Tag: Other Issues

Premiums, Profits, and Costs of Business in Alberta’s Automobile Insurance Industry, 1996-2006

Posted on By economica

by Christopher Bruce and Jason Strauss

This article first appeared in the winter 2008 issue of the Expert Witness.

Introduction

In February, 2008, Economica Ltd. was retained by the Canadian Bar Association to prepare a series of reports on automobile insurance premiums in five provinces: Alberta, Ontario, New Brunswick, Prince Edward Island, and Nova Scotia. We have now completed this work, having prepared two reports on Alberta and one on each of the other four provinces.

In this article, we summarise the main findings of the first of these reports, Alberta’s Minor Injury Regulation: Automobile Insurance Profits, Premium Rates, and Costs, prepared by Christopher Bruce, of Economica, and Jason Strauss, a Ph.D. student in the department of Risk Management and Insurance at Georgia State University. (The full text of this report can be found at: www.cba-alberta.org)

Our Report had three purposes:

  • to provide a measure of the profitability of automobile insurance in Alberta in the period 1996-2006, (that is, immediately preceding and immediately following the introduction of Alberta’s Minor Injury Regulation, the MIR, in the Fall of 2004);
  • to determine whether the observed changes in profits and premiums in the years prior to the introduction of the MIR had been caused by changes in costs; and
  • to identify what the effects on profits and premiums would be if the MIR was removed.

We summarise the results of our analyses in the three following sections of this article.

1. Profitability of Basic Coverage

As the MIR applied primarily to Basic Coverage, we focus in this section on that line of insurance. The methodology we use to estimate profits is based on the approach developed by the Insurance Bureau’s actuary, Mr. Joe Cheng, for his testimony in the case of Morrow v. Zhang (2008). (It was in Morrow that the constitutionality of Alberta’s Minor Injury Regulation was challenged.)

The most common measure of industry profitability (and the measure used in the Cheng Report), is after-tax “return on equity” (ROE) – that is, the industry’s after-tax profits divided by the value of the investments made in the industry. In Table 1 and Figure 1 (taken from our Report), we show that, prior to 2003, Basic Coverage was not profitable in Alberta, with an ROE ranging from -5.6 to +2.1 percent. In 2003, however, the return on Basic Coverage increased dramatically, to 19.1 percent, and rose above 20 percent in each of 2004, 2005, and 2006.

Table 1

Figure 1

1.1 Claims costs relative to total costs

It is possible that the sudden increase in ROE in 2003 could have arisen from a dramatic change in the costs of claims. The data in Table 2, however, indicate that these costs remained a relatively constant portion of insurance companies’ total costs throughout the entire period 1996 to 2006. That is, the rate at which the costs of claims were rising was not appreciably different from the rate at which insurance companies’ other costs – primarily the costs of administration – were increasing.

Table 2

1.2 Claims costs relative to premiums

Alternatively, profits may have risen in the 2003/2004 period because claims costs fell relative to premiums. We investigate this possibility in Table 3, which reports changes in claims costs per motorist, relative to average premiums. What this table indicates is that, until 2002, premiums tracked claims costs fairly closely. That is, each increase in claims costs per motorist was matched by a similar increase in insurance premiums, resulting in a ratio of costs to premiums that varied only slightly. For example, while the average claim for Basic Coverage was 99.0 percent of the average premium in 1996, that ratio was 92.9 percent in 2002 – because premiums rose by 39.1 percent over that period, while average claims rose by a similar amount, 30.3 percent.

Table 3

In 2003 and 2004, however, premiums rose much more quickly than did claims costs, driving down the claims ratio. Between 2002 and 2004, for example, the average premium rose by 19.3 percent, while average claims actually fell by 21.9 percent. Thus, it appears that the dramatic increase in profit rates over the 2003-2004 period was driven, in large part, by a sudden change in the relationship between the costs of Basic Coverage and the premiums that were charged for that coverage. In the following section, we investigate a number of factors that might have led to this change.

2. Changes in Costs per Vehicle

The price of automobile insurance – the premium – is affected by four components. First, there are the average costs of claims (including adjustment expenses) per vehicle that were discussed in the preceding section. Second, allowance must be made for administration expenses (broker’s commissions, overhead, etc.). Third, insurers earn income from the investment of equity and reserves (premium revenue that will eventually be used to pay claims). Finally, a reasonable rate of profit must be added to net costs.

The question we address in this section is whether the increases in premiums between 1996 and 2004 can be attributed to changes in any of these components.

2.1 Average claims per vehicle

In Table 3, we showed that the cost of claims rose at approximately the same rate as the price of premiums over the period 1996 to 2002. Thus, if there was a need for increased premiums in 2003 and 2004, it was not because the ratio of claims costs to premiums had changed over the preceding six years.

Nevertheless, Basic Coverage is composed of a number of sub-categories, including Third-Party-Liability and Accident Benefits. In turn, Third-Party-Liability (TPL) is composed of TPL-Property Damage and TPL-Bodily Injury, of which only the latter was affected by the Minor Injury Regulation (MIR). Thus, it is possible that even though claims costs for Basic Coverage as a whole did not increase in 2003 and 2004, there may yet have been an increase in the component that was affected by the MIR. To investigate this possibility, we report the data in Table 4.

Table 4

In this Table, it is seen that the claims for TPL-Bodily Injury increased at roughly the same rate as the other components of Basic Coverage prior to the MIR. For example, whereas claims for Bodily Injury increased by 32.5 percent between 1996 and 2002, claims for Property Damage increased by a similar percentage, 27.8.

We are led to ask, therefore, whether a change in some other element of the cost of insurance can explain the sudden increase in premiums that was observed in 2003 and 2004. In sections 2.2, 2.3, and 2.4 we analyze administrative expenses, investment income, and return on equity.

2.2 Administrative expenses

Table 5 reports that the ratio of administrative expenses to premiums (the expense ratio) decreased from 25.5 percent in 1996 to 23.8 percent in 2001. As average premiums increased only slightly over this period, the dollar value of expenses must have been decreasing or relatively stable. Furthermore, in the time period immediately prior to the introduction of the Minor Injury Regulation, 2002 and 2003, expense ratios fell further while premiums increased dramatically. It can be concluded, therefore, that changes in administrative expenses were not the source of the premium increases that occurred in 2002 and 2003.

Table 5

2.3 Return on investment

Insurance premiums are placed in a reserve until claims have to be paid. Those reserves are invested and the investment income generated thereby is credited against the cost of premiums. Hence, an increase (reduction) in the rate of return on investment, ROI, may lead to a decrease (increase) in premiums.

