Ontario consumers may have overpaid for auto insurance by $3 billion to $4 billion between 2001 and 2013, according to a study done for the Ontario Trial Lawyers Association.

In 2013 alone, they may have paid $840 million more than they should have to insure their vehicles, according to the study by Fred Lazar and Eli Prisman, professors at the York University Schulich School of Business.

The OTLA is calling on Ontario's auditor general to review how auto insurance rates are set in Ontario.

Of particular interest are the tools used to set the return on investment for auto insurance companies.

"Auto insurance companies in Ontario have had a relatively free ride during the past 20 years," Lazar wrote in the report, released Friday.

Room to reduce rates

He said there is significant room to reduce rates by as much as 7.9 per cent based on 2013 data about profit in the insurance industry.

The study looked at how the Financial Services Commission of Ontario (FSCO), which regulates auto insurance, calculates returns on investment in the industry.

Lazar found the KMPG study which the FSCO used to set a return on premiums rate for the industry was flawed, as it underestimated industry profitability.

The FSCO sets a return on premium benchmark of six per cent in the auto industry. That is the equivalent of a 12 per cent return on equity, the study said.

Lazar recommends return on equity as a more appropriate tool to measure industry profitability. He says Ontario should set return on equity of 5.7 per cent, about half the level it is now.

FSCO said in an email it has just received the report and is in the process of reviewing it.

Industry is profitable

The study looked at 18 companies that dominated the auto insurance sector in Ontario and found they had returns on equity of 14.9 per cent in 2012 and 17.5 per cent in 2013, considerably above the benchmark set by the province.  

It acknowledged the insurance industry can be cyclical, with periods of low return leading to higher premiums, but argued the auto insurance industry has had high returns for 20 years.

In 2013, the Ontario government promised to reduce auto insurance premiums by 15 per cent and made efforts to reduce fraudulent claims in the industry.

The study did not assess that effort, though it said there was evidence that claims had been reduced.

A spokesman for Ontario's Minister of Finance said the province is committed to reducing auto insurance rates, but that "reviewing the financial statements and economic activity of private companies is not within the Auditor General's mandate."

In 2012, Ontario had the lowest number fatalities in auto collisions per 100,000 drivers and a number of injuries lower than the Canadian average, according to figures from the Conference Board of Canada.