Car Insurance

Car Insura


Whenever you get behind the wheel of a car, it is possible that you may cause damage to other people’s property, or injure – or even kill – yourself, other drivers, passengers or pedestrians.
Mandatory Insurance Coverage
Most people don’t have the money to pay for the losses (property damage, injury, death) they might cause while driving, so governments require drivers to carry a certain amount of insurance to cover any losses they might cause others to suffer (Liability).
Some governments, including those of every province and territory in Canada, also require drivers to carry coverage for their own medical expenses and loss of income resulting from driving-related injuries (Accident Benefits/Bodily Injury or AB/BI).
Optional Insurance Coverage
You can also voluntarily purchase additional insurance for your car, including:
  • Coverage for damage to your car (Collision)
  • Protection against theft, vandalism and other perils (Comprehensive)

How Insurance Works

While it may seem complex, insurance is really quite simple: The payments (or premiums) of the many pay for the losses of a few. Your premiums go into a large pool, if you will, at your insurance company. The claims of the few are paid from that pool. Because there are more people contributing to the pool than there are making claims, there is always enough to pay the claims – even large single claims like when someone is permanently disabled as a result of a car collision, or many smaller claims like those resulting from a natural disaster. (The 1998 ice storm that hit parts of Ontario, Quebec and New Brunswick resulted in an estimated 700,000 claims for damage totalling $1.4 billion.) However, large disasters (such as the ice storm) do come close to emptying the pool.
The Pool

Insurance for insurance companies

Even when the pool comes close to emptying, there is another pool from which insurance companies can draw to pay claims. Some of your premiums are used by your insurance company to buy reinsurance – insurance for insurance companies. Sometimes losses are so big – like those resulting from an earthquake – that there is no way that an insurance company can cover the costs. Reinsurance is an extra layer of protection against large losses.

Annual replenishing

Your insurance is an annual contract, so the pool operates for only one year at a time. Your premiums and the premiums of others are based on how much money the insurance companies think they will need to pay the coming year’s claims. Your premiums do not build up over the years – unlike the premiums for some types of life insurance. 

How premiums are calculated

Within reasonable limits, some of which are prescribed by law, your premium is calculated to reflect the probability that you will make a claim – that is, that you will draw funds from the insurance pool. Those who are unlikely to draw from the pool pay less than those who are more likely to draw from it.
Insurers take many factors into consideration to determine the likelihood that you will make a claim. A common misconception is that a policyholder who has never made a claim should pay less, little or nothing for insurance. While it is true that past claims history is important, a more reliable indicator of how likely a person or business is to make a claim is the statistical group to which he/she/it belongs.

Industry earnings

Insurance companies generally do not make money on the premiums gathered from policyholders. In 2005, insurance companies paid more than $21 billion in claims while taking in $35 billion in premiums. The difference between the premiums and claims, in this case $14 billion, is used by the companies to pay salaries and taxes ($6.2 billion in 2005), and to cover the overhead costs (such as electricity bills) of running a business. It is also used to pay the administrative costs of settling a claim. 

Insurance pays for …

Insurance pays for only those types of losses described in your contract. It is very important that you read your policy and/or talk to your insurance representative about what you are covered for and what you’re not. Insurance will not pay for every problem that you may encounter, nor is it a maintenance contract. Insurance is generally intended – and priced accordingly – to help policyholders cope with the financial consequences of unpredictable events that are "sudden and accidental."  If, for example, you live on a floodplain by a river, flooding of your property in the spring is not sudden or accidental; it is inevitable and, therefore, uninsurable. 

What My Insurance Company Does With My Premiums


There are some common and persistent misconceptions about what insurance companies do with the money they collect from you and every other policyholder. Some people think it sits in the bank until someone makes a claim. Not true. Others believe that premiums go to pay for claims that have already happened. Not true either.
Your premium dollar travels a long and winding road, but, in the end, most of it goes to assist consumers in one way or another. For example, if you suffer a loss, a portion of your premium dollar and those of several other policyholders finds its way back to you, to help you recover.

