount.

As for vehicle repairs and damage, RSA is trying to address the growing costs in this area by leveraging its preferred repair facility network, which is particularly important during weather and catastrophic events. It also has preferred repair facilities, which reduce storage fees associated with vehicles waiting on repair. This, Hamm says, reduces claims costs and helps to maintain affordable rates for clients.

RSA also encourages drivers to consider a 48-month waiver of depreciation, rather than the standard 24-month waiver. This would ensure policyholders can get back into a new car, and reduce the need for them to pay out of pocket if there’s a claim.

Conclusion

Former Workplace Safety and Insurance Board CEO David Marshall wrote in his Fair Benefits Fairly Delivered: A Review of the Auto Insurance System in Ontario report that it’s the Ontario auto insurance system that’s at fault. “Claim costs continue to rise while automobile accidents continue to fall. The main cause is not inefficiency or excess profits by insurance companies or the behaviour of claimants, providers or lawyers. It is the way the system is structured.”

For Wilkinson, that structure needs to be changed. A solution, she says, needs all stakeholders at the table: victims’ rights advocates, healthcare providers, lawyers, insurance industry professionals and lawmakers. “We need everybody there to try to work out a new system that will work effectively, because what we have right now is dysfunctional.”

__________________________________________________________________________
Copyright © 2018 Transcontinental Media G.P. This article first appeared in the June/July edition of Canadian Insurance Top Broker magazine

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11-Step Guide to Buying A House

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Purchasing a home is likely going to be one of the largest purchases you will make in your lifetime, which is why it is so important to follow the right steps when starting on your home-buying journey to ensure that the entire process goes smoothly from start to finish!

We’ve put together a step-by-step guide to buying a home, to help you get off on the right foot when it comes to buying a home. Click the download button below to download these steps in PDF form.

1. Decide to buy a home

Make sure you are ready both financially and emotionally!

2. Get Pre-Approved

Work with a mortgage broker or your bank. They will work with you on what you require to submit an application. Once approved, this will determine how much you can afford to spend on a home.

3. REALTOR® Consultation

Work with a RE/MAX agent to help guide you through the process. The right agent will discuss your price range, ideal locations, current market conditions and much more!

4. Start Your Search

Your REALTOR® will get you information on new homes that meet your criteria as soon as they’re listed. They’ll work with you and for you to ensure you find your dream home.

5. Current Market Conditions

Your experienced RE/MAX agent is a valuable resource as you consider different properties. They will be there when you have questions regarding the homes you’re interested in – they can tell you what is a good deal, and when to walk away.

6. Make an Offer

Your REALTOR® will help create your offer tailored to your needs including the right subject clauses down to the closing date that works best for you.

7. Negotiate

You may receive a counter offer but don’t be worried! RE/MAX agents will negotiate for you to ensure you get the best possible price for the house you love!

8. Accepted Offer

It’s crunch time! The next few weeks are busy as you need to schedule and remove every one of your subject clauses by the specified date. You’ll likely need to schedule an inspection, appraisal, financing approval, and several others. You will also need to provide a deposit to put down on the home. The deposit will be a pre-determined amount given in-trust to your REALTOR® to show the sellers you are committed to this home. Don’t worry, that money goes towards the purchase of said home if all goes well! This is a busy time but be sure to reach out to your RE/MAX agent if you have any questions or are unsure about next steps.

9. Subject Removal

Once you have completed all your subject clauses, and everything went smooth, it is time for you to sign on the dotted line and consider your new home to be yours (almost!).

10. Official Documents

You will need to provide your RE/MAX agent with your preferred lawyer or notary to have the official title transferred into your name. You will meet with the lawyer or notary in person to sign all the legal documents before you move in. This typically happens a few days before you take possession of your new home.

11. Move In!

Congratulations, you are officially a homeowner! The date pre-determined by you is your move-in day! You can now move into your new home. Your RE/MAX agent will be there ready and waiting to hand you the keys. Enjoy!

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Know When to Rent ‘Em, Know When to Buy ‘Em

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We’re told it’s always better to buy than rent. Everyone—from our parents to the banks to the government—encourages us to buy, buy, buy our homes.

But times have changed, and I dare say that these authority figures might be slightly out of touch. The jaw-droppingly high cost of real estate in big cities is encouraging millennials to rent instead of own, causing homeownership rates to drop. At 30 years old, 50.2% of millennials own homes versus 55% of baby boomers at the same age. As a millennial homeowner, I can’t help but wonder if I’m generationally displaced.

There’s an old misconception out there about renting that needs to be addressed. You’re not “throwing away your money” if you’re renting. While that familiar axiom might be true sometimes, there are plenty of circumstances in which it does actually make more sense to rent than buy.

