November 28, 1997
Ontario Insurance Commission
5160 Yonge Street, Box 85
North York ON M2N 6L9
In accordance with PART IV, s.36 of the Ontario Insurance Commission’s (“the OIC”) Rules of Practice and Procedure for Commissioner, Superintendent and Advisory Board Hearings, the Ontario Human Rights Commission (“the Commission”) submits this letter of comment with respect to the public hearing to be held on an application filed by (the insurer) for an automobile insurance classification system and automobile insurance rates.
The Commission has reviewed both the application filed by (the insurer) as well as the Final Report on this matter prepared by the OIC. The following comments are with respect to those elements of the proposed risk classification system that appear to have social policy implications.
Certain risk classification factors under (the insurer) proposed system, namely: credit card ownership, bankruptcy status, employment status and stability, and residence status and stability, might be found to contravene Part I of the Ontario Human Rights Code.
Upon reading of (the insurer’s) broker manual, it might be argued that an individual, as the named insured, who is single (without a spouse) and who does not meet some or all of the above risk criteria in the cascade of market classes could be discriminated against on the ground of marital status. This would occur when comparing such an individual to another individual who also does not meet the same risk criteria, but who has a spouse, and that spouse does meet some or all of the risk criteria.
Conversely, an individual with a spouse may be negatively affected if the spouse does not meet one of the risk criteria such as having a bankruptcy-free status.
Furthermore, it might be argued that the exclusion from the range of “preferred” discounted markets of individuals who do not meet some or all of the risk criteria “results in the exclusion, restriction or preference of a group of persons who are identified by a prohibited ground of discrimination”, in contravention of section 11 of the Code. For example, it might be statistically shown that women as a group are less likely than men to be homeowners, credit card holders or employed. Two-year residence status might discriminate against recent immigrants. Non-student status might discriminate against youth.
It is conceivable that based on one of the above scenarios a named insured might file a complaint of discrimination with the Commission in the area of services or contracts on related grounds in the Code such as marital status, sex or place of origin. If the proposed risk classification system was found to be discriminatory under the Code, it would then have to be determined if such discrimination would be considered “reasonable” and “bona fide” on the basis of the grounds under section 22.
Section 22 of the Code provides that individual and group insurance policies, not part of an employment relationship, may make distinctions based on age, sex, marital and family status, or handicap, but these distinctions must be made on reasonable and bona fide grounds.
The Supreme Court of Canada in Zurich Insurance Co. v. Ontario (Human Rights Comm.) (1992), 16 C.H.R.R. D/255 (S.C.C.) defined a practice as bona fide if it was adopted honestly, in the interests of sound and accepted business practice and not for the purpose of defeating the rights protected under the Code. The Court held that a discriminatory practice is "reasonable" if:
- It is based on a sound and accepted insurance practice; and
- There is no practical alternative.
A sound and accepted insurance practice was defined as one that is adopted "for the purpose of achieving the legitimate business objective of charging premiums that are commensurate with risk".
It is unclear whether a Board of Inquiry or a Court would find that (the insurer’s) proposed risk classification system “is based on a sound and accepted insurance practice” as was found in Zurich. The OIC as the body responsible for the Insurance Act would have to provide its expert opinion on whether the insurer's proposal, including actuarial analysis, is based on a bona fide business practice. The OIC’s Final Report acknowledges that “(the insurer) has presented evidence of a statistical correlation between these (risk classification) factors and loss experience”.
It is also questionable whether it would be found that “there is no practical alternative” to (the insurer’s) proposal. The Supreme Court clearly stated that the insurance industry should be actively working to develop non-discriminatory criteria for assessing risk. To date, the industry has not developed such a new system for automobile insurance. A similar automobile insurance complaint may, therefore, be decided quite differently today.
The Zurich decision means on the one hand that the insurance industry can contravene certain grounds under Part I of the Code if it can show under section 22 that such a practice is adopted “for the purpose of achieving the legitimate business objective of charging premiums that are commensurate with risk”. At the same time, the Court made it clear that the insurance industry should not continue indefinitely to use discriminatory criteria for rate setting and stated that "the industry must strive to avoid setting premiums based on enumerated grounds". When these two aspects of the Zurich decision are read together, it might be argued that any newly proposed classification system, even if shown to be a better measure of risk, should at least not further contravene Part I of the Code any more than any current classification system does. And in fact, such a newly proposed system should strive to avoid determining risk based on enumerated grounds.
Irrespective of the majority decision in Zurich and the section 22 exception under the Code, the OIC appears to apply a different interpretation of what is a “reasonable” and bona fide risk classification variable.
The OIC argues a similar contention to the opinion of the two dissenting judges in the Zurich case. The judges found that a statistical correlation is not sufficient to justify the reasonableness of a discriminatory practice. There must be a causal connection.
In its Final Report response to (the insurer’s) application, the OIC states (p.5-6) that any new risk classification variable must pass all tests set out in the Insurance Act (section 412.1 in particular). It goes on to say that apart from a statistical relationship, the risk classification variable must also make a fair distinction. Furthermore:
One indicator of the reasonableness of a risk classification system is its causality, i.e. the insured should be able to logically deduce how they are being rated and see the effect that their driving characteristics has on their rate (OIC Final Report, p.7).
The majority decision in Zurich does not rely on a “causal connection” but simply a statistical correlation as sufficient to justify the reasonableness of a discriminatory business practice. The OIC’s position that an insured motorist should be able to see how their driving affects their insurance rate thus appears to be a more stringent test of “reasonableness” than found in the Zurich interpretation of section 22 of the Code. Under the Insurance Act, the Commissioner of Insurance has the authority to prescribe through regulation elements and conditions of a risk classification system.
An automobile insurance complaint today similar to that in Zurich might be decided differently in that a Board of Inquiry or Court could take into account the OIC’s position that there should be a causal connection between risk classification and driving characteristics and that the Insurance Act gives the Commissioner of Insurance the discretion to require such a condition.
Finally, (the insurer’s) broker manual reference to fraud conviction in relation to auto insurance as an unacceptable risk should be qualified with the statement “for which a pardon has not been granted” pursuant to section 10(1) of the Code.
Please note that the above comments are an opinion of the Commission only and will not preclude the Commission from inquiring into any matter that may be brought to its attention under the Code.
The Commission is available to meet with the OIC to discuss this matter further. You may contact me at 416-314-4522.
F. Pearl Eliadis