Debates about government vs. private auto insurance should use facts

Mark Milke, Financial Post, October 25, 2023

To understand the anti-reality, fake-news age we live in, consider the spurious claims that are regularly made about auto insurance. I’ve followed media, advocacy and government rhetoric about the cost of car insurance for two decades. Here’s how it happens: Some advocacy group or “public” (i.e., government) auto insurance company produces a study claiming that provinces with private-sector insurance have absurdly high costs relative to provinces where government corporations have a monopoly on basic/mandatory auto insurance.

The monopoly provinces (British Columbia, Saskatchewan and Manitoba) are then assumed by the media and public to be relative bargains. Amidst the fuss caused by the stories, governments running both types of systems (public or private) often then step in and cap auto insurance premiums.

Thus in January this year, just before the provincial election, private-sector Alberta froze auto insurance premiums. In the same way, over the past two decades B.C. politicians have periodically ordered government-owned Insurance Corporation of British Columbia (ICBC) to freeze rates — whenever reality, in the form of soaring repair costs, high injury claims, statistically poor drivers, i.e., the young, and a lack of competition all combined to send auto insurance premiums higher.

The end effect is the same regardless of province: Any actuarial basis for insurance prices is thrown out in favour of short-term politics. But freezing auto insurance premiums does not change underlying reality. Unable to cover their costs with higher rates, auto insurance companies will operate at a loss, have less available capital and/or provide fewer options and less desirable coverage than they otherwise might. The same dynamic occurs in the public-sector provinces.

In some instances, price caps also mean less competition. When Alberta imposed its price freeze, one unnamed insurance company with 16,000 clients announced it was leaving the province. No surprise there: When politicians make the marketplace uneconomic, capital will flee to other jurisdictions.

Nate Horner, Alberta’s finance minister, recognized that long-term price caps are unsustainable when earlier this year he said that “it’s something we can’t leave on forever,” hinting he recognized market realities. But his government shouldn’t have imposed a cap on insurance rates in the first place — as if insurers were immune to soaring input costs.

No politician, of whatever political stripe, would restrict what farmers can charge for food or ranchers charge for beef. Policy-makers rightly grasp that anti-reality policies would lead to shortages, less competition, declines in quality — or maybe all three. But it’s the same in auto insurance.

So why do we repeatedly get price freezes for car insurance? There is a standard problem with activist and government-produced or -contracted insurance reports and it’s not the likely bias of the source. (I’ve just written up a report on auto insurance that was paid for by insurers so I too could be accused of bias.) Rather, the problem is in the methodology they use.

A clear example is a report EY prepared for B.C.’s government-owned ICBC earlier this year. EY used hard data — actual paid premiums — for provinces such as B.C., where basic/mandatory auto insurance is provided by government corporations. But it then used internet quotes instead of available real data for private-sector provinces. That apple-banana comparison is a problem: internet quotes do not represent reality. I currently pay $1,350 for my Alberta auto insurance but I can find internet quotes at double that. But I’m obviously not going to pay $2,700 when I can get $1,350. I’m not even going to pay the average of the two ($2,025). I’m going to pay $1,350. And so will other consumers.

Predictably, the B.C. government promoted the EY report as proof government-provided auto insurance is preferable to competitive, private-sector provinces. Wrong. The most accurate prices are the ones consumers actually pay. What actual written premiums show is that although Ontario recorded the highest premiums in seven of the 11 years from 2012 to 2022, B.C.’s premiums were highest in the four years 2017 to 2020, inclusive. And B.C. would have continued to be the highest-priced province except that it moved to so-called “no fault” insurance as of 2022, a year in which it still recorded the third-highest average cost after Ontario and Alberta.

That Ontario had the highest insurance premiums for a number of years does not mean its insurers are gouging consumers or that Ontario auto insurance is a bad deal relative to B.C.’s. Differences in costs also have to be considered. In 2022, Ontario’s total average claim size was $13,537, Alberta’s was $12,309 and B.C.’s just $4,313. The lower B.C. number is because of no-fault insurance, but before wishing for that keep in mind that no-fault means lower, one-size-fits-all payouts to accident victims. In short, you get what you pay for and in government-run provinces, you get less.

When analyzing auto insurance premiums, input costs matter and so do real data. Governments should base policy on both, not on internet-derived data not relevant to real-world costs.

Mark Milke, an independent policy analyst, is author of several studies of automobile insurance in Canada. His latest, Reality Matters: Facts about automobile insurance in Canada, was written for the Insurance Bureau of Canada.