Will Ontario’s budget proposals actually reduce auto rates?

To reduce Ontario auto insurance rates substantially, fairer rating systems and offering usage-based insurance (UBI) may be most effective, says one industry observer.

The Ontario government is proposing measures to reduce the cost of auto insurance. Among them, it is discussing developing a new framework for ensuring fairness in rates that would replace outdated guidance, including territorial rating.  

“If they could figure out a better way to rate drivers more appropriately based on their previous experience and conditions they continue to exhibit, I think it will go a long way,” says Matt Hands, director of insurance at Ratehub.ca. “Seeing that rating system change significantly, we’ll actually see positive impact.” 

Ontario’s budget proposal “could have a big shift in the way we see our auto rates calculated,” Hands told Canadian Underwriter. “It could help drivers in what are currently deemed high-risk areas actually pay a cheaper price. And the industry [would] be able to identify high-risk individuals, and then price them accordingly, without penalizing other people in the surrounding area.” 

Another way to achieve lower premiums is through UBI. But insurers need to be more transparent with their policyholders about how it works before it becomes an effective method for reducing auto rates, Hands says.  

“There’s a lot of mistrust for UBI products because consumers just don’t quite understand how they’re fully going to be impacted by the product or how the rate changes are calculated,” he says. 

“I think there needs to be [transparency] around pay-how-you-drive products, and really opening up to how these calculations work and how they actually can positively or negatively impact your rates.”  

Although consumers have more choice around pay-how-you drive UBI products, more competition between UBI products would also help consumers, Hands adds.  

The budget also proposes to increase consumer choice by making it optional to purchase not-at-fault property damage coverage (also known as Direct Compensation – Property Damage, or DCPD). 

This would have the biggest cost-saving effect for those who own older cars that are worth less than the cost to insure them.  

However, Hands cautions a fully-open system may not be in many consumers’ best interest and does not recommend drivers of new cars to forgo DCPD.  

“I don’t think offering a fully open system is probably the best thing, even though that would probably be the way that we can save the most,” he says. 

While it may allow consumers to customize their policies according to their needs, “the average driver won’t know enough about insurance to fully feel confident in customizing a full policy,” Hands says.  

Those individuals who do want to customize their policies may see significant rate decreases, but “it’s too early to tell” by how much, says Hands. While this customization method could prove to be useful for some, Hands says rethinking risk pooling is the better method. 

Feature image by iStock.com/krisanapong detraphiphat