For the record, this is what happens to your premiums:

In the insurance system, money is always moving. On a daily basis, there are claims to be settled, taxes to be paid and other costs related to running a business (paying salaries, buying equipment, paying rent, etc.). Some money is always set aside so that the company can respond quickly to catastrophes, when a large number of claims will have to be paid in a short period of time. This is called a reserve.
Any money that is not needed for day-to-day expenses or reserves is usually invested by insurers.
^Back to top

Here are a few things you should know about insurers’ investments:

  1. Contrary to what some people think, insurers have never had a year when they lost money on investments. Some years are better than others, but the industry has always generated positive investment returns. 
  2. Insurers are among the most careful investors in the country. On average, approximately three quarters of their investments are in government bonds.
  3. In order to make sure that insurers are able to pay claims, the federal government monitors the industry’s investments to make certain that they are low-risk.
  4. Insurers strive to maintain a portfolio that allows for quick liquidation of investments to pay claims.
^Back to top

Why do insurance companies invest the money? 

The nature of insurance is such that your insurance company holds your premium until it is needed to pay claims. By investing the money in the interim and making a return, your insurance company is able to offset the cost of claims and charge you less than you would otherwise pay.
In fact, there have been years when returns on investments were so good (10% or higher) that insurers only had to collect enough premium to pay for claims and expenses, and made all of their profit from investments. Even when investment returns are much more modest, this is an excellent way to keep premiums as low as possible for consumers.

Insurance Myths

Insurance Myths

(Click on the arrows to find the truth.)

Car Insurance

MYTH: When I’m injured in a car accident, all my medical expenses are paid for by my government provincial health plan.
MYTH: If I’m in a car collision (in NB, NS, PEI), for all that I have to go through all I get is $2,500.
MYTH: No-fault insurance eliminates responsibility and fosters bad driving.
MYTH: Insurance companies are the only ones who pay for high or excessive legal settlements.
MYTH: No-fault insurance will increase your premiums.
MYTH: Most provinces that have experimented with no-fault insurance have repealed it and reintroduced tort-based systems.
MYTH: Insurance companies keep changing the rules on what's covered and what isn’t.
MYTH: Being caught without a seatbelt doesn't make me a dangerous driver, so my insurance premiums shouldn't go up.
^Back to top

Government-run Auto Insurance

MYTH: Government-run insurance would be "driver-owned."
MYTH: Government-run auto insurance systems provide the lowest rates for drivers.
MYTH: Government-run auto insurance systems provide the most generous benefits for consumers.
MYTH: Government insurers operate more efficiently. They have lower operational expenses.
MYTH: Government-run auto insurance systems can better control claims costs.
MYTH: A government-run insurance company can be started for $2 million. There will be no cost to the taxpayers. The system will be funded by drivers.
MYTH: Government-run auto insurers pay dividends to policyholders.
^Back to top

Insurance Industry

MYTH: Insurance companies are making a fortune on premiums.
MYTH: Rates started rising because of the insurance costs of the events of September 11, 2001.
MYTH: Insurers don't pay for damages caused by "Acts of God."
MYTH: Natural disasters like Hurricane Katrina cause insurance premiums to go up everywhere.
^Back to top

Claims and Premiums

MYTH: It's difficult to get paid for a claim.
MYTH: You'll always get less than you ask for, so inflate your claim.
^Back to top

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.
^Back to top

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.
^Back to top

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.

Facility Association

Who is insured through Facility Association?

Facility Association (FA) and its member companies ensure that car insurance is available to anyone who is entitled to it or is required to have it. FA is not an insurance company; rather, it is a not-for-profit organization made up of all car insurance providers operating in every province and territory in Canada except British Columbia, Manitoba, Saskatchewan and Quebec.FA ensures that any driver who can’t get car insurance in the regular market can ultimately get insurance. That being said, only a very small percentage of drivers is insured through FA.
Generally, you may have to buy insurance through FA because:
  • you have one or more moving violations on your record;
  • you have a poor, or no, driving record;
  • of something in your claims history;
  • of the type of car you drive; and/or
  • of how you use your car.
These are some of the reasons you might be considered a higher-risk driver – that is, at higher risk of having an accident. Insurance premiums are based on risk, so, higher-risk drivers insured through FA pay more for car insurance.

Getting out of FA  

There’s good news: You are not destined to pay the higher FA insurance rates forever. If you are currently insured through Facility Association, you should be shopping around for insurance. Facility Association exists to make sure coverage is available for those unable to obtain it anywhere else. As the insurance marketplace improves, or if your situation changes, there is more chance you can find insurance in the regular market – at a lower price. Talk to your insurance representative.
There are other things you can do to make your insurance business more attractive to insurers and lower your premiums.
To learn more about FA, click here.
Copyright © Insurance