In the summer of 2024 a new figure startled legislators in Alberta; the average driver in the province now spends 5% of their disposable income on auto insurance premiums. Over a decade ago in 2010, this was estimated at nearly half the current figure, just 2.7% of disposable income going to auto insurance premiums. Separate reports from the Alberta Insurance Rate Board, the province’s auto insurance regulator, has this number rising but only to 3.1% though this may be a case of using different measures for average disposable income. High premiums, growing faster than inflation and incomes, already caused the province to take action in January of 2023, capping how much firms could increase premiums by year over year . Now the provincial legislator is going back to the drawing board and intends to have a new policy announcement by this fall. Everything from more competition to cutting insurance requirements to a public insurance provider is on the table, so let’s walk through each one.
Any good economist will tell you to drive down prices in a private market you need more firms, more competition. By most measures however, you would not consider the auto insurance industry in Alberta to be competitive. The province is dominated by just ten firms which in 2023 wrote more than 94% of all auto insurance policies in the province. If only there was more firms competing for your policy, surely this would help right? Well, every Alberta auto insurance story points out that at least the province doesn’t have the highest premiums in the country, a title held by Ontario. What is the state of competition in Canada’s largest province, it has an edge on Alberta. The most comparable time in recent memory between the provinces would be pre-covid in 2018 and 2019. During these two years the claims paid out per vehicle was nearly identical across the two provinces. It should be noted that the provinces did not have the equivalent insurance requirements or systems, with a mix of tort and no-fault insurance. While the systems and thereby the cost breakdowns were and continue to be different between Alberta and Ontario, the aggregate per vehicle costs ended up nearly the same. In 2018 and 2019, there were 16 firms in Ontario with at least 1% of the market and the ten largest firms wrote 87% of policies. In Alberta there were just 13 firms with at least 1% market share and the ten largest firms wrote 92% of policies. What did Ontario win with more players and less concentration at the top in the auto insurance game, 15% higher premiums. This cultivates in auto insurers in Ontario enjoying a seven percentage points lower claims ratio over Alberta, that is the percentage of claims paid out of premiums collected, which directly translates into higher profit margins.
Separately from the level of competition, the province has also pointed to changing the rules around auto insurance to bring down claim costs and thereby lower premiums. This could look like moving to a no-fault system cutting down on legal expenses to lowering the legal minimum of insurance needed. Again, we can look to Ontario to see how this might play out in the coming years. In 2010, amid quickly rising premiums, the Ontario government cut down on the claims given out to minor injuries and recovery related expenditures like physiotherapy and disability payments. The policy was touted as a claim cost reduction that would lower premiums by 10% in the coming years. In 2011 the industry paid out 24% less in claims than the year prior, and by a vehicle-by-vehicle basis the industry has never returned to the 2010 peak in the dollar amount of claims paid out. Premiums in Ontario however tell a difference story. While the claim costs fell by almost a quarter, over the next five years premiums would only fall by an average of 2%. This is of course goes against what would be expected in a standard competitive environment, where firms race to cut prices as costs fall to attract customers. Simply put, cost savings were not passed on to consumers in the form of falling premiums. According to my own 2024 working paper on the topic, this policy resulted in consumers overpaying for auto insurance by $16.6 billion from 2011 to 2021 . Alberta has a glimmer of hope Ontario lacked however, a new regulation beginning this year enforced by the Alberta Insurance Rate Board (AIRB) allows the AIRB to force firms to give rebates to consumers if the firm achieves profits higher than 6% of premiums. If fully enforced, lowering claim costs will result in lower premiums, or at least an end of year rebate in premiums.
If more competition or changing the insurance requirements are no guarantees to lower premiums, what about the elusive public monopoly, as seen in Manitoba and Saskatchewan. An Alberta government commissioned report found that this option would save the average driver in Alberta $732 a year, or with nearly three million private vehicles on the road, $2.2 billion. The premium savings directly result from a reason more competition in the industry isn’t as helpful as one might think, insurance is all about scale. More policies per firm diversifies and lowers the average risk level which results in lower average per vehicle costs. For a public insurer not concerned about profit as MPI in Manitoba and SGI in Saskatchewan are, lower costs do indeed mean lower premiums. The cost to the province to transition to a public insurer according to the same report includes $100-500 million in start-up costs and $2.3 billion needed to be held in reserves to cover claims until enough premiums are collected. Premiums would come in quickly however, as even with the expected $732 reduction in premiums, the public monopoly would bring in an expected $2.8 billion in premiums in the first year. Alberta Premier Danelle Smith has already signaled this is not an option however, sighting the total $3 billion sticker price needed in the first year to start such a venture.
Given all this, I am not optimistic about what changes might come this fall. Introducing more competition may prove challenging and ineffective. Reducing costs to the industry also do not guarantee reductions in premiums as has seen in Ontario, though there is hope of the AIRB having better tools to reign in profits. Finally, a public monopoly, which may hold some promise has already been taken off the table. I expect therefore that the coming years we will continue to see high auto insurance premiums and relearn the lesson which started this whole process that the current system does not work.
The piece adapted from this post for the Canadian Anti-Monopoly Project can be found here.