It is seen in Table 6 that the ROI insurers earned on their equity and reserves declined almost continuously over the period 1996 to 2001. Nevertheless, this decrease placed only limited upward pressure on premium rates. Specifically, we estimate that to compensate for the decrease in ROI from 9.0 percent in 2000 to 6.2 percent in 2003, insurers would have needed a $44 increase in the 2003 premiums on Basic Coverage. In fact, those premiums increased by $213, from $537 to $750. (See Table 3.) This confirms that decreasing ROI was not the primary impetus for the premium increases in 2002 and 2003.

Table 6

2.4 Return on equity

Once the net costs of insurance have been calculated, the premium is determined by adding a profit margin, or return on equity, ROE, to those costs. Thus, as the necessary ROE increases, premiums will also increase. We surveyed seven sources of expert opinion concerning the appropriate ROE target for the automobile insurance industry. We found:

  • Dr. Norma Nielson and Dr. Mary Kelly, in a presentation to the Alberta AIRB October 20, 2006, recommended an ROE in the range of 14.31 to 18.26 percent
  • NERA Consulting Economists, in a report for the Newfoundland & Labrador Board of Public Utilities, October 13, 2004, recommended an ROE in the range of 11 to 14 percent.
  • Based on NERA’s report, Dr. Ronald R. Miller of Exactor Insurance Services Inc. recommended an ROE of 12.5 percent.
  • Dr. Basil A. Kalymon, on behalf of the consumer advocate, recommended to the Newfoundland & Labrador Board of Public Utilities that the target return on equity for the setting of automobile insurance rates should be 9 to 10 percent.
  • The consumer representative to the Alberta AIRB, Ms. Merle Taylor, CMA, recommended that the ROE be higher than the allowable rate for utilities (at that time, 8.9 percent). She also stated that a 19.6 percent ROE would be “excessive.”
  • In his testimony in Morrow v. Zhang (2008), actuary Joe S. Cheng, F.C.I.A. stated that a 12.5% ROE was considered by many insurers to be in the low end of a reasonable range; and that the high end of a reasonable range might be 20%.

The Alberta Automobile Insurance Rate Board (AIRB) currently employs a formula that implies that an after-tax ROE of 9.5 percent would be appropriate.

Excluding the report by Merle Taylor, which did not give an exact range or recommendation, the average of the six remaining experts’ opinions concerning a reasonable ROE for automobile insurance is 12.76 percent. This figure is well above the rates earned on Basic Coverage in Alberta between 1996 and 2002, (see Table 1), but is well below the rates earned since then. Most importantly, Alberta insurance companies earned an ROE of 19.1 percent in 2003, the year before the introduction of the MIR.

2.5 Summary and conclusions

  • As indicated in the preceding sections, claims did not dramatically increase in the time period leading up to the Minor Injury Regulation.
  • As also shown above, administrative expenses did not increase but, rather, decreased in the time leading up to the Minor Injury Regulation.
  • Although investment returns decreased in the time leading up to the Minor Injury Regulation, their effect on the increase in premiums was minor.
  • ROE for Basic Coverage averaged -1 percent per year in the period 1996 to 2002 (7.4 percent for All Coverages). During this same period, average premiums for Basic Coverage only increased by 6 percent per year on average (4.5 percent per year on average for All Coverages). This premium deficiency (the difference between premium charged and premium required to reach a reasonable rate of return) appears to have been the primary impetus for the sharp increase in premiums that occurred in 2002/2003, as the “soft” market ended and a “hard” market began.
  • We estimate that without the premium increases in 2002 and 2003, ROE on Basic Coverage would have been -3.8 percent (in 2003).

 

3. Projected Effect of Removing the Minor Injury Regulation

Using the AIRB’s methodology, and controlling for other reforms beside the Minor Injury Regulation (i.e. controlling for the gross to net income reform and the collateral income reform), we estimate that the required average premium increase for Basic Coverage, if the Minor Injury Regulation had been removed, would have been $111.76/year if industry profits were to be maintained at their 2006 level, of 21.8 percent.

Alternatively, using the AIRB’s methodology, we estimate that insurer ROE for Basic Coverage would have been 12.2 percent in 2006 if the Minor Injury Regulation had been removed and premiums held constant. (Furthermore, in this case, the ROE would have been 16 percent for All Coverages.)

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Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary.

Jason Strauss is a Ph.D. student in the department of Risk Management and Insurance at Georgia State University.

Economica’s Privacy Policy

Posted on By economica

by Christopher Bruce

On January 1, 2004 the federal Personal Information Protection and Electronic Documents Act was extended to every organization that collects, uses or discloses personal information in the course of a commercial activity within a province. On the same date Alberta’s Personal Information Protection Act came into effect. The purpose of the (Alberta) Act is to “govern the collection, use and disclosure of personal information by organizations” (see www.psp.gov.ab.ca/faq.html). In light of these events, we outline Economica’s privacy policy:

  • We do not reveal any information concerning the specifics of any case, including the names and personal circumstances of the litigants, to any party other than the law firm that has retained us – unless that firm has specifically requested that we do so. We will not, for example, provide copies of our reports to the plaintiff or defendant, to any other expert who has been retained in the litigation at hand, or to any other law firm that is involved in the litigation without a specific request by the firm that has retained us.
  • All of the documents that we receive concerning the specifics of a case are kept in secure areas and/or in secure computer files. All such documents will be maintained in such a manner that they are not accessible to casual observation by visitors to our offices.
  • We will not discuss a case with any party other than the firm that has retained us, without previously having received the permission of that firm. We will not, for example, request personal information from the plaintiff, the plaintiff’s family, or the plaintiff’s employer, or from other experts without first informing the firm that retained us.
  • When speaking with third parties, such as employers, we will not reveal the name or circumstances of the plaintiff unless it is necessary to do so. If, for example, it is possible to obtain details concerning the plaintiff’s pension plan from his/her employer without revealing the plaintiff’s name, we will do so.
  • When disposing of confidential files concerning any litigant, we will have those files shredded by a professional firm.

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Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Why have automobile insurance premiums been rising?

Posted on By economica

by Christopher Bruce

According to the most recent Statistics Canada data, automobile insurance premiums in Alberta increased by 68.6 percent between 2001 and 2003 (29.9 percent per year), at a time when the consumer price index increased by only 8.0 percent (3.9 percent per year). Similarly, over the 10-year period 1994-2003, premiums increased by 97.8 percent (7.9 percent per year) while the consumer price index increased by only 26.4 percent (2.6 percent per year). (See Figure 1.)

