The Impact of Regulation on the Availability and Profitability of Auto Insurance in Canada

25 Pages Posted: 27 Oct 2010 Last revised: 4 Feb 2014

Mary Kelly

Wilfrid Laurier University - School of Business & Economics

Anne E. Kleffner

University of Calgary - Haskayne School of Business

Si Li

Wilfrid Laurier University - School of Business & Economics

Date Written: May 31, 2013

Abstract

This article investigates the impact of automobile insurance regulation on the size of the involuntary insurance market as well as the level and volatility of auto insurance loss ratios in Canada. We find that rate reduction orders, product reform and a pricing “Grid” that establishes maximum premiums increase the size of the involuntary market, while prior approval does not have any significant effect. In addition, unlike U.S. studies, we find that prior approval does not significantly impact loss ratio volatility. Our models also incorporate the impact of macroeconomic variables that proxy for the underwriting cycle and investment returns. The results suggest that the insurance underwriting cycle and stock market returns appears to be as important in determining insurers’ usage of the involuntary market as regulation. Taken together, our results suggests that regulatory interventions aimed at addressing affordability issues may have the unintended consequence of aggravating availability issues, and underlying market conditions may exacerbate this effect.

Keywords: Insurance regulation, automobile insurance, insurance market cycles

JEL Classification: G22

Suggested Citation

Kelly, Mary and Kleffner, Anne E. and Li, Si, The Impact of Regulation on the Availability and Profitability of Auto Insurance in Canada (May 31, 2013). Available at SSRN: https://ssrn.com/abstract=1698042 or http://dx.doi.org/10.2139/ssrn.1698042

Mary Kelly (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Anne E. Kleffner

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-8596 (Phone)
403-284-7903 (Fax)

Si Li

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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