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No-fault auto insurance was supposed to benefit accident victims. Instead, a vast parasitic industry is siphoning off the money and sending costs soaring.

On a misty evening in December, 2015, Michele Chandler was driving north on University Avenue, a crowded Toronto thoroughfare, after picking up her husband from the train station. Suddenly, she noticed a large cube van drifting into her lane. "I'm watching my car literally crumple," she recalls.

Both vehicles pulled over and tried to entice the police to the scene. Eventually, a cop in a passing cruiser instructed Chandler to get herself towed to a collision-reporting centre in a northeast suburb.

Chandler did as she was told. At the centre, a privately run facility at the ragged end of an industrial back street, she provided answers to scores of detailed questions from an intake clerk and then gave a statement to the police. By the time she had paid cab fares and towing charges, and factored in the deductible, Chandler was out hundreds of dollars. "For doing nothing, we were out of pocket before the car was ever fixed," she says indignantly. "And none of it was our fault. There's a lot of inside trading and surplus expense layered on over the years that no one seems to question."

Each year, tens of thousands of Ontarians make auto insurance claims for everything from fender-benders to cataclysmic, life-altering accidents. They do so on the seemingly reasonable assumption that their premiums, dutifully paid year after year, will provide coverage.

As in almost all jurisdictions, auto insurance in Ontario is not optional. The current system dates back to 1990, when the government introduced "no-fault" insurance, meaning accident victims could make claims regardless of who was liable. The change was accompanied by a generous schedule of accident-related benefits, which covered not just medical treatments and rehabilitation but also indirect outlays, such as compensation for helping relatives recover.

While no-fault insurance may be based on the noble principle of putting accident victims first, what soon becomes apparent to those who enter the system is the staggering proliferation of companies and specialized subindustries looking to scoop some of those coverage dollars before they trickle down to the injured parties. The situation in Ontario is particularly fraught. Its drivers pay $12 billion in premiums each year, which represents almost a quarter of Canada's $52-billion property and casualty industry. Through the latter 2000s, Ontario premiums ballooned, and they now stand 30% higher than those in Alberta, 28% above B.C. and 70% above Atlantic Canada, according to the Insurance Bureau of Canada (IBC).

It's possible to think of that huge sum as a roaring river of cash. Between the insurers and the individuals downstream, all sorts of for-profit players are siphoning off dollars: towing companies, autobody shops, medical assessment chains, physicians who conduct patient evaluations for insurers, forensic accountants, investigators, claim adjusters, rehab clinics and personal injury lawyers. And let's not forget the insurance companies, which until 2014 were permitted returns on equity in excess of 11% on their insurance business. This elaborate ecosystem is ultimately focused on a tiny population: Only 1% of insured passenger vehicle operators make an insurance claim in a typical year.

Finally, there are the fraudsters. A 2012 provincial review estimated that fraud likely played a significant role in an "unexplained" $2 billion paid out annually in accident benefits between 2005 and 2010. A year earlier, a report by the Financial Services Commission of Ontario (FSCO) put the average insurance payout for an accident at $56,000—more than five times higher than in other provinces. The latest public evaluation of the system suggests the gap hasn't closed.

The upshot for the driving public is that while premiums continue to creep up, less and less of that huge sum is reaching accident victims. As Greg Somerville, CEO of Aviva Canada (the only insurer contacted for this article that agreed to comment), points out, Ontario households now spend 4.7% of their average monthly disposable income on auto insurance. Whether accident victims are getting value for that outlay, he adds, "is highly questionable."

How did the system get so bloated? And where is all that money going? More than a year ago, Ontario Finance Minister Charles Sousa commissioned an investigation to answer those questions—and to find solutions. The report is supposed to be released this spring. In the meantime, here is a guided tour of how some key players contribute to the multicar pileup that is Ontario's no-fault insurance system.

1. The Collision Reporting Monopoly

Steve Sanderson was one of the first entrepreneurs to figure out how to capitalize on the no-fault system. A former towing-company owner who had contracts with the Toronto Police Service, Sanderson now runs Accident Support Services International (ASSI), a fast-growing collision-reporting chain. Tow trucks and accident victims bring banged-up vehicles to ASSI's facilities, where clerks gather information about accidents, and police check the vehicles and take statements.

Sanderson, a robust 60-year-old with the worldly manner of a veteran detective, recounts how he heard constant gripes in the early 1990s about the hours it would take police to show up to accident scenes. He also knew first-hand about dodgy tow-truck drivers accepting "commissions" from body shops, whose operators, in turn, would wildly overcharge insurance companies for fender-benders. "Our program," he says, "has been very successful in short-circuiting this."

