Time for a Tune-up: Reforms to Private-Sector Auto Insurance could Lower Costs and Add Value for Consumers

32 Pages Posted: 28 Mar 2023

Date Written: March 20, 2022


Auto insurance premiums in Canada amount to about $27 billion per year. For most Canadians, auto insurance represents a significant yearly expense. Provincial and territorial governments control auto insurance, which is mandatory across Canada. Some provinces deliver the insurance themselves through a government agency. Others outsource delivery to private-sector insurers. A recent C.D. Howe Institute study (Campbell and Omran 2021) concluded that Canadians appear to pay the highest premiums in the world for auto insurance relative to GDP. This paper proposes policy changes governments should adopt to reduce the cost and improve the value of auto insurance in Canada. Insurance premiums vary considerably among provinces. Our review shows that the premium for personal injury coverage is the most significant contributor to the overall differences. We find that personal injury coverage is, on average, four times more expensive in provinces where the private sector delivers the insurance than in the provinces with government delivery systems, even though the government systems offer greater benefit entitlements for personal injuries. The paper explores in detail why this is happening.

The government insurance systems for personal injury coverage have the natural advantages of being single-payer, empowered systems that do not allow lawsuits for medical claims. On the other hand, we don't have a truly private-sector auto insurance product to compare with the government-run systems. The product delivered by insurers in the private-sector provinces is a government-designed product. Provincial governments decide on the features of the product, control how it is delivered, and control its pricing. The product is highly inefficient and has many poor design features, which cause it to be wasteful and unnecessarily expensive.

In effect, the advantages of competitive private-sector market forces have been sacrificed by governments for other priorities. This situation robs consumers of good value for their insurance dollars. Despite the current advantages enjoyed by government insurance, we conclude that it would be inappropriate for the private-sector delivery provinces to switch to government insurance. Government auto insurance has its challenges and problems. First, there is a risk that at some point, governments will interfere through their agencies to pursue political goals that will distort the price/value of the insurance product. The future of consumer services, like insurance, lies in being responsive to rapid changes in consumer needs, pricing and innovation, qualities which governments are poorly suited to deliver.

This paper makes policy recommendations for governments with private-sector auto insurance delivery systems, including a series of product reform recommendations to significantly improve value for money. The recommendations increase consumer choice and show how to reduce the propensity to file claims and mitigate fraud. Notably, the recommendations include suggestions for minimizing the disputes that drive the high transaction costs in today's systems. The report also recommends that governments address auto repair fraud and potential restrictive trade practices by auto manufacturers, which increase costs to consumers.

The report concludes that there is no valid reason why governments should perpetuate the expensive and wasteful auto insurance regimes they have designed in the private-sector delivery provinces. Sensible solutions exist that will save consumers substantial sums each year, reduce disputes and provide much better value.

Keywords: Financial Services and Regulation; Insurance; Consumers’ Interest and Protection

JEL Classification: G22; G28; D40

Suggested Citation

Marshall, David, Time for a Tune-up: Reforms to Private-Sector Auto Insurance could Lower Costs and Add Value for Consumers (March 20, 2022). C.D. Howe Institute Commentary 619 (2022), Available at SSRN: https://ssrn.com/abstract=4393302

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