Government-run Auto Insurance
MYTH: Government-run insurance would be "driver-owned."
FACT: Government-run auto insurance is often referred to as “driver-owned”
auto insurance. A truly “driver-owned” auto insurance company
would sell shares, have open elections for its board of directors and
have annual general meetings. This does not happen with the existing “driver-owned”
auto insurance systems in BC, Manitoba and Saskatchewan.
Truly “driver-owned” auto insurance companies already exist
within the private sector. Mutual insurance companies are owned by their
policyholders. If, at the end of a fiscal year, the mutual insurance company
has a profit, the profit is shared among the policyholders. Conversely,
if a mutual insurance company suffers a loss, there are provisions for
all policyholders to be assessed a levy to make up for this shortfall.
MYTH: Government-run auto insurance systems provide the lowest rates
for drivers.
FACT: Insurers provide car insurance within a strict framework of provincial
laws and, because of that, insurance systems cost what they cost whether
they are owned by government or the private sector.
Premiums in provinces where insurance is delivered by private companies
are competitive with premiums in those provinces that have government-run
auto insurance systems. However, when it comes to what consumers get for
those premiums, the people in the privately run insurance systems are
better protected with richer benefits and higher claims payouts.
Government insurers also change rating territories as a way of increasing
rates for consumers without applying for a rate increase. Rating territories
have been changed in BC frequently in recent years. In November 2002,
ICBC made a number of dramatic changes to its rating territories and moved
thousands of motorists into higher-priced territories. This resulted in
these motorists’ rates increasing dramatically, some by as much
as 30%. These are the kind of backdoor rate increases given to the public
by government-run auto insurers who have had their “front-door”
rate increases capped or limited by regulations or the politics of an
election campaign.
MYTH: Government-run auto insurance systems provide the most generous
benefits for consumers.
FACT: In all cases, benefits paid by private insurers are richer than
those offered by government-run insurers. For example, in the no-fault
system in Manitoba, an accident victim who is catastrophically injured
has no right to sue for economic loss that exceeds the maximum pre-set
payments. The average claim paid in Ontario is nearly $9,000 but in BC
the average is only about $2,400. That’s a huge disparity that shows
that in Ontario, you get a lot more for your insurance dollar.
MYTH: Government insurers operate more efficiently. They have lower operational
expenses.
FACT: The fact is that there are no economies of scale in government-run
auto insurance systems. The 2003 administrative expense ratios for Saskatchewan
Government Insurance (SGI), Manitoba Public Insurance (MPI) and the Insurance
Corporation of British Columbia (ICBC) versus the national private industry
(5.7%, 7.3%, 3.3% and 15.4% respectively) are significantly misrepresented.
For example, in ICBC’s 2003 annual report, its operating expense
ratio is reported as 18.1%; the private industry’s operating expense
ratio for the same period is reported as 28.1%. ICBC’s 18.1% operating
expense ratio includes commissions and taxes, but excludes general expenses
related to claims. In contrast, when the private auto insurance industry
quotes operating expenses, it includes all expenses.
When these differences are accounted for, the operating expense ratios
become 18.1% for ICBC and 21.2% for private insurers in BC.
Therefore, the private industry’s expense numbers compare very
favourably to ICBC’s and, where they are higher, this can almost
wholly be attributed to:
- ICBC’s tax status as a Crown corporation;
- accounting changes at ICBC that have moved items out of expenses
and into claims; and
- lower commission rates that ICBC can afford to pay brokers as a result
of holding a monopoly on mandatory auto insurance coverage.
MYTH: Government-run auto insurance systems can better control claims
costs.
FACT: Actually, no. Historically, not one of the government-run insurers
has been able to contain claims costs. In fact, these insurers have resorted
to increasing premiums and deductibles, changing rating territories and
introducing significant product change, such as no-fault insurance, with
greater frequency than private insurers.
The relatively small growth of claims reported by ICBC (3.2%) was accomplished
by increasing deductibles and thereby eliminating an estimated 60,000
claims from the system. This move effectively transferred $160 million
in the cost of repairs from the government-run insurer to policyholders.
This was on top of a rate increase.
Further, according to ICBC’s 2005 year-end results posted on their
website, their claims costs in the first nine months were up 11.5% from
the same period last year. As a result, ICBC has filed for a 6.5% rate
increase in 2006 to “manage” the rising trend in claims it
is experiencing. Compare this to private insurers who saw claims rise
only 0.2% between 2004 and 2005 according to Office of the Superintendent
of Financial Institutions (the federal regulator of insurance companies)
site. In light of this, how can it be said that government run auto can
better control 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.
FACT: The 2004 report of the New Brunswick Select Committee on Public
Automobile Insurance recommended that the province adopt a Manitoba-based
model of government-run auto insurance. KPMG, the independent actuaries
hired to review the findings of the committee, determined that the cost
of establishing a public insurance system would outweigh the claimed benefits.
At a very minimum, the cost of a government-run auto insurance system
to taxpayers would equal the cost of operating expenses (such as occupancy,
advertising, furniture and equipment, and head office overhead), acquiring
office space, and foregone insurance taxes and health care levies, which
a government would have to recoup elsewhere. In NB, these costs and lost
taxes and health levies would have amounted to at least $140 million in
2004, potentially having an adverse effect on the funding of other public
services.
In addition, despite paying back start-up loans, every government-run
insurer in Canada has required a taxpayer bailout, whether through direct
cash injections or through dedicated tax revenues. In early 1976, less
than two years after its inception, ICBC required a 25% rate increase
and a bailout of $181 million ($627 million in today’s dollars).
None of that money was ever paid back.
MYTH: Government-run auto insurers pay dividends to policyholders.
FACT: The fact is that MPI in 2001, and ICBC in 2000, did pay dividends
to policyholders. However, advocates of government-run auto insurance
have failed to mention that MPI had a deficit of $97 million following
that surplus distribution and had to transfer $93 million from its capital
surplus reserves to pay for it. This reserve declined steadily from $143
million in 2001 to $42 million at the end of 2003. Increasing claims pressure
(claims costs in 2001 were $30 million more than expected) and a severe
weather event would drain this reserve very quickly. MPI estimates that
a severe hailstorm could increase claims by as much as $50 million (2001
annual report).
In ICBC’s case, the corporation lost $250 million in the year following
the dividend. It couldn’t afford the dividend but paid it out
prior to an election. In exchange for the $100 each received, drivers
had their deductibles doubled and premiums raised and many were transferred
into more expensive rating territories. ICBC paid for this giveaway
through a reduction in reserves, which are now at dangerously low levels.
This dangerous, politically motivated "dividend" is a perfect
example of what is wrong about government-run insurance, not what is
right about it. This is not how to run a business.