Although the government has reacted to this increase by introducing wide-ranging legislative changes, no satisfactory explanation has been given for why premiums should have risen so dramatically. The purpose of this article is (i) to review eleven of the explanations that have been given for rising premiums and (ii) to investigate those explanations to determine whether they are consistent with the evidence.

Figure 1

1. Number of accidents

Everything else being equal, an increase in the number of accidents per driver must increase insurance companies’ average payouts and, therefore, their average premiums. However, statistics indicate that the number of accidents has not increased significantly in the last decade. Between 1994 and 2001, for example, the number of collisions increased only from 431.4 to 460.5 per 10,000 vehicles, an average rate of increase of less than one percent per year. This cannot explain the sizeable premium increases of the last few years.

2. Severity of accidents

Even if the number of accidents had declined, the costs of claims per driver might have increased if the average severity of accidents had risen. If fewer people had been injured than in the past, but each injury had been much more serious than previously, total costs of claims might have risen.

With respect to severity, it is known that whereas the number of collisions involving injuries or fatalities increased only slightly between 1994 and 2001 – from 72 to 83 per 10,000 registered vehicles – and the number of collisions involving property damage remained almost constant – at about 360 per 10,000 registered vehicles – the number of “bodily injury” claims almost doubled – from 65 to 112 per 10,000 registered vehicles – over the same period. As bodily injury claims are generally much more expensive than other types, this trend suggests that the average cost of claims should have risen over the 1994-2001 period. Indeed, the Insurance Bureau reports that the average cost of injury claims rose by 44.6 percent (4.2 percent per year) between 1993 and 2002.

What these statistics do not explain, however, is why automobile insurance premiums increased so dramatically in 2002 and 2003. The statistics indicate that whereas the dramatic rise in premiums has been a recent phenomenon, the number and severity of bodily injury claims per vehicle has increased steadily for almost ten years. This evidence suggests that the recent rise in premiums is not closely connected with the increase in severity of accidents.

3. Damages

Even if the number and severity of accidents had remained constant, it is possible that the average cost of accidents could have risen if the courts had become more liberal in their awards of damages to accident victims. With respect to serious personal injury and fatal accident claims, the evidence on this question is clear, however – in the last 20 years there has been virtually no change in the manner in which the courts assess damages. Although there are no definitive statistics on this issue, the principles of damage assessment, in major injury cases, have not changed in Alberta since the mid-1980s. If damages for major injury cases have increased, it is not because there has been a change in the attitude of the courts; it is because Albertans’ incomes have been rising – necessitating larger awards to compensate victims for their losses of income.

It is possible that damage awards for minor injuries have increased substantially. However, it is noteworthy that insurance companies, who have argued that this is one of the major causes of increased premiums, have not released any data to back this claim. It seems reasonable to draw an adverse inference from this failure. Surely if the data supported the insurance industry’s arguments, they would have made those data public.

4. Fraud

Insurance companies commonly argue that consumer fraud is a major source of inflationary pressure on insurance rates. There are two major problems with this argument. First, although insurance fraud undoubtedly occurs, insurance companies have been unable to provide any statistically reliable evidence to show that fraudulent claims amount to more than a small percentage of payouts.

Second, and more importantly, even if fraud was a major problem, no evidence has been put forward to suggest that fraudulent claims have increased substantially in the last two years. For an increase in fraud to explain a significant portion of the 69 percent increase in premiums that has been observed, fraudulent claims would have to have increased dramatically. There is no evidence at all that this has occurred.

5. Medical costs

A recent study by the Insurance Research Council (a U.S.-based agency) found that “escalating medical costs are the key factor behind” the growth in automobile insurance claims in the past five years. It seems unlikely that this source could account for a significant portion of the recent rise in premiums in Alberta, however, as a substantial portion of medical costs resulting from automobile accidents are covered by Alberta Health Care. Since 1996, those costs have been covered under an annual levy that has increased at a relatively steady rate, of approximately 12 percent per year. For this source to explain a significant portion of the 69 percent increase in premiums seen in the last two years, there would have to have been a dramatic increase in the annual levy, an increase that has not been observed.

6. Legal costs

An additional component of the cost of insurance is the fees charged by lawyers and other experts. Although a substantial portion of victims’ legal fees are paid by the victims out of their damages – and, therefore, do not contribute to insurance companies’ costs – insurers have to hire their own lawyers and may sometimes have to pay a portion of the victims’ legal fees. Nevertheless, any argument that these costs have contributed to the substantial increase that has been observed in automobile insurance premiums founders on a lack of evidence that these fees have increased substantially in the last few years. It is one thing to argue that legal fees may, or may not, be “too high,” it is another thing altogether to argue that they have risen as a percentage of insurance costs.

7. Return on investment

To a certain extent the costs of operating an insurance company are offset by the company’s ability to invest the premiums it has received until drivers make their claims. The higher is the interest on those investments, the less does the company have to charge in the form of premiums. Some commentators have argued recently that the observed increase in premium costs has resulted from the decline in the average rate of return on investments.

This is not a compelling argument, however, as this decline cannot explain more than a small portion of the dramatic increases in premiums. If insurance companies hold premiums for half a year on average (that is, if premiums are collected at the beginning of the year and then spent at a constant rate over the year), and if the rate of return on investments is, say, 8 percent, then the interest that is collected will (on an annual basis) equal 4 percent of premiums. If the rate of return then declines to 5 percent, the effective return on the investment of premiums will fall to 2.5 percent, a drop of only 1.5 percent. As this is roughly the order of magnitude of recent declines in rates of return, this factor cannot explain a significant percentage of the recent increases in premiums.

8. Administrative costs

Approximately 25 to 30 percent of an insurance company’s costs are for administration – salaries of salespeople and adjusters, rent, cost of supplies, advertising expenses, etc. There is no evidence to suggest that these costs have risen significantly in the last few years.

9. Re-insurance

Insurance companies have argued that one of the most important sources of increased costs in the last two years has been the increase in premiums that they have had to pay to re-insurance companies since September 11, 2001. This argument is implausible. Figure 1 illustrates the increases in both automobile and homeowners’ insurance premiums in Alberta in recent years. If re-insurers had raised their rates in response to the perceived increase in terrorism, they would have raised those rates by at least as much for homeowners’ insurance as for automobile insurance. But it is seen clearly in Figure 1 that homeowners’ insurance premiums rose by far less than did automobile insurance premiums. This provides compelling evidence that increases in re-insurance premiums have not been a major source of the reported increase in automobile insurance premiums.

