The Reality of Government-run
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
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
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
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.
^Back to top
Government-run vs. private insurance in your province
Click below for more information specific to government-run auto insurance
and the role of the private sector in your province.
^Back to top