The Reality of Government-run Car Insurance

Every once in a while, an individual or group suggests that having the government own and operate a province’s car insurance business is “The Answer” to the insurance problem of the day. These people tend to believe that a government-run monopoly would lead to cheaper prices and increased benefits. While it is true that the government-run insurers in Manitoba and Saskatchewan have lower premiums in dollar terms, consumers in these systems have far fewer benefits. In Manitoba, for example, an accident victim who is catastrophically injured has no right to sue for economic losses – including future lost wages – that are over and above a predetermined amount.
What few people realize is that insurers provide car insurance within a strict framework of provincial laws and that they are supervised by a number of government agencies, including rate review boards and both federal and provincial regulators. Car insurers deliver a product that is defined by these laws and regulations.
In many cases, thoughtful and far-sighted government reforms of these laws and regulations have reduced the cost to provide insurance in many provinces and, as a result, premium prices have reduced.
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What “government-run” really means

• Huge start-up costs. Depending on where you are in Canada, the average cost to establish a government-run insurance company would be $300-$500 million. This is the money required to buy buildings, hire staff, obtain sufficient start-up capital and cover operating expenses. It includes the costs associated with providing the resources to handle all the claims, to provide insurance for all the cars in the province and to make up for the shortfall in funding for public services resulting from the withdrawal of taxes and health levies currently paid by the private insurance industry.
• Huge bail-outs. All government-run auto insurers in Canada have required taxpayer subsidies as a result of charging too little in premiums and having insufficient start-up funds. In 1975-76, BC taxpayers had to bail out their government-run insurance company – Insurance Corporation of British Columbia (ICBC) – in the amount of $181 million ($645 million in 2006 dollars), just two years after it had begun operations. This money has never been repaid. At the same time, ICBC had been so mismanaged, with insurance being sold significantly underpriced, that the government was forced to increase rates by at least 25%.
• Reduced private sector investment. Private home, car and business insurance companies directly invest in the provinces in which they do business. Direct investments include corporate shares, bonds and real estate. The size of the investment varies from province to province. In Ontario, for example, insurers’ investment in the province totals more than $6 billion.
• Limited choice for customers and poor customer service. Government-run auto insurance provides limited choice for consumers and no incentive for good customer service. It offers a “one-size-fits-all” solution for consumers (e.g., fixed deductibles, no multi-vehicle discounts). A privately run auto insurance system provides powerful competitive incentives for insurance companies to offer the lowest possible rates, strong service delivery and a wider range of policy options.
• Lack of product innovation. Government-run auto insurance companies have no incentive to understand the needs of customers. They have a captive market share. Product innovations such as first-accident forgiveness, replacement cost coverage, and roadside assistance were all available in privately run auto insurance systems long before they were adopted by government-run auto insurance companies.
• Price volatility. Consumers in the government-run systems of BC, Manitoba and Saskatchewan have experienced repeated periods of sharp rate increases with intervening periods of rate stability. Because private insurers operate under regulatory oversight, and capital and financial adequacy requirements, “rate shock” for their customers is limited, primarily, to periods of very high inflation and claims cost pressure.

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Private insurance works

• Competition works. Auto insurance is purchased competitively in almost every jurisdiction in North America. Most people believe in the free market for nearly all the products they buy. In fact, governments have deregulated several former public monopolies over the last number of years, and consumers have won every time. Thanks to competition and choice, consumers now enjoy lower long-distance telephone rates and more choice and real competition in cable television services.
• Insurance rates reflect true cost. Premiums in a competitive environment reflect the real cost of insuring a driver. Auto insurance premiums are set based on a host of factors that affect the frequency and cost of claims. The likelihood of being involved in a collision or having a vehicle stolen, geography, type and age of a vehicle, insurance claims records, other drivers in the household who use the vehicle, driver age, driving records, driver gender and traffic congestion all affect risk and claims. It's the cost of claims, more than anything else, that determines the premium level for consumers. Unlike private insurers, government-run auto insurers have been able to increase rates without ever having to apply for a rate increase. Government insurers have increased the number of claims paid directly by the customer by increasing deductibles, and have moved more drivers into higher-priced territories by making changes to insurance rating territories.
  
• Employment. Private auto insurance systems provide vital injections of investments, jobs and taxes into regional economies. The private insurance industry in Canada employs almost 100,000 people, either directly or through its support of a broker workforce.
  The argument that is always presented by those promoting government-run monopolies is that the monopoly provides often much-needed jobs. This is simply not true; in fact, jobs and investments increase when more companies compete for business.