10. Collusion

Some critics of the insurance industry have argued that the recent increases in automobile insurance premiums have resulted from collusive behaviour among insurance companies. This argument is suspect for two reasons. First, it is difficult to explain why insurance companies would have raised premiums for automobile insurance and not for homeowners insurance. Second, there are more than 100 automobile insurance companies operating in Alberta. Over a century of experience suggests that it is extremely difficult even for an industry of only three or four firms to maintain a collusive stance. It is unlikely that 100 firms could do so.

11. Statistical interpretation

There is some concern that the dramatic increases that have been observed in automobile insurance premiums in the last few years have resulted from the way that statistics are collected and reported rather than from “real,” underlying factors. Two arguments have been made in this respect.

First, the Insurance Bureau argues that the manner in which Statistics Canada collects information about automobile insurance premiums produces misleading results. Nevertheless, the Bureau’s own data (published in the December 2003 issue of their newsletter Perspective) indicate that automobile insurance premiums in Alberta rose by approximately 63 percent (5 percent per year) between 1993 and 2003 and by approximately 30 percent (14 percent per year) between 2001 and 2003. Although these numbers are much lower than those produced by Statistics Canada, they are still substantially higher than the overall consumer price inflation figures for those periods. (Also, whereas Statistics Canada’s data measure changes in the price of a fixed “basket” of insurance policies, the IBC data measure changes in the costs of actual insurance policies that have been purchased. Thus, if, as premiums rise, consumers purchase less comprehensive policies, the IBC data will underestimate the rate of increase of given policies.)

Second, it is well known to observers of the automobile insurance industry that premiums move in a cyclical manner. When premiums are relatively low, insurers’ profits fall and many firms leave the market. This reduces competition and allows premiums to rise. But as that happens, profits also rise, attracting new firms, and driving down premiums again. Typically, this cycle takes approximately 10 years. The data in Figure 1 show, for example, that there were significant increases in premiums in the early 1980s, early 1990s, and early 2000s; and stagnation of premiums in the mid-1980s and mid-1990s.

This observation suggests that the recent, dramatic increases are simply part of a larger, cyclical movement in automobile premiums. Even if this is true, however, the average increase over the last 10 years – even when calculated on the basis of the IBC figures (5 percent per year) – has been more than double the average rate of consumer price inflation. Clearly, cyclical and statistical factors alone cannot account for this substantial increase.

Table 1

Conclusion

The information that has been reviewed in this paper suggests that two factors are primarily responsible for the pattern of premium changes that have been observed in Alberta in the last decade. First, the dramatic increases in the last two years represent a “natural” upturn in a long term cycle in premiums. Past patterns suggest that these increases will be followed by stagnation of premiums for the next six or seven years.

Second, there is some evidence to suggest that the average severity of personal injury claims has been rising. As I find no evidence that this increase has been due to fraud, to an increase in the number of accidents, or to changes in the criteria employed by the courts to calculate damages, it appears that the most plausible explanation is that the losses suffered by plaintiffs have been increasing in value.

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A large number of individuals were kind enough to provide me with assistance in the preparation of this article. I would particularly like to thank Don Higa, Jim Rivait, Walter Kubitz, Derek Aldridge, and Harris Hanson.

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Policies to deal with rising premiums

Posted on By economica

by Christopher Bruce

In the first article in this newsletter, I analyzed the arguments concerning eleven possible sources of increased automobile insurance premiums. The purpose of this article will be to review each of those sources to determine whether there are changes in government policy that might reduce premium costs.

1. Number of accidents – Experience Rating.

The Alberta government has already taken one of the boldest and most innovative steps possible towards reducing the number of automobile accidents. This is their proposal to introduce experience rating – the direct tying of premium values to drivers’ accident-causing behaviour – to the automobile insurance sector.

Experience rating has two highly desirable characteristics. First, the individual driver has complete control over his or her premiums. If individuals drive cautiously, avoiding accidents and driving violations, their premiums will decline to the lowest available rate. Furthermore, individual drivers’ rates will not be relatively high just because they happen to belong to a group, like young males, that has a relatively high accident rate.

Second, there is a substantial body of statistical evidence to show that when insurance premiums are related to experience, accident rates fall. When individuals know that they can reduce their premiums significantly by driving more carefully, they do so.

Under the government’s proposal, the impact of a serious driving offence or an at-fault accident will be much greater than it is currently, under what is known as “actuarial” rating of premiums. For example, under the proposed system, a typical Edmonton driver who has recently begun to drive (i.e. who has no “experience”) will pay a premium of about $2,000. After four years of no accidents or driving offences, that driver will pay only $700 – a saving that will continue for each and every year into the future as long as the driver has no accidents or convictions. One would expect an annual saving of $1,300 to be of sufficient size that it would induce most individuals to take additional precautions against unsafe driving.

Furthermore, the proposed system would move the driver four steps up “the premium ladder” each time he or she had an at-fault accident. So the driver with four years of accident free driving would be bumped from the reduced $700 premium to the $2,000 base premium, losing the entire $1,300 “bonus”.

And the incentive to avoid driving convictions is even stronger. A single impaired driving conviction would increase premiums by 200 percent.

These proposals are highly desirable. The government deserves far more credit than it has received for recommending them. Nevertheless, the government needs to reconsider two aspects of its plan.

First, it is mistaken in its proposal that a government agency should set the base premium rate. For example, in the case discussed above, the $2,000 base premium for Edmonton drivers was not one chosen by the insurance companies, but by the government. This is unreasonable for two reasons. First, the government cannot know what the true cost is to the insurance companies of providing insurance. As a result, the base rate that it will choose is almost certain to be either too high or too low.

If it is too high, insurers will make excess profits at the expense of Alberta drivers. If it is too low, insurance companies will make losses and some of them will refuse to provide coverage to Albertans.

Second, when the government sets premiums, the competitive incentive for insurance companies to find ways to lower rates is lost. If insurance companies are forced to charge the same rates regardless of how efficient they are, there is less incentive for them to seek ways of being efficient. It is these competitive pressures that keep premiums from rising more than they have.

There is a simple solution to these problems: the government should set only the percentage increases and decreases that are to result from various “experiences” and leave the insurers to set the base rates from which those increases and decreases are to be calculated. This will get the government out of the business of setting rates, while leaving intact the strong incentives created by a system of experience rating.

The second problem with the new legislation is that it does not deal with the adverse incentives that it gives to insurance companies. Specifically, experience rating results in a situation in which insurers know they will make substantial profits on some classes of customers and lose money on others. Thus, it gives them a strong incentive to refuse to insure the money-losing group. In the scheme proposed by the Renner committee, that group will be composed primarily of young males.

