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Top five reasons auto insurance premiums have increased

June 6, 2024 | By: Mark Cripps, Manager, Communications, IBC
Top five reasons auto insurance premiums have increased

No matter where you live in Canada, the cost of auto insurance has likely increased over the past few years. It’s not just a problem in this country. Rising auto insurance premiums are also a big issue in the United States.

To understand why, it’s important to understand the main factors contributing to these increases.

1.  Auto thefts

Canada’s auto theft crisis is hitting people in the pocketbook. According to new data released by Insurance Bureau of Canada (IBC), in 2023 the cost of insurance claims to replace stolen vehicles in Canada skyrocketed to a record-breaking $1.5 billion – an increase of 254% since 2018. The problem is most significant in Ontario, where auto theft claims costs increased 524% between 2018 and 2023, surpassing $1 billion for the first time in 2023.

To put these numbers into perspective, between 2018 and 2021, auto theft claims across Canada totalled $556 million annually.

Claims costs impact premiums because insurers price premiums based, in part, on the level of risk associated with a vehicle. Vehicles with the highest risk of theft will typically be more expensive to insure. IBC estimates that auto theft adds approximately $130 to the average annual premium in Ontario.

2. Lingering inflation and supply chain issues

While overall inflation in Canada has been decreasing in 2024, it’s a different story when it comes to the costs that directly impact auto insurance claims.

At the height of Canada’s inflation crisis, the Consumer Price Index (a measure of the average change over time in the prices paid by consumers for consumer goods and services) rose to 8.1% in June 2022. However, according to Statistics Canada data, insurers were seeing auto insurance claims costs much higher than the peak inflation rate. For example, over the past three years the cost for new passenger vehicles increased by 12.1%, while the cost of vehicle parts and replacement has increased by 18%.

Parts suppliers, collision repair centres, and dealerships continue to face supply chain challenges, as well as a shortage of technicians. While the situation has improved, inflationary pressures continue to contribute to the increasing cost of physical damage claims, as well as the length of time to repair a damaged vehicle.

Insurers must set premiums on a forward-looking basis, and this includes factoring in the expected cost of covering future auto insurance claims.

3. Legal costs

Private auto insurance systems in Alberta, Ontario and the Atlantic provinces operate under full or limited tort rules (which gives someone injured in an accident the right to sue the at-fault driver). Insurers must take into account the anticipated costs for these lawsuits when they price insurance premiums. In some cases, an injured person might need to engage a lawyer after a collision, but that should be the exception, not the rule. The majority of people injured in a collision make a claim and receive the benefits they need to recover. However, some personal injury lawyers use aggressive marketing and advertising to encourage frivolous claims, which drives up costs for everyone. As a result, legal costs can vastly exceed the amount provided in a cash payment to those injured in collisions for pain and suffering.

In a 2022 report, respected insurance expert David Marshall noted that the higher costs for personal injury coverage in provinces with private-sector insurance systems is due to the faulty design of the insurance product.

For example, in Alberta, lawsuits and legal fees associated with insurance claims have increased 31% since 2018 and now account for about 20% of a driver’s premium for mandatory coverage.

4. Regulatory intervention

Provincial governments determine the content of auto insurance policies, how claims are handled and how complaints are managed.

Government regulatory intervention in the auto insurance system can have dire consequences for consumers. For example, in Alberta, a number of government rate interventions that began in 2016 created cost pressures in the system and made the market unattractive for some insurers. In 2023, 17 insurance companies lost money and one left the market. Some insurers have now reduced the number of policies they sell and tightened policy conditions.

A similar story is playing out in California. Regulatory intervention between 2020 and 2022 resulted in some of the country’s biggest auto insurance companies leaving the market. Consumers faced significant challenges securing coverage as insurers limited payment options and coverages, and cut their workforce.

Following insurer withdrawal and capacity reductions, California has begun to approve insurer rate increases again. At the beginning of 2024, State Farm, the state’s largest private insurer, announced it would raise insurance rates for current customers by 21%. Some analysts anticipate a 35% rate increase across the board if the Department of Insurance approves the requests.

Rate intervention in the market only serves to kick issues within the auto insurance system down the road, and consumers ultimately end up paying the cost.

5. Sophistication of newer cars

Insurance premiums can also be affected by new technology in cars. More advanced technology in vehicles makes repairs more expensive and increases claims costs. Insurance providers may then raise rates to meet the higher cost of fixing cars after collisions.

While new cars come with significant safety features like collision preparation systems or blind spot monitoring, this technology requires sophisticated sensors. When damaged in a crash, a bumper with these sensors is more costly to repair than a typical bumper without these built-in safety features.

For example, a 2017 Toyota Rav 4 rear bumper requires 17 parts and a total average cost of $2,769 to repair. The 2022 model of the same vehicle requires 39 parts and costs an average of $4,144 to repair – an increase of 50%.

Are auto insurance companies making exorbitant profits?

Many consumers have a misconception that insurers make excessive profits from the sale of auto insurance. However, because it is a mandatory product, provincial insurance regulators have guidelines in place regarding insurer profitability to ensure fairness and affordability for consumers.

According to the General Insurance Statistical Agency, which collects and aggregates auto insurance statistics for government regulators across Canada, auto insurance products provide little return to companies.

The most recent data for Alberta (2012–2022) shows insurers lost 7 cents for every dollar of auto insurance premium sold. When factoring in investment income, insurers still lost 0.6% overall.

In Ontario over the same period, insurers were able to average a modest 2 cents of profit on every dollar of premium sold, and 7.9% return on equity overall when factoring in investment income.

What can be done to lower your premium?

While the cost of auto insurance has been rising, you can take steps to lower your premium. For example, you can increase your deductible (the amount you agree to pay toward the cost of repairs if you make a claim) or take advantage of insurerssafe driving programs like usage-based insurance. Bundling policies (e.g., having auto and home insurance with the same company) can often lead to premium savings. Most importantly, shop around for the best rate!

About This Author

Mark Cripps has a Bachelor’s Degree in Journalism, and spent 25-years of his career as a journalist and editor working across Ontario. He also worked for 8 years as a Press Secretary and Director of Communications for the Ontario Ministry of Municipal Affairs and Housing and Agriculture, Food and Rural Affairs. He has been with IBC since 2019, and manages communications for Western and Pacific Regions, as well as the commercial insurance file.