The Reality of Government-Run Auto Insurance

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 declares a profit, the profit is shared among the policyholders. Conversely, if a mutual insurance company declares a loss, there are provisions for all policyholders to be assessed a levy to make up for this shortfall.

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.

Because the laws vary according to region, comparisons are not valid; one can’t compare the no-fault system of Manitoba, for example, to the tort system that might be implemented in NS by a government-run insurer.

Nova Scotia premiums are competitive with those of the Prairie provinces in terms of dollar costs. However, when it comes to what consumers get for those premiums, the people in Nova Scotia 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, unilaterally moving 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.

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 – including future lost wages – that exceeds the prescribed schedule of payments.

FACT: The fact is that there are no economies of scale in government-run auto insurance systems. ICBC’s 2006 Revenue Requirements Application (revised filing of January 27, 2006) states that “ICBC’s success in reducing operating expenses was achieved through eliminating costs and DEFERRING [caps added by author] expenditures on maintenance, facilities and technology infrastructure, and investment in people.” The argument for “economies of scale” misrepresents the fact that ICBC has simply deferred some expenses where private insurers are committed to continually serving consumers through investing in technology and people. Furthermore, the ICBC Application states that, “The cost reductions which were implemented at ICBC are NOT [caps added by author] sustainable….ICBC is faced with inflationary pressures and in addition must increase spending to address expenditures that were deferred in recent years.”

ICBC’s reported operating expense ratio includes commissions and taxes, but excludes general expenses related to claims. In contrast, the operating expenses reported by the private auto insurance industry include all expenses.

When these differences in reporting are taken into consideration, 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 – it doesn’t pay income tax;
• accounting changes at ICBC that have moved items out of expenses 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.

FACT: Private insurers are among the shrewdest and most careful investors in the country. In fact, they are required by regulators to invest safely. In 2004, private insurers invested 79% of their portfolio in bonds, more than two-thirds in government bonds. This compares to ICBC’s 65%, MPI’s 78% and SGI’s 65%.

Private insurers across the country invested over $13 billion in provincial and municipal bonds in 2004. In Nova Scotia, these types of investment had a value of almost $175 million.

Furthermore, while private insurers are required to maintain capital if they invest in risky assets, government-run insurers are not. In ICBC’s 2003 annual report, the corporation reported a $141 million write-down on an aging shopping mall and office tower. This is just one example of its questionable investment outcomes.

FACT: 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.

ICBC made a number of dramatic changes to its rating territories in 2002. Unsurprisingly, in 2003, the relatively small growth in claims costs reported by ICBC (0.7%) was accompanied by a reduction of 141,000 claims in the system. Based on the average cost of an ICBC claim in 2003, this move effectively transferred over $300 million in the cost of repairs from the government-run insurer to policyholders. This was on top of a rate increase in 2003.

According to ICBC’s most recent results posted on their website for the year ending 2005, their claims costs 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 OSFI’s site. In light of this, how can it be said that government-run auto can better control costs?

FACT: The elimination of age, gender and marital status as rating factors creates a new type of discrimination against older, safer drivers and subsidizes younger, higher-risk drivers. Further, government-run insurers find other ways to rate according to these risks. ICBC’s RoadStar program is one example of a government insurer implementing age-based rating through the back door. A driver who gets his/her licence at the age of 16 does not qualify for the discount until age 25. Coincidentally, 25 is the age that risk-based raters (private insurers) use to indicate safer drivers. What is more, a driver has to be at least 34 years old to qualify for ICBC’s absolute best rate. ICBC is attempting to have higher-risk drivers pay higher premiums. In recent years, ICBC has also stated that it needs "right pricing" to ensure that customers are paying the premiums required for the risk they represent.

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 retained to review the suppositions 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 government-run auto to taxpayers will equal the worth of foregone insurance taxes, which a government has to recoup elsewhere. In NS, the lost taxes would have amounted to at least $29 million in 2004.

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 ($641 million in today’s dollars). None of that money was ever paid back.

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 saw a steady decline 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 would be wrong about government-run insurance, not what would be right about it. This is not how to run a business.

Finally, dividends are not unique to government-run insurers. Policyholders in private insurance markets can also receive policyholder dividends, where the financial situation of the company warrants, if they are policyholders with mutual companies.