Fraser April 2004 AUTO INSURANCE SERIES Alert Market solutions to public policy problems

Lemons and Peaches: Comparing Auto Insurance Across Canada

Introduction Myths abound on the issue of public versus Main Conclusions private auto insurance. Some people posit • Provinces with public auto insurance have the that public auto insurance is safer, cheaper, less discriminatory, and more generous than highest premiums and the lowest claims payouts private insurance. in Canada, producing low auto insurance value (claims payouts compared to premiums) None of these claims are true. In fact, the exact opposite of these statements is a closer • Provinces with public auto insurance also have a description of reality. high number of claims per driver, between two For example, the firstFraser Alert in this auto and four times the number in the private sector, insurance series presented data showing pointing to lax system management that vehicle collision rates are higher in • Insurance value has been falling in provinces with the provinces with near-monopoly public public auto insurance systems for the past eight auto insurance than elsewhere in Canada. years and rising in provinces where drivers are The use of “social risk pricing,” whereby insured by the private sector riskier drivers are subsidized by the rest, also leads to deliberate premium discrimination • The Atlantic provinces provide the best insurance value on these measures, with low premiums and higher-than-average claims payouts. Alberta and Mark Mullins is the Ontario have higher premiums but also pay the Director of Ontario Policy highest claims in Canada. All are peachy deals. Studies at the Fraser • By comparison, the public sector auto insurance Institute in Toronto and is a columnist with systems are lemons, combining high premiums globeandmail.com. with very low claims payouts He has a doctorate in • BC’s public system is the most extreme case, economics from the with an average premium 20 percent above the London School of Economics and was national level and an average claim 50 percent formerly a chief economist in the below the national level. The equivalent of almost financial markets and a public policy consultant. 40 percent of BC drivers make a claim every year. against safer drivers, who are occurs. Though insurers act as Comparing Claims Payouts predominantly older, more exper- intermediaries in this process, ienced, and female—and are more the fundamental truth is that With that starting point, figures numerous.1 the system is a self-insuring one, 1 to 3 show average claims by with funds circulating between province. The appendix discusses Two later publications investigated policyholders. data and analytical issues assoc- the issue of premium levels and iated with calculating the statistics premium growth by province.2 An important measure of auto presented in this report. insurance value is whether the This research found that provinces insurer is collecting more, about There are two conclusions to draw with public auto insurance schemes the same, or less than the amount from this inter-provincial claims have relatively high premiums, of premiums necessary to pay the comparison. partly owing to tax subsidies and costs incurred by those who are inadequate financial reserves. First, average claim payouts insured. Not collecting enough Average premium levels have in the private sector are much can lead to bankruptcy, while also been rising in all provinces, higher than those in the public collecting too much is wasteful. whether vehicles are insured sector, especially in Manitoba Collecting about the same as the publicly or privately, contrary and BC. Claim payout levels amount paid out means that the to Statistics Canada’s consumer in Saskatchewan and Quebec, insurer is acting as an efficient price indices, which inaccurately which have publicly-provided agent on behalf of those insured. measured auto insurance premiums auto insurance, are half those of for a number of years in the late Therefore, the effectiveness of Ontario, the province with private- 1990s. auto insurance can be assessed by sector auto insurance that paid out comparing the average premium the highest average claims in 2002. The present Fraser Alert extends paid with the average value of a Claim payout levels in Manitoba this line of analysis to assess the claim, somewhat akin to a cost- and BC, which also have publicly- degree to which provincial auto benefit type of calculation. The provided auto insurance, are about insurance systems offer good insurance product has more value 70 percent lower. insurance value for money. in the hands of a claims recipient Second, private sector payouts Insurance can be seen as a pooling if the claims payment-to-premium have been increasing over time, of risk, with all policyholders ratio is relatively high. It is also in while those in the public sector paying premiums to ensure the interests of all policyholders to are relatively stagnant and are that some receive benefits if a keep the number of claims low, so declining after adjustment for collision, theft, or other misfortune as to keep average premiums low. general inflation. Of the public

Figure 1: Average Claim (Private Sector Provinces) Figure 2: Average Claim (Atlantic Provinces) $8,000 $8,000

New Brunswick Nova Scotia $6,000 $6,000 PEI Nfld & Labrador

$4,000 $4,000

$2,000 $2,000

Ontario Alberta Atlantic $0 $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

2 Fraser Alert Lemons and Peaches: Comparing Auto Insurance Across Canada 3 Figure 3: Average Claim (Public Sector Provinces) Figure 4: Claims per Driver (Private Sector Provinces)

