Without cap, Alberta auto insurers accumulating Cdn$400 million per year in unfunded liability

Alberta’s auto insurance industry is accumulating an estimated Cdn$400 million per year in unfunded liability as a result of a provincial court decision late last year that struck down the province’s Cdn$4,000 cap on minor injury claims.
Barbara Sulzenko-Laurie, the vice president of policy for the Insurance Bureau of Canada (IBC), made the observation in remarks she made to the IBC’s eighth annual regulatory affairs symposium.
“If the [current] appeal [of the Alberta Court of Queen’s Bench decision] is ultimately lost, say at the Supreme Court of Canada in 2009, the industry could potentially have hundreds of millions of dollars in unfunded liability, with no way of recovering these losses,” she said.
Sulzenko-Laurie was challenging a decision earlier this year by the Alberta Automobile Insurance Rate Board (AIRB) to raise the province’s auto insurance rates this year by only 10% half of what AIRB’s own auditors suggested, and significantly below the 37% increase recommended by the IBC.
The decision to go with 10%, AIRB chair Alfred Savage told the symposium in a panel discussion, was based on whether the current appeal of the earlier cap decision would succeed or fail.
Assuming a worst-case scenario, in which the court-ordered ban on the cap was upheld, AIRB actuaries recommended raising the province’s auto rates by 20%.
“We said, ‘Okay, we don’t know if the cap is going to come or go, so we’ll split the difference [between a 20% increase and no increase] and we’ll go 10%,'” Savage said, explaining the board’s logic.
The board thus raised rates by 10%, amounting to an overall rate increase of 5% across the industry (the base starting point was a 5% decrease, which AIRB actuaries had recommended on the assumption that the cap was still in place).
Savage acknowledged the 10% increase would be “inadequate” if the cap remains outlawed. “But if the cap is struck, my prediction is the province will probably change the law,” he said.