KPMG et al

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  1. Types of Compensation Systems
    • liability insurance: instead of total tort or fault based
    • injury insurance: instead of no-fault
    • combined liability and injury insurance (CLII): instead of threshold
  2. Liability insurance (fault):
    • indirectly compensates the innocent injured party
    • still eliminates punishment by paying losses on behalf of at-fault drivers
    • if drivers injure themselves, not compensated, but doesn’t discriminate between minor error or highly irresponsible behaviour
    • even at-fault drivers injuring themselves still are compensated through social welfare
  3. Injury insurance (no-fault):
    • directly protects the injured party by covering that person’s losses
    • still retain fault as a basis for setting premium
    • criminal sanctions remain in place if drivers commit a criminal act
    • compensation may be reduced for individuals who caused their own injury in the course of committing particularly invidious kinds of fault, e.g. DUI
  4. Hybrid (threshold):
    • injured parties are compensated by their own injury insurance up to specified limit
    • if damages exceed threshold, they can seek addition compensation from liable party
  5. Liability insurance in practice
    • system does not distinguish between different kinds of wrongdoing
    • insurer must defend claims making the process adversarial and uncertain in outcome
    • discourages rehabilitation because of delayed resolution
    • tend to focus on building a credible case for a higher settlement or award
    • compensation for future damages is paid up front, requiring speculation; there is no assurance that it will be adequate, well invested and spent for the intended purposes
    • tends to overcompensate people with less severe injuries (pain and suffering) and under compensate those with permanent and more severe injuries (policy cap)
    • should be highly individualized in theory, but in practice the outcome varies considerably because of skills of lawyers, witnesses, disposition of judges and juries
  6. Injury insurance in practice:
    • does not need to distinguish degrees of fault, except possibly for rating purposes
    • less adversarial, provides more certain outcome: compensation for economic losses is paid out within days, and compensation for future economic losses is not paid until needed
    • tends to overcompensate people with minor injuries and under compensate those with higher income levels
    • less individualized benefits, placing little emphasis on individual factors
  7. Advantages of combined system:
    • makes introduction of injury insurance more palatable
    • transaction costs of tort liability process are reduced
    • usually limits or eliminates compensation for non-economic losses in minor injury cases
    • savings make it possible to improve individualized compensation for major injuries
  8. Types of combined systems:
    • choice plan: policyholders can choose between liability and injury
    • plans where bulk of compensation is liability, with limited add-on injury benefits
    • threshold systems: compensate mostly on injury basis, and use liability above threshold (monetary, descriptive, or combination). Strong descriptive works well, monetary alone does not (tends to encourage inflation)
  9. Types of Benefits and Losses
    • income support: wage loss: actual and projected salary, including lost opportunities
    • fatality compensation: for surviving spouse or dependants for loss of support
    • care costs: current and estimated future costs to cover medical expenses, vehicle and home modifications, attendant care, equipment
    • expenses: replacement services (housekeeping and dependant care); funeral costs
    • non-economic losses: includes intangibles such as pain and suffering; in the 1997 trilogy decision, the Supreme Court of Canada set an upper limit of $100,000 (indexed)
  10. Other factors influencing nature of benefits
    • payer priority and collateral benefits: disadvantages of being 2nd payer:
    •    claimants may feel an entitlement exists regardless of other resources
    •    limits insurer's ability to manage the medical care, rehabilitation and disability
    •    makes it very difficult to obtain complete data for controlling or studying costs
    • net vs gross wages: 10% to 20% of earnings is required to meet job expenses:
    • injury based compensation typically provides 80% to 90% of net loss
    • liability pays 100% of gross. (lump sum, compensates for taxes). Otherwise use structured settlement on a voluntary basis (no need to gross up)
    • wellness model: tort process discourages rehabilitation because of delayed resolution
    • vehicle based insurance: only owner has choice, not spouse, dependants, pedestrians
    • threshold under CLII products: must decide which damages are treated in tort
    • costs and sustainability of product: affordable cost, reasonable future cost trends
    • solicitor and client costs: significant element in tort process, and can also be for no-fault depending in administration type
    • indemnity vs entitlement: no-fault may tend to be paid on basis of entitlement
    • interface with social safety net: denied benefits fall on the social safety net
    • public vs private delivery: current BC is public, which can easily be designed to sustain cross-subsidies between coverages
  11. Types of protection offered by auto insurance
    • security against specified potential losses
    • restitution of actual loss through claims settlements
    • prevention and mitigation of losses to control costs and protect policyholders
  12. 6 design requirements for auto insurance:
    • equitable and fair benefits in size and allocation
    • adequate benefits to meet the needs of injured people
    • affordable and sustainable coverage so system remains financially sustainable
    • personal responsibility, ensuring that wrong behaviour affect the insurance program
    • promotion of wellness by the insurance system
    • customer service orientation for the products and services offered
  13. Equitable and fair benefits:
    • benefits are provided only for legitimate losses and claims
    • seriously injured receive priority in the allocation of benefits
    • benefits are equitable and non-discriminatory, and perceived as such by the public
  14. Affordable and sustainable coverage:
    • forces that drive costs can be identified and addressed
    • costs and cost trends are predictable, monitored and manageable 
    • crash and injury prevention, rehabilitation and fraud prevention receive priority
  15. Personal responsibility:
    • individuals causing crashes and personal injury suffer tangible consequences
    • design features discourage frivolous or fraudulent claims
    • moral values are advanced to prevent abuses of the system
  16. Adequate benefits:
    • recovery and economic needs of injured people are met to a socially acceptable level
    • substantial percentage of the premium dollar is returned to claimants as benefits
    • benefit levels directly reflect the losses experienced by individuals
  17. Promotion of wellness:
    • emphasize speedy recovery, rehabilitation and adequate long term care
    • benefits adjudication process is administered in a fair manner
    • process and product are designed and operated to minimize antagonism and dispute
  18. Customer service orientation:
    • high levels of services are provided to policyholders and claimants
    • individual rights and entitlements are coherent and comprehensible 
    • product and process are flexible to match product features with social needs
  19. How BC re-established the link between wrongdoing and punishment
    • if wrongdoer is in breach of contract (e.g. DUI), insurer can subrogate to recoup losses
    • premium is affected by at-fault claims
Card Set:
KPMG et al
2014-04-12 19:55:38
Auto Insurance
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