Axe the cap on auto insurance premiums
Ican understand why many hard-pressed consumers are worried about food and housing costs (including home operation costs). They account for almost three-fifths of the average Canadian’s household budget. Given voter wrath over rising prices, politicians are scurrying in search of policies, whether smart ones such as deregulation to build more homes or silly ones such as taxing grocery companies to somehow supposedly force prices down.
Whenever auto insurance premiums spike, however, policy hell breaks loose. Sure, affordability is a problem, with both interest rates higher and real wages lower since 2021. But why auto insurance attracts so much political attention escapes me. After all, car prices themselves have soared 15 per cent since January 2021. Car insurance premiums, which range on average from roughly $1,000 in Quebec to $1,700 in Ontario, accounted for only one per cent to 1.5 per cent of household disposable income in 2022. Yet every time premiums rise, the political response is to freeze the rate. That is a surefire way of making things worse.
Even in entrepreneurial Alberta, the NDP government capped rate hikes at five per cent annually from 201519. In 2020, the Kenney government did wisely abandon price caps. But it introduced various regulatory changes to reduce insurance costs. This had a positive effect, with insurance premiums rising by only $64 (3.9 per cent) over 2021 and 2022. But with further increases looming, last year the UCP government capped premiums increases once again.
“Zap, you’re frozen!” is not a solution for improving affordability. The United Conservative Party has introduced, effective this year, three new policies: capping insurance rate increases at 3.7 per cent for drivers with commendable records; increasing government authority over premiums; and enabling flexible premium plans. But after years of governments fiddling with the market, a lot more deregulatory catch-up is needed.
The price caps have driven away insurance companies. In 2015, there were 47 operating in the province; in 2022, just 38. The exodus is no surprise: profitability is horrible. According to the General Insurance Statistical Agency, the average return on equity for Alberta private auto insurance was minus 1.1 per cent from 2015-22. The 2017-19 period was particularly desperate in that claim costs exceeded premium revenue. Profitability did recover in 2021 and 2022, with the average return to equity rising to 8.6 per cent — decent but not stellar.
A cap only for Albertans with good driving records is still a cap. Companies have to make up the loss in revenue by charging higher prices to new drivers and those who happen to have had bad luck with just one minor accident in the past six years. Even the best drivers can have an accident. To encourage safer driving, it makes more sense to provide a bonus to drivers with good experience.
Alberta is not the only jurisdiction to have capped rates. California froze them after the pandemic year and even forced companies to provide US$2.4 billion in premium refunds in 2021. Six auto insurers left the market and most companies imposed various restrictions on coverage. In 2023, rates rose by 6.9 per cent and this year Allstate came back, though only after regulators allowed it to raise its rates 30 per cent.
If Alberta wants to avoid a California-style mess, it should axe the cap. Premiums rise for unavoidable reasons. Alberta’s average claim costs rose 65 per cent in the decade 2012-22, with half the increase explained by a 35 per cent rise in auto prices. Bodily injury costs have risen even faster (by 78 per cent) in part reflecting larger settlements. That sort of cost inflation seems bound to continue. In fact, electric vehicles being more expensive than their gasoline-powered counterparts, it’s a de facto part of federal climate policy.
In addition to the three changes it has just made, Alberta has indicated it is looking at much greater use of no-fault insurance. Quebec has the lowest premiums in Canada partly because of no-fault insurance for bodily injuries. But it is provided by a public monopoly and there are complaints payouts are low. New Jersey has a tort system under which drivers can opt for cheaper insurance by giving up certain rights to sue for pain and suffering. In 2017, only 3.6 per cent of policyholders insisted on effectively paying more for an unlimited right to sue.
More and more jurisdictions rely on no-fault insurance to drive down premiums by capping the damages people can recover after an accident. But if people know they can’t be sued to cover the costs their negligent driving causes, they may drive less carefully, as discussed in a 2010 Rand study. The same study suggested U.S. no-fault insurance states have higher medical costs than tort states as claimants use auto insurance to cover unrelated medical needs.
Albertans should understand that the heavy hand of government in insurance markets can make things worse, not better. Insurance shouldn’t be measured solely by the premium charged but also by the coverage and benefits. Slamming the brakes on premiums can rear-end coverage and benefits.