The Facts — Government-Run Auto Insurance Not the Solution

Start-up costs for a government-run auto insurance company could be anywhere between $250 million and $390 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 the 45,500 annual claims, to provide insurance for the nearly half a million cars in Nova Scotia, and to make up for the loss of funding of public services because of the withdrawal of taxes and health levies currently paid by the private industry. The exact amount required for start-up depends on whether the government-run insurer will use income from its investments to stabilize insurance rates or offset the start-up costs. The estimated start up costs do not include the approximately $525 million the government-run insurer would have to assume if it did not have private insurers to pay their unpaid claims.

In 2004, private home, car and business insurance companies had a total investment of over $1.4 billion in Nova Scotia. Their total direct investment in provincial businesses, including corporate shares, bonds and real estate, totaled over $575 million.

Crown corporations do not pay income, capital or administrative taxes. Government-run auto insurance corporations in other jurisdictions pay premium taxes, grants in lieu of property taxes, and health care levies.

In 2004, the Government of Nova Scotia collected a total of $103.3 million in tax revenue and $13.7 million in health care levies from the insurers doing business in the province.

A government-run insurer not paying income or capital taxes or taxes on administrative costs would reduce provincial tax revenues by at least $27.1 million annually.

Government-run auto insurance provides limited choice for consumers and no incentive for good customer service. It is a “one-size-fits-all” solution for consumers (e.g., fixed deductibles, no multi-vehicle discounts). Privately run auto insurance provides powerful competitive incentives for insurance companies to offer the lowest possible rates, strong service delivery and a wider range of policy options.

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.

With a government-run system, the insurer represents both parties. In a conflict between insurers in a privately run tort system, a consumer’s insurance company works for the consumer to get him/her the best settlement. Government insurers can be motivated to settle the claim as quickly and cheaply as possible.

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.