ICBC: Where political expedience trumps actuarial sense

Mark Milke, Globe and Mail, February 1, 2018, B4

If governments owned grocery stores, you can bet they would control and limit the price of citrus fruits in winter when such items are in short supply. In addition, whenever such stores incurred red ink – and this despite a legislated monopoly on selling most food – the bad numbers would be blamed on a previous government; taxpayers would then be enlisted to bail out the business.

Something like this has occurred in the automotive insurance market, in the "company" owned by the British Columbia government. This week, the new NDP regime responded to bad news from the Insurance Corporation of British Columbia (ICBC). That government Crown corporation, created in 1973 by the province's first NDP government, reported it will record a $1.3-billion net loss for the fiscal year ending March 31.

The NDP blames the looming loss on the previous government, the Liberals, this because of dividends taken from ICBC over the years and transferred into general revenues. Also, that last government prevented rates from rising during the election year, this to curry favour with the public.

But the NDP can hardly claim much moral or economic superiority. ICBC has never been allowed to act like an actual insurance company, not since its creation in 1973, and not in its first operational year (1974), when it was given a monopoly over mandatory (basic) automobile coverage in the province – or ever since.

As an example, consider the earliest political decision on insurance premiums. As two chroniclers of the 1970s-era NDP government, Lorne Kavic and Garry Nixon recounted in a later book, the government promised voters in 1972 that it would mandate lower premiums than the private sector. The practical result of that promise was to ignore actuarial advice. In 1973, "the NDP caucus decided upon a structure lower than suggested by its professional advisers" – i.e., the actuaries, the authors wrote.

The result, highlighted by Vancouver newspaper columnist Vaughn Palmer this week, was that in 1975, when the Social Credit party took over from the NDP (in office from 1972 to 1975) ICBC was already short cash. The Social Credit government injected $181-million into the Crown, (or nearly $800-million in today's dollars according to Mr. Palmer) to keep automobile insurance premiums from rising.

This political interference continued under every successive B.C. government of every partisan stripe. It always results in anti-actuarial policy. For example, in its 2017 annual report, and reflecting long-held policy, ICBC trumpets how "in setting premiums, ICBC does not discriminate on the basis of age, sex or marital status."

Think about that: An insurance company that refuses to calculate premiums based upon actual risk profiles. That policy reflects how multiple B.C. governments preferred not to anger younger drivers and this even though young males ages 19-20 are three times more likely to have an accident than males in their fifties.

To defend such anti-actuarial government-run companies, claims are occasionally advanced that they operate cheaper and more efficiently than the private sector. Space does not permit a rundown of all the flawed data, specious arguments, or why private-sector premiums are highest in Ontario, but why Alberta's are lower than government-sector British Columbia.

One point: Groups and governments that advance such notions routinely ignore the available data on paid premiums – the costs of policies bought by actual drivers. Defenders of government insurance monopolies instead average millions of internet quotes to produce inflated estimates of premium costs in private-sector provinces, a flawed exercise. For example, I pay $1,100 annually in Alberta. I can find quotes at double that. Internet quotes reveal nothing about actual prices paid.

Back to British Columbia: There are a number of possible remedies for ICBC. Allowing the corporation to act on actuarial advice and set insurance rates according to risk profiles is one. After 44 years of political interference, that's not a realistic long-term remedy.

Another, which will permanently kill political interference, is to break up ICBC as the United States did with AT&T in the 1980s and allow for wide-open competition. That won't solve short-term capital reserve problems; it would, in the medium- to long-term, allow for downward price pressure, product innovation and attention to actuaries and not politicians. If the government won't go down that route, at least turn ICBC into a co-operative akin to Mountain Equipment Co-op albeit with private-sector competition to keep the new co-op-style ICBC in check.

The last thing the B.C. government should do is allow its 1970s-era creation to continue in its present form, which will always tempt politicians to interfere. That model led to four decades of a government "business" where actuarial sense was always ignored in favour of the short-term political interests of whatever party happens to be in power.

~Mark Milke is the author of the 2017 report, Political Risk: The Case for Ending ICBC's Insurance Monopoly, published by the Canadian Taxpayers Federation.