Insurers will lose money on this group because the number of accidents drivers have had in the past is only loosely related to the number that they can be expected to have in the future. What decades of statistics tell us is that a nineteen-year-old male with a perfect, three-year driving record is more likely to have an accident in the next year than is a forty-year-old male with the same driving record. And a nineteen-year-old who had an accident last year is more likely to have an accident next year than is a forty-year-old with the same experience. This means that insurers will expect to pay out more claims to nineteen-year-old drivers than to forty-year-old drivers.

Assume, for example, that ten percent of nineteen-year-old drivers who have had a clean record for three years will have an accident in the next year; whereas only five percent of forty-year-olds with a similar record will have an accident next year. If the average accident costs the insurance company $10,000, it will expect to pay out an average of $1,000 for each nineteen-year-old and $500 for each forty-year-old.

If the government forces insurers to charge the two groups the same premium, they will have to charge something between $500 and $1,000 just to cover their expected claims costs. For example, if the two groups were the same size, the premium would be $750 (the average across the two). But this means that they will expect to make a $250 profit on the average driver in the older group and a $250 loss on the average driver in the younger group.

As insurance companies are profit-driven, we can expect that they will respond by doing their best to attract older drivers – and to turn away younger drivers. The stakes are high. Those companies that find themselves with a relatively high percentage of young drivers will lose money and will soon be forced out of the market. Companies will use every loophole at their disposal to attract as many drivers in the older age groups as possible.

For example, companies might offer to sell automobile insurance through employers, in much the same way they currently sell long-term disability and dental plans. As employees are predominantly in the 25-64 year age group, and as high risk drivers are predominantly in the 16-24 and 65+ age groups, such a practice would allow firms to “skim” off the low-claim drivers.

The government will need to introduce strict controls to ensure that companies are not seriously disadvantaged if they write insurance for groups whose average claims exceed average costs.

2. Severity of accidents – Improved policing.

Reductions in severity are most likely to come from improvements in the design of automobiles; and in the use of safety devices such as seat belts and air bags. Nevertheless, provincial governments can reduce severity by enforcing highway speed limits more strictly – particularly on segments of roads that are known to have high accident rates.

Recent scientific evidence, published in journals such as Accident Analysis and Prevention, Injury Prevention, and the Canadian Medical Association Journal, concludes that the two changes that offer the greatest promise for reducing the incidence and severity of accidents are: first, raising the legal drinking age; and, second, banning the use of hand-held cellular telephones by drivers of moving vehicles.

3. Damages – Restrictions on tort.

Many of the proposals that have circulated in the last year or so have had to do with the placement of restrictions on tort damages. In general, these proposals are based on the assumption that victims are currently being “overcompensated;” hence, a reduction in damages will not cause a hardship to victims. The two most commonly-made proposals are that individuals should not be able to claim from two insurers for the same loss – the “double compensation” issue – and that loss of income should be calculated net of income taxes – because victims do not have to pay taxes on their awards, they will be adequately compensated if damages are based on after-tax income.

Typically, double compensation occurs when the victim is compensated for loss of income both by the defendant and by the victim’s own long-term disability insurance. Under the new legislation in Alberta, victims will be allowed to collect from only one of these parties. This proposal seems reasonable except that it is usually suggested that the victim be required to collect from his or her own insurance company. Effectively this requires that the victim be made to pay for damages caused by a negligent driver – and it allows the negligent driver to evade responsibility for his/her actions. Neither of these outcomes seems defensible. Furthermore, if disability insurers are able to re-write their policies in such a way as to avoid paying damages when their clients are able to collect from negligent drivers, the legislation will affect only disability insurance premiums (which will decrease), not automobile insurance premiums.

The second proposal for reducing tort damages – that victims be compensated only for after-tax losses – also seems reasonable. As plaintiffs do not pay taxes on court-awarded damages, the payment of “gross” income overcompensates them. The primary argument against this proposal is that plaintiffs currently rely on this “overcompensation” to help them pay for their legal fees (which are only partially paid by the defendant). If plaintiffs have to pay for their legal fees out of after-tax income, their awards net of legal fees will leave them undercompensated.

A third element of the new legislation sets limits on the award of “non-pecuniary” damages. This is not based on the assertion that victims are being overcompensated by the courts. Rather, it is based on the assertion that victims of “minor” injuries are exaggerating their injuries and, therefore, defrauding the system. The issue of fraud is discussed in the next section.

4. Fraud.

Setting limits on damages is an entirely inappropriate method of dealing with fraudulent claims, primarily because it punishes the innocent. If fraud is an important factor in the determination of automobile insurance premiums, there are two appropriate responses. Insurers can increase their vigilance; and, in cases of egregious behaviour, they can ask the government to lay criminal charges. As both of these responses are already available to the insurance industry, the government does not need to take further steps.

5. Medical costs.

It is clear that public policy towards medical costs is unlikely to be influenced significantly by government concern over automobile insurance premiums. In this area, drivers and insurers can only hope that government health policy incidentally acts to reduce personal injury claims costs.

6. Legal costs – no fault.

It is often argued that legal costs could be minimized if a form of no fault insurance was introduced. Whatever the advantages of no fault might be, there are three important problems with it that must be dealt with before such a proposal can be considered seriously.

First, because more parties can make claims in a no fault system than in a fault system (“at fault” drivers can make claims in no fault systems but not in fault systems), there is very little chance that no fault will reduce premiums. Indeed, the evidence shows that no fault jurisdictions have premiums very similar to those in fault jurisdictions.

Second, the purported source of savings in a no fault system is that accident victims are denied access to the court system; hence legal bills are reduced. But, the courts serve an important function – they allow parties to appeal decisions made by their insurance companies that they feel are unfair. It is possible that an appeal system can be introduced to no-fault insurance, but there is some evidence to suggest that if such a system really is fair, it will cost as much as do the courts. In short, any savings in administrative costs tend to come at the expense of justice.

Third, there is consistent, strong evidence to suggest that there are more accidents in no fault jurisdictions than in fault jurisdictions because drivers in the former do not have to take responsibility for their actions. (Recent statistical studies conclude that when no fault insurance is introduced, the accident rate rises by approximately 6 percent.) Indeed, not only are the drivers who are at fault for their own injuries not made to pay higher premiums, they are fully compensated by the insurance system for any costs they incur.

7. Return on investment.

If insurance companies have been harmed by falling rates of return on their investments, there is nothing the government can do to help, short of making short-term loans at below-market rates.

