Three of four provinces with government auto insurance monopolies have highest rates in Canada: The Fraser Institute

November 18, 2008 – TORONTO, ON – Government-run auto insurance monopolies in British Columbia, Saskatchewan and Manitoba are charging some of the highest average premiums in Canada, concludes a new report released today by the independent research organization the Fraser Institute.

The peer-reviewed report found that drivers in BC pay the highest average premium at $1,304 annually. At $1,229, Ontario has the second highest average premium and is the only province with private, competitive auto insurance that has an average insurance premium exceeding $1,000. Saskatchewan has the third highest average premium at $1,063 followed by Manitoba at $1,029.

“The results suggest that government-run auto insurance is less efficient than auto insurance provided by a regulated, competitive market,” said Brett Skinner, Fraser Institute director of health, pharmaceutical and insurance policy research and author of Personal Cost and Affordability of Automobile Insurance in Canada (2008 edition).

“Independent study after independent study come to the same conclusion: public auto insurance is more expensive on average than competitive, private models, despite contrary claims by government auto insurers.”

Prince Edward Island has the lowest average auto insurance premium, at $701, followed by Newfoundland & Labrador ($703), Quebec ($719), Nova Scotia ($749), New Brunswick ($768), and Alberta ($959).

“Quebec is also among the least expensive provinces in nominal comparisons of average auto insurance premiums, but the provincial government insurer is restricted to selling basic coverage only, while the private sector delivers 100 per cent of the optional auto insurance market,” Skinner said.

The study estimates the average cost of personal passenger auto insurance premiums in all 10 provinces for 2007 using publicly available data. Varying inter-provincial definitions for reported data make calculating comparable average premiums difficult. Government auto insurers do not publish audited data in a format that permits a simple calculation of average premiums in their provinces that can be directly compared to other provinces. In order to estimate and fairly compare the average cost of auto insurance in every province, the study applies (by estimation) the same data definitions that government regulators require from private sector insurers in six provinces to the published data of the government auto insurance monopolies in four provinces.

The study found that in British Columbia, Saskatchewan, and Manitoba, the government auto insurance monopolies occupied 95 to 98 per cent of the market. Additionally, these jurisdictions tend to require excessive benefits coverage and therefore, require expensive premiums.

“When consumers are given a choice, they will often prefer a lower level of benefit coverage in exchange for lower premiums,” Skinner said.

“In jurisdictions where government provides auto insurance, regulations tend to require drivers to over-insure themselves. Over-supply or under-supply of goods and services is a typical result of central planning interference in a market.”

The report concludes that the profit motive does not lead to higher auto insurance costs for consumers. When the private sector insurance industry is open to competition and consumer choice is protected, the portion of auto insurance premiums earned as profits will not result from excessive prices, but instead come from cost efficiencies achieved by successful claims management, pricing strategies, customer service, and good business management. Private sector insurers are also able to use the returns on invested surpluses that accrue during profitable years to subsidize premium rates in years where losses exceed the premiums paid by drivers. Such efficiencies are lost in government auto insurance monopolies where there tends to be a higher frequency of claims and suppression of rates for high-risk drivers below the actuarial cost of insuring them.

“When auto insurance is provided by government, coverage and pricing decisions become politicized and are usually not based on sound economics,” Skinner said.

The report recommends that drivers in BC, Saskatchewan, and Manitoba would be better served by an appropriately regulated market where auto insurance is obtained from private sector insurers operating in competition with each other. It also recommends that Quebec’s government auto insurer be made accountable for its finances, which are in serious long-term deficit.

“As long as markets are open to competition, minimally regulated, and consumers have freedom of choice, on average, we should expect to observe the lowest possible premiums for any given level of insurance benefit,” Skinner said.

About The Fraser Institute

The Fraser Institute measures and studies the impact of markets and government interventions on the welfare of individuals. In our research, we bring together academics, economists, and policy analysts from around the world. The Institute’s list of researchers has grown to include more than 350 authors in 22 countries (six of whom have been awarded Nobel Prizes), comprising more than 600 Institute publications and thousands of articles.