Insurers respond to Alberta’s auto reform reports

Editor’s Note: This story has been updated to include comments from Insurance Brokers Association of Alberta.

Canada’s national insurer association has expressed deep concern about an Alberta government-commissioned Oliver Wyman report, which touts public auto insurance as the reform option leading to the lowest premiums for Albertans.  

One expert says the Oliver Wyman report can’t be viewed separately from another commissioned report by Nous Group, which finds it would cost anywhere between $2.4 billion and $2.8 billion total for the province to establish a new public model. 

And that’s beside the “major errors and flaws” in the methodology of the Oliver Wyman report, says Aaron Sutherland, vice president of Insurance Bureau of Canada (IBC)’s Pacific and Western regions.

“It cannot be used as a basis for informed debate, or government decision-making, on an issue of as large as the nationalization of the auto insurance market,” says Sutherland. 

What’s in the Oliver Wyman report 

The Oliver Wyman report analyzed seven alternative systems to the current Alberta court or “tort” model (where the at-fault party or their insurer may be held responsible for damages).  

Under the current model, Alberta drivers pay an average of $2,015 in auto premiums ($1,448 of which goes towards claims costs), according to the report.  

Its findings show changing to the British Columbia model of public insurance would bring the largest reduction in premium costs for Albertans ($1,238 in required average premium). The B.C. public system is a no-fault model, with the automobile policy as second payer for disability income benefits.

The B.C. model is followed by the Manitoba public system model as first payer for disability income benefits. Switching to the Manitoba model would reduce the premium to $1,245 (with claims costs contributing to $1,128 of that total).  

Insurers’ objections 

Oliver Wyman’s report presents “inaccuracies” in the savings arising from a no-fault public auto regime, IBC writes in a Backgrounder outlining its key concerns on the report. IBC also contends the report is flawed in how it compares between public and private models. 

For one, Oliver Wyman erred in its analysis of IBC’s own reform suggestion, the Enhancing Care & Expanding Choice proposal, the association says. The report estimates the average annual auto insurance premium under IBC’s proposal would shake out to $1,872. But IBC says this number should figure closer to $1,636, since most consumers don’t need all the available coverages and add-ons.  

“They’re assuming everyone today purchases the maximum coverage available, which is simply not the case,” says Sutherland. “And so, they come forward with an average price in the market today that is far higher than the reality of what drivers are paying.” 

Further, operational costs (such as technology upgrades by public auto insurers) were deemed outside the scope of Oliver Wyman’s report. Yet the cost of technology upgrades by private insurers was included via insurer expense ratios. It makes for a “deeply flawed” comparison, says IBC—and that’s just one example.  

Debates about methodology aside, IBC says Oliver Wyman’s report, taken unto itself, does not paint a broad enough picture of the effects on the economy, employers, and government finances that would come with switching to a provincial public auto system.

And that’s where the Nous Group report comes in. 

The high-level estimate suggests it would cost between $2.4 billion and $2.8 billion in total to establish a new public insurer in Alberta. That’s broken down into an initial investment of anywhere between $100 million and $500 million to establish the insurer, plus up $2.3 billion in capital reserves available to pay out claims under depending on the model used. 

It would also mean the loss of 3,200 to 3,900 private sector insurance jobs, upward of 750 broker jobs, and 700-850 legal services jobs. Between 4,500 to 5,000 new public insurer jobs would be created. 

In a statement released Wednesday, the Insurance Brokers Association of Alberta says on top of job losses and an increased tax burden upon Albertans, a public auto system would “deprive rural communities of the additional functions brokers fulfill, as many small communities rely on their local brokerage to provide registry and financial services as well.”

“When you start to actually layer in the realities of what public auto looks like, it shows quite clearly why no government has moved towards a public auto model in the past 50 years,” says Sutherland. 

“It only appears to lower auto insurance premiums by virtue of creating an ongoing taxpayer subsidy to the tune of hundreds of millions of dollars. And it comes with massive economic harm,” he says. 

What’s more, the Nous Group report also finds transitioning to a public insurer will reduce consumer choice regarding their auto insurance provider. Private insurers have been raising the red flag about this issue since before the United Conservative Party renewed its controversial auto rate cap in January.  

“Consumers may have limited flexibility in selecting insurance coverage that best suits their needs and preferences, as there are fewer options available to them. However, quantifying the extent of changes in consumer choices is challenging due to individual preferences, risk tolerance, and specific coverage requirements,” the Nous Group report reads.  

“Additionally, introduction of a public insurer may limit the ability to bundle insurance policies such as home and auto insurance under private insurers. Bundling often results in discounts or reduced premiums, however calculating the exact impact on bundled premiums is for further analysis at a later stage.” 

Legal costs 

Private insurers and the Oliver Wyman report do align on the observation that legal costs are the main driver of auto insurance premiums in Alberta. 

Legal costs in Alberta’s auto insurance system have risen 31% since 2018 and account for roughly 20% (or $200 for each policy annually) of premiums drivers pay for mandatory coverage, according to a report from accounting firm MNP, which was prepared for IBC. Oliver Wyman quoted this report in its analysis.  

But Alberta’s tort jurisdiction makes it so injured parties can sue for pain and suffering from minor injury, up to its cap of about $6,000.  

“What we’re seeing all too often is an increase in frivolous lawsuits being brought forward by members of the trial bar,” Sutherland says. “Now we’re seeing just dramatic increases on the price impact that’s having in the Alberta marketplace. 

“While we disagree on the specifics of their actuarial analysis and have some concerns with some of the assumptions and measures they used, it’s the trend that is clear,” he says. “One thing they’ve clearly pointed out is that addressing litigation costs in the auto insurance system is the best way to improve affordability for drivers.” 

IBAA adds, because legal costs are inflating premiums, an optional care-based insurance model may be the way to go.

“Providing consumers with the option to sue on minor injuries removes unnecessary legal fees from the system, which immediately alleviates cost pressures. Albertans deserve a care-based approach to minor injuries, while still maintaining the right to sue for catastrophic injuries.”

Feature image by iStock.com/AndreyPopov