8. Administrative costs – Public insurance.

It has often been suggested that administrative costs could be reduced if the private insurance system was replaced by a government-run monopoly. This suggestion ignores the fact that monopolies have been found, almost universally, (i) to be less responsive to their customers than are competitive firms; and (ii) to be less efficient than are firms that have to face competitive pressures. (Some proponents suggest that automobile insurance is less expensive in Saskatchewan and Manitoba than in Alberta because it is provided by monopoly in the former two provinces. However, this ignores the many subsidies that those insurers receive from their governments and also ignores the fact that British Columbia’s premiums are not significantly different from Alberta’s.)

9. Re-insurance.

Following the terrorist attacks of September 11, 2001, re-insurance companies have raised their premiums significantly. As the terrorist attacks should have only a negligible effect on automobile insurance claims, the re-insurers’ actions are unjustifiable. It might be appropriate for the Government of Alberta to provide re-insurance coverage to firms working within Alberta until re-insurance rates return to a level that is consistent with the risk that is being faced.

10. Collusion.

Unless some evidence is presented to suggest that automobile insurers are colluding, no action needs to be taken on this issue.

11. Statistics.

If Statistics Canada has overestimated the rate of increase of automobile insurance premiums and if premiums do follow a regular cycle, which is currently at its peak, then there is little or no rationale for the Alberta government to do anything about premiums. Alberta might cooperate with the Insurance Bureau and Statistics Canada in reassessing the method by which premium inflation is measured; but, otherwise, Alberta merely needs to wait a year or two and that inflation rate will fall significantly by itself. The drastic changes proposed by the government are completely out of line with the (non) seriousness of the situation.

Summary

This article has concluded that the government would be justified in adopting the following policy changes:

  • Introduce experience rating, as proposed by the Renner committee, but without government control over the base premium rate.
  • Increase police surveillance of moving traffic violations, particularly in areas identified as being of high risk.
  • Raise the legal drinking age.
  • Ban the use of hand-held cellular telephones by drivers of moving vehicles.
  • Introduce a regulation that losses of income be made on an after-tax basis.
  • Provide re-insurance to the automobile insurance industry until rates return to a level that can be justified based on expected claims.
  • Cooperate with Statistics Canada and the Insurance Bureau of Canada in investigating the manner in which the inflation rate of automobile insurance premiums is measured.

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Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Management fees

Posted on By economica

by Derek Aldridge

This article first appeared in the winter 2002 issue of the Expert Witness.

We occasionally encounter cases in which it is argued that the injured plaintiff requires an additional award to pay for the services of a financial manager (that is a “management fee” award). I have recently been involved in a couple of cases in which I had to consider this issue in detail, and in this article I will share some of my thoughts on the matter.

Typically (in my experience) these cases involve seriously injured plaintiffs (often children) with large loss of income and cost of care claims. It is anticipated that the plaintiff will be unable to manage his own financial affairs, and will therefore need the assistance of a financial advisor. The advisor (most banks and related financial institutions provide these services) will invest the plaintiff’s money, ensure that his bills are paid, prepare his taxes, and so forth. The annual cost of these services is mainly based on a percentage of the funds under management each year (though the actual cost schedules are often complex). Because the plaintiff will need to spend part of his award on a financial manager, he therefore needs additional funds to cover these costs (that is, a management fee award). The difficulty arises when we consider whether or not the plaintiff will receive a higher rate of return on his investments, due to the expertise of the financial manager. That is, it may be the case that the financial manager’s fee will be at least partially offset by the increased return on investment. (For example, if I am paying a financial manager $5,000 per year, I expect that the return to my investments will be at least $5,000 per year greater than if I did not use a financial manager.)

However, this is not a simple issue. When we determine a reasonable real discount rate to use in our calculations, we assume that plaintiffs will invest their money in simple low-risk investments such as government bonds. It is our understanding that this is their only obligation – they need to do better than keeping their money in a safe deposit box, but they do not need to pursue an “active” (and more risky) investment strategy. However, when the plaintiff uses a financial advisor, what sort of service should we expect that the plaintiff will request? If the plaintiff requests that the manager act very conservatively and invest the money in a similar manner as is expected of a plaintiff-investor, then there will be no increased return to offset the cost of the financial manager. A management fee award will be needed. Alternatively, if the plaintiff is obligated to make full use of the financial advisor, then presumably the advisor will do better than the conservative government bond strategy assumed for a plaintiff-investor, and there will be a higher return to offset the costs. It may be the case that the total net return (after management fees) is higher than the return that can be earned by simply investing conservatively in government bonds. In order to properly estimate the awards in this case, we would need to estimate the expected long-run real rate of return that the manager will earn, re-estimate all our future loss calculations, and then estimate the management fee. Note that in any province with a mandated discount rate, the issue is even more complex, since the economist does not have the option to simply change the discount rate based on the anticipated investment strategy of the plaintiff.

Suppose it is the case that a plaintiff can use a financial manager and earn a net real return that is greater than the “normal” real rate of return earned by a plaintiff-investor. Why then would we not expect that all plaintiffs should use investment advisors, in order to best mitigate their losses? In a province with a mandated discount rate, if a higher net return can be earned using an investment advisor, then why does the mandated rate not reflect this?

These are complicated issues. In my view the preferred approach in most cases is to separate the plaintiff’s need for “financial assistance” from the actual management of her funds. “Financial assistance” would include the day-to-day services needed by a plaintiff who cannot manage her own financial affairs – such as bill-paying, handling spending money, paying taxes, and so forth. These services could presumably be handled by an accountant or a lawyer. The services would not include actual investment management – it would be anticipated that the person assisting with the plaintiff’s financial affairs would arrange for conservative investment of the plaintiff’s award in the usual low-risk vehicles. If it could be determined that this level of financial assistance would cost (say) $5,000 per year, than that cost could simply be incorporated as a normal cost of care, without introducing the difficult and contentious issue of financial management.

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Derek Aldridge is a consultant with Economica and has a Master of Arts degree (in economics) from the University of Victoria.

What is Econometrics?

Posted on By economica

by Kelly Rathje & Christopher Bruce

This article was originally published in the Winter 2000 issue of the Expert Witness.

Commonly, economic experts will testify that a particular characteristic of the plaintiff, such as his years of education or his marital status, is “correlated” with one of the factors that is of interest to the court, such as future income or retirement age. The branch of economics that seeks to determine whether such correlations exist is called econometrics. In this article, we explain briefly how econometric techniques work.

