UNLOCKING B.C.’S AUTO MARKET

Sensing the “blood in the water” of dissatisfied voters in British Columbia with the manner in which the current NDP provincial government has performed whilst in office over the past decade, the Insurance Bureau of Canada’s (IBC) Pacific Coast office has opened full throttle on a consumer and political campaign aimed at introducing open competition in the auto insurance market on the eve of what will likely be a ground-breaking provincial election.

This is not a new battle for the IBC and auto insurers, who have lobbied and argued fervently against the monopolistic position B.C.’s crown company, the Insurance Corporation of British Columbia (ICBC), has held over the province’s “basic” auto insurance market for over 27 years. A political attempt at privatization of B.C.’s numerous state-run operations in the mid-1980s fell flat due to unpopular public reaction, and subsequent political lobbying efforts by insurers in the 1990s (during the period of NDP governance) to have ICBC privatized fell on deaf ears – public opinion polls during this period also showed a reluctance to privatization of the crown corporation. So what makes the current attempt by the IBC anymore hopeful?

Two fundamental shifts have occurred on the political lobbying front, which suggest that a “real move” toward freeing competition in B.C.’s auto insurance market will likely take hold this year, says Dennis Prouse, government relations manager Pacific region at the IBC. Firstly, he notes, it was only in 1997 that insurers decided to act in a cohesive lobbying and awareness campaign through the B.C. Coalition of Private Auto Insurance (BCCPAI) – which now has 21 member companies. The decision was also taken to focus lobbying efforts on a message of “open competition” rather than “privatization of ICBC”. This shift in stance produced a significant public swing in favor of open competition, with two market research polls carried out by Pollara in 1997 and again last year suggesting that around 81% of drivers in the province would like to see private insurers compete against ICBC.

The second occurrence is the upcoming provincial election set for May 16 of this year, which will likely see the Liberal Party under leader Gordon Campbell gain office with a majority government. The until now ruling NDP government had been a strong supporter of crown corporations, and during the party’s period of office, the role of ICBC had been expanded to include the province’s vehicle licensing office as well as overseer of several road safety programs. Meetings between the IBC and the Liberal’s Campbell indicate that a Liberal government will favor deregulation of B.C.’s auto insurance market with the objective of “reducing price/costs” and “introducing broader consumer choice”, says Prouse. He points out that this “liberalization” of the province’s auto insurance market has been a key platform throughout the Liberal campaign. Notably, Prouse refers to a CKNW radio interview with Campbell in August of last year during which the Liberal leader stated the following: “I think ICBC will be there [operating in the market under a Liberal government] but I can guarantee you that competition will be there…Monopolies don’t provide the service, innovation, and the imagination that’s required.”

Prouse admits, however, that although the Liberals appear “enthusiastic” in embracing deregulation of markets currently monopolized by the state, representatives of the party have only spoken in “general terms” to what may lie ahead. “None of us know what kind of regime we will be looking at, and we also don’t know at what speed the new government will want to move at.” Prouse emphasizes the fact that the Liberals are determined to bring in economic reform measures, should they be elected to office. In this respect, he points to a report published by the Investment Dealers Association (IDA) which examined the poorer economic performance of B.C. over recent years against the other provinces and concluded that these circumstances came about due to “over-regulation”. Prouse adds, “There is a strong need for a new government to give a demonstration to the rest of the world that B.C. is ‘open for business’, and that our province is willing to take on former ‘sacred cows’ in an effort to modernize our economy.”

The coalition is therefore hopeful that a Liberal Party government will take meaningful steps toward “competition and choice” in B.C.’s auto insurance market within the new government’s first term. “We’re hoping to have some kind of a roadmap [from a Liberal government on how they envisage the future of competition in insurance] before the end of this year,” Prouse says. As a first step, Campbell has indicated that a new government under the Liberals would separate road safety and vehicle licensing from the ICBC, he adds.