$4,000 20%

16% $3,000

12% $2,000

8%

$1,000 BC Saskatchewan 4% Manitoba Quebec Ontario Alberta Atlantic $0 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Figure 5: Claims per Driver (Atlantic Provinces) Figure 6: Claims per Driver (Public Sector Provinces) 20% 40%

New Brunswick 16% 32% Nova Scotia

PEI 12% 24% Nfld & Labrador

8% 16%

4% 8%

BC Saskatchewan Manitoba Quebec 0% 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

insurers, only Manitoba, with a claims are the most powerful force The six provinces with private nominal growth rate of just over 4 behind rising average claims in sector auto insurance (Ontario, percent annually for the past eight every province, while growth in Alberta, and the Atlantic region) years, saw a significant rise in its collision claims has typically been have annual claims rates of average claim payout. slower. between almost 8 percent and 10 percent. Quebec, with its mixed More detailed data from the public private-public system, has a sector monopolies are difficult to claims rate one-third higher at obtain. Comparing Frequency of Claims 13 percent. BC, meanwhile, with However, a closer look at the type a purely public auto insurance of claim by province shows that Figures 4 to 6 show another system, is tops, with a claims rate the private sector makes collision striking difference between the at over 38 percent. Manitoba and and accident benefit payouts two two auto insurance systems: the Saskatchewan also have very high to three times higher than do the frequency of claims per driver claims per driver.3 public sector insurers in either is much higher in the provinces Unlike the average claims payout Manitoba or BC. Whether the where vehicles are insured with a comparison, the frequency of insurance system in the province public program. claims against private sector is private or public, personal injury

2 Fraser Alert Lemons and Peaches: Comparing Auto Insurance Across Canada 3 insurers are declining, while those In British Columbia, collision Comparing Premiums against public auto insurers are claims per driver are three to rising. This is a key measure of six times higher, comprehensive Figures 7 to 9 show average auto efficiency in an insurance sys- claims frequency is 20 percent to insurance premiums by province. tem, as a high frequency claims As these numbers have been two times higher, and accident 4 rate indicates payouts that are benefit claims per driver are five presented in earlier research, unrelated to the underlying risk to ten times higher than in the only the broadest conclusions of the insured pool. The private provinces with private sector auto will be discussed here. See the system thus seems to be better insurance. Similarly, Manitoba appendix for more on the premium managed than the public system property damage claims frequency calculation approach. on this measure and is improving is skewed higher. Property damage The four provinces with public its management performance over claims are also an important factor sector auto insurance had time. pushing claims frequency higher in relatively high average provincial many provinces. Again, more detailed evidence premiums in 2002. Drivers in BC supports these conclusions regard- paid the most at just over $1,000 ing the overall number of claims per year, which is 20 percent per driver. above the premiums paid in the

Figure 7: Average Premium (Private Sector Provinces) Figure 8: Average Premium (Atlantic Provinces)

$1,100 $1,100

New Brunswick Nova Scotia

PEI Nfld & Labrador $900 $900

$700 $700

$500 $500

Ontario Alberta Atlantic

$300 $300 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Figure 9: Average Premium (Public Sector Provinces) FigureFigure 12:10: Claim-to-Premium RatioRatio (Public (Public Sector Sector Provinces) Provinces)