Assume that we are interested in determining whether the annual incomes that individuals earn are correlated with, or determined by, years of education. Assume also that 70 individuals have been observed and that for each individual, we know their number of years of education and annual income.

We have plotted the observations for these individuals in Figure 1. For example, individual A has 15 years of education and an annual income of $45,000.

Figure 1

When income levels are plotted against years of education, one would expect that the observations would be scattered, as seen in Figure 1. What the econometrician wishes to do is determine whether these scattered points form a “pattern.” One simple pattern that is often tested is that of a straight line. In this case, the formula for a straight line is:

I = a + b1(E)

where I is income; a is a constant; b1 measures the amount that education influences income; and E is years of education.

What the econometrician tries to do is to find the line which minimises the distances between the observations and the points on that line. The straight line which appears to meet this criterion with respect to the observations in Figure 1 has been drawn there. The formula for this line is

I = 6,850 + 2,000(E) (1)

This formula says that if the individual has 12 years of education, his income is predicted to be $30,850.

I = 6,850 + 2,000(12) = 30,850

It can be seen from Figure 1 that, in general, the observations lie fairly close to the line. For this reason, we would conclude that the hypothesis that education affects income is supported. Furthermore, because the “sign” on the 2,000 component of the equation is positive, we would also conclude that education has a positive effect on income. (In this case, each extra year of education appears to lead to 2,000 extra dollars of annual income.)

Equation (1), which investigates the effect which only one variable has on another, is not typical of the equations that are normally of interest to economists. Typically, for example, we would assume that there is a large number of factors, in addition to education, that will affect income. In that case, econometricians extend their equations to include numerous variables.

For example, suppose the economist has additional information about the age of each individual in the data set. This variable can also be added to the equation to help “explain” income. The equation would become:

I = a +b1(E) + b2(A),

where A is “age.” The resulting estimated equation might be something like:

I = 5,000 + 1,900(E) + 200(A) (2)

This model now indicates that for every extra year of education an individual has, they will earn an extra $1,900, on average, and for each additional year in age, there is an increase of $200. In other words, if an individual has a high school diploma, and is 34 years old, then the equation indicates on average, they will earn $34,600 (= 5,000 + [1,900 x 12] + [200 x 34]). Similarly, if an individual holds a bachelor’s degree (16 years of education), and is 34 years old, then the equation indicates that, on average, they will earn $42,200 (= 5,000 + [1,900 x 16] + [200 x 34]).

The variables used as examples to this point – income, education, and age – all share the characteristic that they can easily be measured numerically. Other variables which might influence the wage rate are less easily converted to numerical equivalents, however. Assume, for example, that our hypothesis was that incomes were higher in rural areas than in cities, or that men were paid higher incomes than women, all else being equal.

As econometric analysis is a statistical technique, it requires that the economist enter all of his or her information as numbers. The way that econometricians deal with this problem is to construct what are called “dummy variables.”

In this procedure, one of the observations is arbitrarily chosen to be the “reference variable” and it is given the value of 0 whenever it appears. The other observation is then given the value of 1. For example, if “female” was the reference category, then the dummy variable would be given the value 0 whenever the observed individual was female and would be given the value 1 whenever the individual was male.

Assume that this has been done and equation (2) has been re-estimated with a male/female dummy variable included. The new equation might look like:

I = 3,000 + 1,900(E) + 200(A) + 4,000(M) (3)

where M is 1 if the individual is male and 0 if she is female. The interpretation that is given to the value that appears in front of M in this equation is that income is $4,000 higher when the worker is a male than when the worker is female.

Alternatively, because the dummy variable takes on the value 0 when the worker is female, the relevant regression equation for females is simply equation (3) excluding the dummy variable:

I(female) = 3,000 + 1,900(E) + 200(A)

And because the dummy variable takes on the value 1 when the worker is male, the relevant equation for males becomes:

I(male) = 3,000 + 1,900(E) + 200(A) + 4,000(1)

= 7,000 + 1,900(E) + 200(A)

The income model is one example of how econometrics is used, and how it is useful to determine trends and relationships between variables. Other uses may include forecasting prices, inflation rates, or interest rates. Econometrics provides the methodology to economists to make quantitative predications using statistical data.

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Kelly Rathje is a consultant with Economica and has a Master of Arts degree (in economics) from the University of Calgary.

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Employment of Persons With Disabilities: The Employment Equity Act 1986 to 1996

Posted on By economica

by Gordon C.M. Wallace and Gail M. Currie

This article first appeared in the autumn 1996 issue of the Expert Witness.

Impaired earning capacity remains a significant head of damages in the evaluation of a personal injury action. The discipline of Vocational Rehabilitation has a longstanding history of assisting the Courts in understanding a disabled plaintiff’s occupational options through matching their vocational attributes, abilities, and interests with the requirements of specific jobs. (G. Wallace and D. Nordin, “Assessment of Residual Employability Potential” in E.L. Gross (ed). Injury Evaluation: Medicolegal Practices. Butterworths, Toronto, 1991). Unfortunately, in many circumstances, while appropriate occupational options may be identifiable, the reality is that disabled individuals often face significant barriers in obtaining and maintaining employment in the competitive labour market. These realities can have significant impact for the personal injury claim and therefore are important considerations for counsel to be cognizant of.

The awareness of the difficulties which individuals with disabilities face in regards to their employment is certainly not a new concern. In 1985, the report of the Parliamentary Committee on Equality Rights to the House of Commons noted that:

Disabled people suffer from extraordinarily high unemployment rates. When they are employed, they tend to be concentrated in the low paying, marginal sectors of the labour market. They also have expenses that non- disabled workers do not face, such as medication, special aids and devices, and special transportation services (page 105).

In an attempt to address some of the inequities for this and other disadvantaged populations, in January of 1985, the Federal Government introduced Bill C62 which provided for the establishment of Employment Equity Programs in all corporations under federal jurisdiction, including crown corporations with 100 or more employees. In 1990, this legislation encompassed 370 employers accounting for 630,000 employees. This covered only 5 percent of the Canadian labour force while nearly two thirds of this represented group were employed in Ontario 40 percent) or Quebec (20 percent). Almost the entire work force under this legislation was employed in service producing industries rather than good producing industries such as manufacturing and construction. The three main industrial sectors – banking, transportation and communication – each accounted for roughly 30 percent of the workforce.

Under this Bill, a person was included under the “disabled” category if they had the following three criteria:

  1. Have a persistent physical, mental, psychiatric, sensory or learning impairment.
  2. Consider themselves to be or believe that an employer or potential employer would be likely to consider them to be disadvantaged in employment by reason of impairment.
  3. Identify themselves to an employer or agree to be identified by an employer as a person with disabilities.