Sanderson has established a seemingly impregnable position in Ontario's auto insurance ecosystem. As the exclusive provider of a service once grudgingly delivered by the police, ASSI enjoys a monopoly in every large and mid-size municipality in Southern Ontario. It charges operating costs, plus a 10% premium, to insurance companies, which view ASSI facilities as an easy way to connect with policyholders and get prompt access to the data their adjusters need to process claims. The company now counts 90% of Ontario's auto insurers as customers.

A decade ago, Sanderson invested in an analytics system that searches for trends hidden in the vast amount of accident data his clerks gather. Today, ASSI slices that information into reports, some of which it sells to municipalities. As the sole provider of a service on which insurers, municipalities and accident victims all rely, the company has carved out an enviable niche. There's no evidence the province has questioned ASSI's unique position.

II. The Medical Treatment Game

Starting in the late 1990s, word began to circulate about a proliferation of fly-by-night physical rehabilitation clinics. Patients would be asked to presign authorization forms, which the clinics would use to order a range of medical assessments and treatments, generating huge fees that were then charged to insurers. "I would walk into some of these clinics, and there was nothing but dated exercise equipment with no supervision in a plaza storefront," says Sebastian Gallagher, a former insurance-claims adjuster who now works for a law firm. A 2012 provincial task force on auto insurance fraud found that some clinics paid "substantial referral fees" to tow-truck operators, body shops, paralegals or referring physicians.

Laurie Davis, who for years co-owned a rehab company that served communities in Eastern and Central Ontario, confirms she saw the number of shady operators grow last decade. "Of course there was fraud," she says. Some of Davis's patients were car accident victims, and as regulators imposed stricter licensing regulations and caps on benefits in 2010, she sold her practice and set up a lobby group, Ontario Rehab Alliance, to make sure the legitimate players didn't get lumped in with the dodgy outfits. "We saw the dragnet fishing approach," she says. "Instead of focusing energy on litigating fraud, the government reduced accident benefits. To us, that's a horribly misguided approach."

While the crackdown has placed more focus on fraud and produced a consolidation in the rehab industry, it's also had some unintended consequences. One Toronto health professional, who is paid out of accident benefits and asked not to be named, says the increased scrutiny has led to wait times of six to 12 months for treatment of major brain injuries sustained in car crashes. "People may not be getting the rehab [they need] because they're waiting to get a determination" of whether their conditions meet the new criteria, she says.

Davis notes that serious injuries should be treated as soon as possible, because delays tend to extend recovery time—which, in turn, adds to costs. Yet each new set of accountability rules has slowed the process of connecting victims with treatments and has raised the administrative expense of claims.

III. The Fraud Trackers

Rehab clinics, of course, weren't the only area where fraud spread in the wake of the 1990 no-fault rules. The provincial task force estimated that between 2005 and 2010, the total cost of claims had surged by 150%—even though the number of claims had increased by only 30% in that period. It identified $300 in "unexplained" benefit costs per registered passenger vehicle and suggested "fraud played a significant role."

Today, auto insurers spend millions each year on fraud prevention. Aviva, for example, has a team of 55 employees who do nothing but identify and investigate fraudulent claims. Some companies also outsource fraud tracking, which in recent years has spawned much lucrative work for private investigators, paralegals, forensic accountants and fraud examiners.

Some services are highly specialized. For example, Steve McIntyre, a certified forensic investigator and former cop, is retained by insurers to verify the income of self-employed accident victims making claims for "income replacement" benefits. He reports that the volume of referrals has risen steadily, as more people are joining the so-called gig economy as freelancers and contractors, and usually don't receive employer tax slips confirming their income.

Looking to improve the efficiency and effectiveness of fraud tracking, nine of Ontario's top insurance companies banded together four years ago to form Canadian National Insurance Crime Services (Canatics). The non-profit uses the insurers' combined claims data to scan for anomalies suggesting fraud and then passes any leads to the affected insurer. The investment, whose cost is borne by insurers, is necessary. "The only way to fight fraud is to collaborate," says Ben Kosic, a former KPMG partner who heads Canatics. "We're never going to get one step ahead of the fraudsters, but we don't have to be four steps behind."

IV. The Legal Ambulance Chase

Earlier this year, the Law Society of Upper Canada came down hard on the marketing and billing practices of the profession's personal-injury segment. The oversight body clamped down on hefty fees—up to 30% of net legal fees—lawyers generated from other lawyers merely for referring clients to them, and imposed tougher rules on advertising by personal injury firms. "Credentials and other conditions of competency are being lost among this flood of advertising," Deanna Gilbert, a Thomson Rogers partner, told Law Times.

