Car insurance hurts? Study suggests why

Car insurance hurts? Study suggests why
Oct. 12, 2006. 09:06 AM
JAMES DAW


The outcry over the cost of auto insurance in Ontario has subsided after a 14 per cent reduction in average premiums since 2003. But a study suggests we and other Canadians carry a relatively heavy burden.

Canadians must buy more insurance protection than American and British motorists, and insurers face more regulation. The result, according to a researcher with the Vancouver-based Fraser Institute, is less freedom of choice, less fairness and less affordable insurance.

Brett Skinner has constructed his own market-quality index using 15 points of comparison to rank the 10 Canadian provinces, 50 American states and the whole of the United Kingdom. He concludes Manitoba, Saskatchewan and British Columbia are the worst markets by his unique measure, and Ontario comes next.

Only Alberta ranks higher than two American states, namely Kentucky and North Dakota The United Kingdom ranks in the middle.

"The data show the public monopoly or government-run auto insurance systems consistently produce the worst outcomes (in terms of choice, affordability and sustainable pricing) for consumers," Skinner writes in his research paper, posted yesterday at the Fraser Institute's website.

Skinner, a Ph.D. candidate in political science and public policy at the University of Western Ontario in London, upholds the usual Fraser Institute bias in favour of private enterprise and unfettered markets.

"The goals of the study are to provide insights into the links between regulation of auto insurance markets and its outcome for consumers, and to help identify public policies that are most likely to produce superior results over all," he writes.

During an interview, he warned the newly elected Liberal government in New Brunswick to reconsider its threat to bring in public auto insurance if private insurers fail to cut premiums.

Skinner has not attempted to compare premiums at the level of the individual motorist. Nor has he attempted to do a value-for-dollar comparison. In his eyes, it's a negative factor that Canadian provinces require vehicle owners to carry two to 10 times more coverage for liability for bodily injury than U.S. states, and proportionally even more no-fault medical and income accident benefits.

To gauge the relative insurance costs, Skinner merely ranks states and provinces by the percentage of gross domestic product spent on premiums for private autos in 2002. By this measure, U.K. residents spent the least, Ontario about the average and British Columbia the second highest. Skinner does not adjust for the number of private vehicles in use, or driving conditions.

To measure affordability, he divides premiums by total personal disposable income for both the insured and uninsured. His argument is that insurance will feel more expensive to residents who have less income to spend after taxes.

Skinner concluded British Columbia had the least affordable coverage in 2002, followed by New Brunswick, Saskatchewan, Manitoba, West Virginia and Ontario. Ontario's affordability ranking would have changed since then. The average premium per vehicle of $1,280 at the end of August was close to 2002 levels, while personal disposable income will have risen.

Skinner also ranked jurisdictions by their insured losses as a percentage of premiums to see whether the premium levels were sustainable.

He also compared restrictions on private competition and the right to sue, the approval process for premium adjustments, minimum financial strength and premium taxes.

Mark Yakabuski, Ontario vice-president of the Insurance Bureau of Canada, said Skinner got industry data but no guidance from bureau staff.

"The report is instructive, but it is not necessarily where we want to go in Ontario," he said. "(Skinner is) certainly highlighting freedom of choice issues, but without giving the same kind of information about the cost of these choices."

If drivers were not insured to the levels now required in Canada, the cost of personal injury and loss of income due to disability would be borne somewhere else.

But Skinner argues that forcing consumers to buy minimum levels of coverage, and restricting the degree to which insurers may set premiums to reflect the driver's risk profile, can also produce unintended social consequences.

His study may add to the debate over the right mix of public policies, but will not put an end to it.


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James Daw, CFP, appears Tuesday, Thursday and Saturday. He can be reached at Business, 1 Yonge St., Toronto M5E 1E6; or 416-945-8633 or at jdaw@thestar.ca by email.