In addition to the Employment Equity Act, the government also established a Federal Contractors Program designed to influence the behavior of firms with 100+ employees submitting tenders worth more than $200,000 to the government for goods and services provision. As well, the Affirmative Action Policy had been introduced by the Treasury Board in 1983 with an objective of enabling the equitable representation and distribution in the public service of Women, Aboriginal Peoples and Persons with Disability.

Unfortunately, even with their laudable intentions, these measures appear to have had very little impact in terms of increasing the employment of individuals with disabilities. In fact, in terms of “persons with disabilities”, a review of the Statistical Summary Employment Equity Act 1987-1990 (Employment and Immigration Canada, January 1992) indicates only modest gains over the reported four years. Specifically, the labour force representation of this group increased from 1.59 percent in 1987 to 2.39 percent in 1990. However, a further analysis of the “hiring” and “termination” data for this group indicates that there had been more of the latter and less of the former! In other words, more disabled persons had been terminated or left the workforce over this period than had been hired. It has been suggested that what the numerical increase actually represents is the increased identification of present employees who would fall under the definition of having a disability. For example, individuals who wear eyeglasses could be considered as having a disability under this criterion and several large employers appear to have made greater efforts at identifying these individuals within their labour force. Therefore, any percentage increase for this group came from greater self- identification among existing employees and not from increased recruitment of individuals with disabilities (Canadian Human Rights Commission Annual Report 1991, Minister of Supply and Services Canada, 1992).

More recent information indicates that the representation of persons with disabilities was 2.56 percent in 1993 and 2.63 percent in 1994. However, this latest increase was also due primarily to a higher rate of self- identification and changes in the composition of the group of employers reporting under the Act (Employment Equity Statistical Summary, 1987-1994, Human Resources Development Canada, 1995).

Comments made by witnesses before a Parliamentary Committee established in 1991 to review the Employment Equity Act published in the report, A Matter of Fairness (May 1992) are illustrative of the difficulties experienced by individuals with disabilities. For example, Mr. Gerry McDonald, Vice Chairman of the Coalition of Provincial Organizations of the Handicapped, offered (February 19, 1992):

Canadians with disabilities are dismayed because the promise to improvements to the socio-economic status of disabled persons have not materialized. Disabled Canadians continue to confront systemic discrimination in employment. This is despite numerous national, international and regional instruments that assert equality rights. In Canada it is clear that after five years of employment equity, virtually no progress has been made in the area of acquisition of permanent full- time employment in the federally regulated work force by people with disabilities.

Ms. Carol McGregor, a spokesperson for the Disabled People for Employment Equity was even more blunt, stating (February 24, 1992):

We have seen over the past five years an Act that has proved to be utterly useless.

Mr. Maxwell Yalden, Chief Commissioner of the Canadian Human Rights Commission, testified (February 5, 1992):

Because the real gains of persons with disability have been more than offset by those leaving the work force, there has been a net outflow…. It is worse than that, because in some areas – I think women are one and perhaps visible minorities another – even in hard economic times when there were a number of people being let go, those groups still continued to increase their hold in the work force, but the disabled went down. There was a net outflow.

One of the major problems that was identified with the initial Employment Equity Act Legislation was its lack of effective sanctions. The only monetary penalty built into the legislation was for companies who fail to report what their employment equity plans are. Unfortunately, the legislation did not provide for any monetary sanctions for companies who failed to implement these programs. Subsequently, in 1994 Bill C64, designed to amend the original Act, was introduced to Parliament. This new Bill contains three main elements to amend the original Employment Equity Act, namely: 1) The inclusion of the Federal Public Service under the Act; 2) The clarification and guidance regarding obligations of employers; and 3) The creation of a mechanism to gain compliance and employment equity.

The inclusion of the Federal Public Service under this Act will increase its coverage to approximately 900,000 employees or about 8 percent of the Canadian Labour Force. Provision was also made for an independent external agency, the Human Rights Commission, to be responsible for enforcement of employer obligations with a mandate for this organization to conduct employer audits to ensure obligations under this legislation are met. However, there has been little change in the area of sanctions with monetary ones still only being applicable to those employers who fail to report their employment equity plans. No financial sanctions are yet available for those employers who do not actually carry through on their plans. The Canadian Human Rights Commission is however, expected to negotiate written undertakings from employers to take specific measures to remedy any inequities in the employment of the designated groups. If the Human Rights Commission Officer fails to obtain a written undertaking from an employer, the Commission has the power to issue a directive to the employer to take the specified action. Tribunal rulings constitute a final step if an employer fails to act on a written undertaking or disagrees with a direction. However, no order can be made or direction given that would:

  • Cause undo hardship on the employer;
  • Require an employer to hire or promote un-qualified persons;
  • With respect to the public sector, require that people be hired or promoted in a manner inconsistent with merit under the Public Service Employment Act;
  • Require an employer to create new positions;
  • Impose a quota on an employer.

So just how far do employers have to go to create more equality in the work force under this Act? The Act specifically notes:

Every employer shall ensure that its Employment Equity Plan would, if implemented, constitute reasonable progress toward implementing employment equity as required by this Act.

The major concern here is, or course, what constitutes “reasonable progress”. To date, the experience of persons with disabilities enjoying increased employment as a result of federal legislation since 1986 has certainly been “modest” at best. Whether or not the new changes to the Act will substantially increase the employment of persons with disabilities and/or move them from “poorly paid employment ghettos” (A Matter of Fairness, Report of the Special Committee on the Review of the Employment Equity Act, May 1992) remains to be seen. Therefore, until such evidence can be documented, the complete evaluation of impaired earning capacity claims for personal injury cases need to consider this present reality of the Canadian labour market. It requires plaintiff’s counsel not only to consider the identification of alternative occupational options for their clients but to also address the reality of disabled individuals obtaining and maintaining competitive employment. In many cases, this will require assessment of the clients circumstances by both the disciplines of Vocational Rehabilitation and Economics.

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Gordon Wallace, M.A., C. Psych. is the founder and a Senior Consultant of The Vocational Consulting Group Inc. Gail Currie, B.Sc., CCRC is a Vocational Rehabilitation Consultant in the company’s Edmonton office. The company also has offices in Vancouver and Kelowna and Calgary.

Head Office: #410 – 1333 West Broadway, Vancouver, B.C. V6H 4C1 (604) 734-4115 Fax (604) 736-4841