C.D. Howe report calls for more flexible auto insurance pricing in the face of rising risks
A new report from the C.D. Howe Institute sheds light on a growing issue within Canada’s auto insurance systems: Restrictive rate regulation can undermine the industry’s ability to respond to risk. In an era of increasing volatility – extreme weather, inflation, supply chain disruption – insurers need to be agile. Yet in provinces with stricter regulatory regimes, they are constrained from doing just that.
The report – “The Price of Over-Regulation: Assessing the Impact of Rate Controls on Auto Insurance Market Flexibility in Canada” – finds that the rigid rate-setting frameworks in Alberta, Ontario and Atlantic Canada are limiting insurers’ ability to adjust premiums in response to changes in claims costs. The long-term result: Regulation meant to protect consumers may be putting them at risk.
C.D. Howe quantifies this effect: Insurers in strictly regulated provinces adjust premiums about 2% less in response to rising claims than those in more flexible jurisdictions. That difference may seem small, but in today’s environment of inflation and climate risk, even modest lags can put pressure on financial stability and lead to consumer harm.
It notes that: “…delays in premium adjustments, especially in response to rising claims costs and inflation, can lead insurers to reduce their market participation or withdraw certain products, ultimately reducing consumer choice, competition and welfare.” In fact, this is exactly what has been playing out in Alberta, where auto insurance rates have been frozen or capped for three years.
The report outlines four broad models of rate regulation used across jurisdictions: prior approval, file and use, use and file, and open competition. In Canada, provinces typically use hybrid approaches based on the first three models, with varying degrees of government constraint and intervention. The report recommends that, whatever system is in place, moving toward greater flexibility would allow insurers to respond more effectively to shifting risk – ultimately benefiting consumers.
The best consumer protection: competition
Insurance Bureau of Canada (IBC) agrees. In a healthy, competitive market like Canada’s, the best form of consumer protection is competition, as insurers already adhere to strict consumer protection guidelines. The report states, “…there is no evidence that this paper is aware of that Quebec, which essentially lacks rate regulation for private vehicle damage, exhibits indications of unfair treatment towards consumers. In fact, insurers are required to adhere to the Canadian Council of Insurance Regulators (CCIR) guidelines on the fair treatment of consumers.”
Simply put: When insurers are free to compete, rates reflect real risk, innovation flourishes and consumers benefit from greater choice and better service. Ongoing rate regulation limits that dynamic. IBC believe that policymakers should allow market forces to guide prices to the greatest degree possible.
International experience backs this up. The report finds that regulatory bodies in Europe have largely stepped back from price-setting, and states, “There is evidence that this deregulation process has deeply enhanced competition, fostering innovation and efficiency.”
A global trend toward smarter regulation – Canada is falling behind
This global shift toward smart deregulation contrasts with the situation in Canada, where the report observes that the rate regulation systems are expensive to administer and these regulatory costs “... are ultimately passed down to consumers – either through inevitable price adjustments or through decreased competition.”
Other jurisdictions – from the United Kingdom to Australia to South Korea – are moving to modernize their regulatory regimes and support investment and innovation. The United Kingdom, for example, recently introduced a statutory mandate requiring regulators to promote growth and guard against risk.
Meanwhile, Canada is falling behind, and it is hurting our competitiveness. The World Economic Forum ranks Canada 38th on burden of government regulation. Twenty years ago, we ranked fourth globally in ease of doing business. Today, we rank 20th.
Favouring market dynamism over market control
This declining competitiveness isn’t the fault of any one government or regulator. It’s the cumulative result of a fragmented, burdensome and overly cautious regulatory environment – one that prioritizes control over competition, and stability over dynamism.
The push toward more stringent auto insurance rate regulation in Canada began in the early 2000s, largely in response to a sharp rise in premiums, particularly in Atlantic Canada. However, this reactive approach overlooked a key factor: Premiums were increasing because of a dramatic surge in claims costs in the preceding years, with increases ranging from 45% to 50%. At the time, the industry made the same case it continues to make today: when premiums rise, the solution lies in addressing claims costs through product reforms – changes that must be implemented by government – not in restricting insurers’ ability to price their products appropriately.
Today, the cautious regulatory philosophy that aims to keep premiums down is well-meaning but increasingly out of touch with global trends.
Home, auto and business insurance is a very heavily regulated sector in Canada, whether in pricing, product design, capital or investment requirements. Over time, those layers of oversight have grown, adding cost, slowing innovation and tying up capital that could be put to more productive use to benefit customers.
This is the warning embedded in the C.D. Howe report. It’s also a window of opportunity. Halting regulatory creep and modernizing frameworks – including introducing more flexible approaches to auto insurance – can promote efficiency, unlock competition and restore Canada’s economic dynamism.
Regulation matters. But in a rapidly changing world, so does adaptability. The C.D. Howe report is a timely reminder that protecting consumers and empowering markets are not opposing goals – they’re two sides of the same coin. Let’s make sure Canada doesn’t fall further behind.