IBC’s position

Commenting on the Pollara market research survey “Public Attitudes Toward the Provision of Car Insurance in B.C.”, Lindsay Olson, regional vice-president of the IBC, notes that the vast majority of drivers across the age spectrum would like to see full competition reinstalled in the auto insurance market (see chart 1). “They [the driving public] want better value for the money they spend on car insurance, and they’ll only see this if full competition is reintroduced to the car insurance market in the province.”

The Pollara public attitude study determined that around 60% of British Columbians would support measures converting ICBC into a privately owned and operated entity, with 65% of survey respondents indicating that they are currently dissatisfied with the price of car insurance, and 46% saying that they are not satisfied with the overall value received on auto insurance. Based on the B.C. survey results on claim satisfaction and compared with that of Ontario, she adds, “by making comparison with data from the Financial Services Commission of Ontario (FSCO), which requires private auto insurance companies in the province to carry out annual claimant satisfaction surveys, the report shows that the proportion of claimants who were very satisfied with the service they received was more than 40% higher in Ontario than in B.C.”. Overall, 81% of the Pollara respondents are in favor of open competition between private sector insurers and ICBC (see chart 3).

The IBC’s CEO George Anderson estimates that around 90% of drivers in B.C. would see an immediate drop in annual premium of $235 should the province’s auto insurance market be fully opened to competition. In particular, Anderson takes aim at ICBC’s underwriting approach of subsidizing higher risk younger drivers by charging higher premiums to older drivers. “These extra charges are unfairly used to subsidize a small group of inexperienced and bad drivers,” he adds, whilst referring to an ICBC-produced publication that observes that “young drivers are four and a half times more likely to be in an auto accident than their parents.” Anderson adds, “these subsidies do nothing to change poor driving habits”.

In an address made to the Vancouver Board of Trade (VBT) a year ago, Anderson outlined a number of benefits drivers in B.C. would gain from open competition. Specifically, Anderson attacked what was then a new proposal by ICBC to convert into a non-government co-op body that would maintain the existing protection the insurer receives as a crown corporation. The ICBC’s argument was that as a B.C. operation, the new corporation would ensure that premiums stayed in the province, investment made in road safety, and employment would be protected.

In response, Anderson says that the IBC’s own economic research suggests that the magnitude of insurance savings within the B.C. economy could result in an additional 9,000 new jobs being created throughout the province. The additional tax revenue collected from ICBC (which as a crown corporation does not pay tax) and other insurers could also be used by the provincial government to invest in road safety initiatives. And, while necessary cutbacks at ICBC in a deregulated market would mean loss of some jobs, the vast majority of these wou
ld be absorbed by other insurers moving into the marketplace, he observes. Referring to the “independent co-op concept” presented by ICBC, Anderson notes wryly, “It might be instructive to begin by speculating about why the changes to the corporation [ICBC] are being proposed just now. The timing is intriguing. Strategists inside ICBC may feel the ‘winds of change’ at their backs. One might even suggest that the strongest wind they feel is that of political change – an election is coming.”

High-risk drivers

One of the biggest concerns voiced by those supporting the continued monopolistic role of ICBC is that high-risk drivers will not be able to secure auto insurance in a deregulated marketplace. Anderson points out that there is a legal requirement in all provinces where private insurers compete to provide insurance coverage. In this respect, he notes, the industry’s Facility Association (FA) has effectively fulfilled the role of underwriting the high-risk segment of the market. “In other jurisdictions, the FA, an insurance pool created by private insurance companies, provides coverage for high-risk drivers unable to secure insurance elsewhere.”

Stan Griffin, president of the FA, confirms that the IBC has requested an outline of how the high-risk driver segment in B.C. could be underwritten in the event of rapid deregulation. “We’ve had discussions with the IBC consultants in Vancouver, who have asked us to put together a plan. Basically, we’re going through a check-list of the necessary steps which would have to be taken.”