$1,100 9 BC Saskatchewan Manitoba Quebec

$900 6

$700

3 $500 BC Saskatchewan Manitoba Quebec

$300 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

4 Fraser Alert Lemons and Peaches: Comparing Auto Insurance Across Canada 5 provinces with the next three should therefore generally reflect and Alberta have high premiums highest rates: Ontario, Manitoba, the trend in claims frequency, with but they also have the highest and Alberta. Saskatchewan and higher claims frequency leading to claims payouts. Saskatchewan and Quebec had mid-range premium lower insurance value. Quebec have mid-range premiums rates, while the lowest premium but low claims payouts. BC and Figures 10 to 12 show the levels rate was in PEI. Manitoba have an unattractive of, and changes in, insurance combination of high average In all provinces, premiums have value by province. Insurance value premiums and low average claims, been increasing. The Canadian improved noticeably during the and also have very high and annual average premium growth 1990s in the private sector, while it growing claims per driver. rate over the eight years to gradually declined in the provinces 2002 was 2.8 percent. Only with a public auto insurance These combinations are BC’s premiums grew at a rate sector. highlighted in figure 13, where noticeably slower than that average premiums and claims For example, in Ontario, where national average, with Quebec payouts are plotted. The ideal drivers are covered by private auto matching the national premium location is the southeast quadrant insurance, average claims were growth rate. five times higher than average premiums in 1993; the ratio was Table 1: Auto Insurance Ranking over 8-to-1 in 2002. Comparing Insurance of Provinces Value By contrast, insurance value in Lowest Highest Insurance all of the provinces with public Province Premium Claim Value Insurance value is defined here sector auto insurance continuously NF 2 4 1 as the average claim payout declined in the 1990s and the NB 6 1 2 compared to the average premium. ratio of average claims to average NS 3 5 2 A higher ratio indicates more value premiums ranged between 2 times ON 8 2 3 and an increasing ratio is reflective and 5 times in 2002. AB 7 3 4 of rising value. PEI 1 6 5 Table 1 shows the ranking of PQ 4 7 6 Ultimately, total premiums and premiums, claims, and insurance SK 5 8 7 total claims payouts must balance value by province. MB 8 9 8 (absent changes in invested BC 10 10 9 The Atlantic provinces offer the premium returns) to preserve Note: 1 is best ranking, 10 is worst ranking best deal, with relatively modest financial solvency in the system. in 2002. premiums and higher-than- Source: Author’s calculations from IBC and Over a long period, insurance value average claims payouts. Ontario insurer reports.

FigureFigure 11:10: Claim-to-PremiumClaim-to-Premium RatioRatio (Private(Private Sector Provinces) FigureFigure 11: 12: Claim-to-Premium Claim-to-Premium Ratio Ratio (Atlantic(Atlantic Provinces)

12 12 Ontario Alberta Atlantic

9 9

New Brunswick 6 6 Nova Scotia

PEI

Nfld & Labrador 3 3 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

4 Fraser Alert Lemons and Peaches: Comparing Auto Insurance Across Canada 5 (low premium and high claims Figure 13: Provincial Average Premiums vs. Average Claims payout) and the worst position $1,100 is the northwest quadrant. This highlights the large $1,000 BC difference between first-ranked $900 Newfoundland and Labrador and MB AB ON last-placed BC. $800 SK QC NB Premiums $700 NS PEI NL Recommendations $600 • Public insurance monopolies $500 have relatively high premiums, $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 yet make claims payouts that Claims are fractions of those made by the private sector. This produces inferior insurance value. Appendix All of the data in this Fraser Alert come from Statistics Canada, prov- • Public insurance systems are incial ministries, the Insurance Bureau of Canada, and the annual also marked by very high rates reports and publications of the monopoly public insurers. of claims per driver, indicating that claims are in excess of those Claims amounts are based on incurred claims excluding associated justified by insurance pool risks. costs. The claims are “developed,” thus including estimates of future costs from ongoing claims. Average claims are calculated as total • Provinces offering private claims divided by the number of drivers. sector auto insurance produce lower premiums, higher claims Private passenger claims growth is used from 1993 to 1997 for Ontario, payouts, and lower claims per Alberta, and the Atlantic region and all vehicles claims growth in driver—all superior outcomes those provinces thereafter. SGI Canada claims growth is used after compared to the provinces with 1996, as Saskatchewan Autofund data are unavailable. SAAQ claims public auto insurance. growth was used after 1999 for Quebec private sector auto insurance growth for a similar reason. • To address these issues, a program of privatization Premiums are calculated as total premiums (adjusted for tax and and market restructuring in reserve subsidies in the public sector) divided by a weighted base of provinces with public auto drivers, driving age population, vehicles, and policies. insurance schemes would encourage new business entrants and better respond to consumer demand for Notes auto insurance. It would also 1 See “Public Auto Insurance: A Mortality Want to Know More? depoliticize this state-run Warning for Motorists,” Fraser Alert, Fraser Institute, September 2003. Other relevant resources: system, which misprices risk and encourages excessive claims 2 See “Two Hundred Bucks More: The • www.ibc.ca Premium Cost of Public Auto Insurance,” usage, in an effort to provide Fraser Alert, Fraser Institute, November • www.icbc.com benefits to a broader-than- 2003 and “Auto Premium Inflation: How • www.mpi.mb.ca optimal group of policyholders. StatsCan Rocked the Bank of Canada,” Fraser Alert, Fraser Institute, December • www.saaq.gouv.qc.ca 2003. • www.sgi.sk.ca 3 Of the public insurers, only Manitoba acknowledges this high claims rate in its • www.fraserinstitute.ca public reports. 4 See “Two Hundred Bucks More: The Premium Cost of Public Auto Insurance,” Fraser Alert, Fraser Institute, November 2003.

6 Fraser Alert