Those ads ultimately aim to entice accident victims to sue for larger insurance payouts. The amounts are substantial. Across Ontario, tort costs accounted for 24% of auto insurers' total expenditures in 2015. Aviva's Somerville estimates that about a third of his company's claims costs go to cover bodily in-jury claims.

All of those lawsuits create a need for specialized paralegals like Sebastian Gallagher. Soft-spoken and relentlessly earnest, Gallagher analyzes accident benefits for Toronto firm Neinstein. A one-time accident victim himself, he spent years working as an accident benefit claims adjuster for a series of auto-insurance firms. Eight years ago, just as Ontario was beginning to crack down on fraud and rein in accident benefits, Gallagher switched sides. He now uses his insider knowledge of insurers to help lawyers arbitrate clients' claims and understand the limits of the complicated system.

Reforms instituted in 2010 have made it increasingly difficult to claim accident benefits, Gallagher says, and the amounts available are smaller. Additionally, the cost of medical assessments insurers require to process claims are deducted from the total. Last summer, the province further capped certain benefits related to catastrophic injuries from $2 million to $1 million. Personal injury lawyers are outraged by the changes. "The process has become unduly complicated," fumes Adam Wagman of the Ontario Trial Lawyers Association (OTLA). "Victims are constantly having to prove how sick they are to obtain the benefits they need."

The lawyers, of course, also take a hit, as their 30% contingency fee applies to smaller payouts.

V. The Insurance Racket

Depending on whom you ask, Ontario's insurance underwriters are either the victims or the prime beneficiaries of the current system morass.

The industry, which generates income from underwriting activities and the performance of investment portfolios, dominates Canada's property and casualty sector. For years, firms vied to sell auto insurance here because regulators allowed double-digit returns on equity (ROE). In 2014, in response to criticism about high ROE targets, the FSCO switched its benchmark to a return on premium, which now stands at 6%.

For years, insurers have complained that despite its size, Ontario is not a profitable market for auto policies. And the industry has not offered the province's drivers much relief. Last year, rates dropped by just 1.4% and by 1% the year before—well below the 15% reduction by 2015 the provincial government set as a goal in 2013.

Insurers point their fingers at lead-footed regulators, fraud artists, rapacious personal injury lawyers and various other parties for both keeping premiums high and obstructing or diverting the cash that should flow to accident victims. Pete Karageorgos, Ontario director of consumer and industry relations for the IBC, argues that despite the recent caps, Ontario's accident benefit rates continue to exceed those in other provinces. "Why is it that people can heal faster in Alberta than here in Ontario, and at less expense?" he asks pointedly.

Critics, however, see a different picture. A 2015 study commissioned by the OTLA concluded that insurers overcharged policyholders by a combined $1.5 billion in 2013 and 2014, due to what the researchers assert are high premiums and profit margins. What's more, the province's move last summer to slash maximum payments for catastrophic injuries directly benefits the industry's bottom line.

Lawyers also highlight the significant sums insurers spend re-diagnosing accident victims. Wagman of the OTLA says half of all claimants are sent for independent medical assessments requested by adjusters to confirm the required treatment and, ultimately, the size of the benefit. He says the average cost per person assessed is now $5,200, while the average treatment cost is $4,700. "The insurance companies spend more money assessing victims than on treatment," Wagman says. "That's a fundamentally broken system."

The lawyers and the insurers don't agree on much, but they do concur that regulators bear much of the blame for the mess the auto insurance sector has become. Excessive regulation has driven up claim-processing costs and spawned various parasitic industries, says Karageorgos. "Everyone has their hand out instead of trying to help injured consumers."

Insurers are urging regulators to facilitate their efforts to test-drive new products they say could lower premium costs, such as pay-per-use policies that are gaining traction elsewhere. Such policies base rates on readings from "telematic" devices, which track mileage and driving style. People who drive cautiously or don't use their cars much could see their rates drop. Four years ago, the FSCO allowed only limited use of such policies, so the technology has been slow to catch on. With the province harping on excessive premiums, it's easy to understand the industry's impatience with the accompanying regulatory inertia.

While the various players offer vastly different diagnoses of what ails the system, most agree it desperately needs an overhaul. Which is why everyone is anxiously awaiting the findings in the latest report. The province's auto insurance sector has seen waves of reform in the past decade, at least some of which added to the costs and confusion. Tinkering is no longer enough. "This system is broken beyond repair," says Wagman. "It needs to be blown up, and we need to start all over again."