Griffin points out that developing a new market such as B.C. would not be a first attempt for the FA. He admits, however, that the size of the market does present a formidable challenge. “This isn’t the first time we’ve moved into a new territory, but I can say that it will be our biggest challenge yet.” Due to the current uncertainty regarding how the politicians would see a deregulated B.C. auto insurance market, Griffin says it is impossible to establish what kind of lead-time would be required for integration of the FA system. “one of the main issues will be setting rates [for high-risk drivers], as there is currently no historical rating data to work with.”

ICBC response

Brian Butters, assistant vice president of public affairs at ICBC, notes that the crown corporation is not a “political decision maker” and therefore is not in a position to dictate how B.C.’s insurance market should operate as. However, he says the long-standing role of the government insurer has allowed it to gauge a clear picture of the market’s “unique needs”, and therefore believes that the form of coverage provided by ICBC in the basic auto market is what the province’s drivers really want. “From our own polling of drivers and ICBC customers, we believe that the market wants universal coverage, non-discriminatory rating, investment in road safety programs, and the fact that premiums are being placed with a large entity that is committed to investing in the province. From our perspective, we would like to see whatever future insurance model evolves in the B.C. market to embody these fundamentals.”

Butters confirms, however, that ICBC’s proposal of a new corporate structure submitted to the government last year has been shelved. He notes that the Liberal Party, assuming it gains office in the latest provincial election, has indicated that it plans to do a review of all crown corporations, including ICBC. Comments made by the Liberals should not be interpreted to mean that a future Liberal-led B.C. government will opt for full deregulation of the auto insurance market, Butters warns. “Our interpretation of what the Liberals have said, and how the IBC has taken the message, is not one and the same. We believe that the IBC has jumped to conclusions that the Liberal message means full and open competition in the auto insurance market. All they [the Liberals] have said, however, is that they would like to see greater competition in the market. You must remember that only 60% of the auto insurance market falls under basic coverage, the remaining 40% is open to competition, which ICBC competes very effectively within against other insurers. Possibly the Liberals may wish to expand this “40% market segment”, or perhaps exclude ICBC from competing against other insurance companies.”

Another component, or voice, in the debate, is the province’s brokers, Butters observes. “The brokers have their own opinions, and we know that they have met with Liberal representatives. But it is my understanding that they are very comfortable with the status-quo.”

Broker views

There are a number of concerns among brokers in B.C. to what the private sector insurers can bring to the table, confirms Chuck Byrne, the executive director of the Insurance Brokers Association of B.C. (IBABC). “There is skepticism within our community over what private insurers can offer. We also feel that there are certain market efficiencies through ICBC. However, we are interested in seeing how a deregulated marketplace will impact on pricing and the types of products that would be made available [from private insurers].”

Byrne says meetings have been held with the IBC coalition and various provincial political representatives, including the Liberal Party, to ensure that the independent broker voice is not lost in any restructuring plans of the province’s auto insurance market. “We’ve told the IBC coalition that we won’t be marching down Main Street with them. You might say we’re ‘sitting on the fence’ until further details are made known of how an openly competitive marketplace would benefit our members.”

Specifically, Byrne says, concerns have been raised by the association’s members over commission scales as well as access to underwriting markets of smaller brokerages. IBABC has asked its members to approach the private insurers they have current dealings with to identify whether the companies in question have established any form of “base plan” to how they would operate in a deregulated market. Feedback from these consultations will be heard at IBABC’s annual general meeting and conference set for June 13th – 16th, during which a special half-day session will be held to hear from various proponents in the deregulation debate, he adds.

Byrne notes that commission fees will play a pivotal bargaining role from a broker perspective to how the profession will stand in the deregulation debate. At this stage, ICBC pays lower commissions on basic auto business to what insurers in other provinces offer, he notes, plus the current delivery system In B.C. is less efficient, placing a greater workload on the broker. “This is something that ICBC could look at,” he muses.

Chart 1: Support for Different Systems of Car Insurance by Age Group