You Might Choose to Rent If…

…You Invest What You Save

Renting tends to come with lower carrying costs than owning. Typically, all you’ll have to worry about paying as a renter is, well, the rent (clearly) and perhaps a share of utilities. This leaves you with extra monthly cash to invest, which can ultimately put you on even financial footing or better with a homeowner.

As always, there’s a familiar caveat here: You need to be financially disciplined for this strategy to pay off. One mistake I see a lot is that those who rent tend to fall prey to something called ‘lifestyle inflation.’ Rather than investing what they save as renters, they just rent nicer apartments, eat at fancier restaurants, and put more money into their wardrobe than their RRSP. But this money vacuum can be easily avoided by:

1. Budgeting to find out how much you have left over to invest each month after factoring out all your expenses, then;

2. Funneling that leftover money directly into your investments. Some robo-advisors, like Wealthsimple, allow you to do this automatically via pre-authorized contributions, which set recurring transfers from your chequing account into your investment portfolio, at whatever amount and interval you choose.

…You Have Rent Control, aka the Urban Holy Grail

Depending on where you live, you might be lucky enough to benefit from the urban miracle known as rent control. That means your landlord can only increase your rent by the rate of inflation, which in turn keeps your cost of living way down and leaves you with more money to invest. In Canada, rent control is now implemented in most big cities like Toronto and Vancouver (although not in Montreal).

…You Have a Mobile Lifestyle

Renting makes it easier to move; if you’d like to relocate it’s usually as simple as giving your landlord 60 days written notice. But when you own a home you’re more tied down, and the obligation to be near your property may prevent you from chasing new adventures in faraway lands. I once turned down a fantastic job opportunity in Dallas, Texas for this very reason.

…You’re on a Tight Budget

Renting tends to be more affordable than buying in big cities like Toronto and Vancouver. I know, I know, renting is still unreasonably pricey in certain neighborhoods. But buying in those same areas can be arm-and-a-leg expensive.

When you rent, all you have to come up with is the first and last month’s rent; no need to scrimp and save to pull together a massive down payment on a house, which, incidentally, will take you two to four times longer to save than it did your parents.

And homeownership leads to a lot of other costs aside from mortgage payments. When you buy real estate, you’ll need to pay closing costs, which typically add up to between 1.5%–4% of the property’s purchase price and can include a home inspection fee, real estate lawyer fee, land transfer taxes, and homeowners insurance (sometimes you’ll have to fork over an entire year’s worth of home insurance as one lump sum).

There’s also the elephant in the room that nobody likes to speak about: repairs and maintenance. Homeowners are responsible for paying the big bucks for costly home repairs, such as a new roof and furnace, and are advised to set aside 3–5% of a home’s value toward home repairs and maintenance each year. Renters, on the other hand, can just call their landlord whenever they need repairs (provided the landlord actually picks up). Still, it’s important that tenants know their rights when renting to be aware of which fees do and don’t fall under their responsibility.

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A Montreal Real Estate Broker Answered 5 Qs About Buying A Property To Rent Out

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You’ve probably heard that Montreal’s real estate market is on fire. But how can you get in on the action? According to Alex Marshall, a local real estate broker, buying a property as an investment for the purpose of renting it out is a great way to go about it.

Marshall, who’s part of the Keller Williams Prestige team, sat down with us to explain why and how to purchase an investment property. These types of properties are also known as revenue properties.

Why do you recommend buying a revenue property?

Marshall used personal experience to highlight the advantages of owning a revenue property. He’s currently renting out the Saint-Henri loft he bought in 2010.

“Not only is my tenant paying off my mortgage, but I’m making a couple 100 bucks a month as well,” Marshall said.

Marshall was also able to take out a line of credit on the property, he said, and use the equity to buy an additional property.

“You actually don’t need to live in the property that you buy. I’m seeing clients who are in apartments with low rent [who] don’t want to move but have got the money right now … and are looking for smart ways to invest,” he said.

What are some tips to help people save up for a revenue property?

When Marshall was saving up to buy his first property, he said he worked a second job. 

“There’s a lot of value to having that side hustle … even if it’s at Subway or it’s at a landscaping company on Saturdays. It will add up significantly in the long run,” he said.

He gave the example of adding $5,000 to your annual income.

Marshall said you can qualify to borrow roughly four times your annual salary for a mortgage so $5,000 could actually provide you with an extra $20,000 of buying power.

“That might get you a second bedroom, that might get you a parking spot, that might get you a larger space,” he said.

The pandemic, Marshall said, has also helped some of his clients save extra funds.

“You can’t travel, you can’t go to the restaurant, you can’t go to the theatre, you can’t go to the bar. So a lot of people right now are finding themselves with almost a disposable income,” he said.

Marshall also recommends looking into Canada’s Home Buyers’ Plan program, which allows you to withdraw up to $35,000 — — tax-free — from your registered retirement savings plan (RRSP) to put toward buying or building a qualifying home. 

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