Government-run auto insurance systems provide the most generous benefits for consumers.

Government-run auto insurance systems provide the most generous benefits for consumers.

FACT: In all cases, benefits paid by private insurers are richer than those offered by government-run insurers। For example, in the no-fault system in Manitoba, an accident victim who is catastrophically injured has no right to sue for economic loss that exceeds the maximum pre-set payments. The average claim paid in Ontario is nearly $9,000 but in BC the average is only about $2,400. That’s a huge disparity that shows that in Ontario, you get a lot more for your insurance dollar.

The fact is that there are no economies of scale in government-run auto insurance systems. The 2003 administrative expense ratios for Saskatchewan Government Insurance (SGI), Manitoba Public Insurance (MPI) and the Insurance Corporation of British Columbia (ICBC) versus the national private industry (5.7%, 7.3%, 3.3% and 15.4% respectively) are significantly misrepresented.

For example, in ICBC’s 2003 annual report, its operating expense ratio is reported as 18.1%; the private industry’s operating expense ratio for the same period is reported as 28.1%. ICBC’s 18.1% operating expense ratio includes commissions and taxes, but excludes general expenses related to claims. In contrast, when the private auto insurance industry quotes operating expenses, it includes all expenses.

When these differences are accounted for, the operating expense ratios become 18.1% for ICBC and 21.2% for private insurers in BC.

Therefore, the private industry’s expense numbers compare very favourably to ICBC’s and, where they are higher, this can almost wholly be attributed to:

• ICBC’s tax status as a Crown corporation;
• accounting changes at ICBC that have moved items out of expenses and into claims; and
• lower commission rates that ICBC can afford to pay brokers as a result of holding a monopoly on mandatory auto insurance coverage।
• Actually, no. Historically, not one of the government-run insurers has been able to contain claims costs. In fact, these insurers have resorted to increasing premiums and deductibles, changing rating territories and introducing significant product change, such as no-fault insurance, with greater frequency than private insurers.

  The relatively small growth of claims reported by ICBC (3.2%) was accomplished by increasing deductibles and thereby eliminating an estimated 60,000 claims from the system. This move effectively transferred $160 million in the cost of repairs from the government-run insurer to policyholders. This was on top of a rate increase.

  Further, according to ICBC’s 2005 year-end results posted on their website, their claims costs in the first nine months were up 11।5% from the same period last year. As a result, ICBC has filed for a 6.5% rate increase in 2006 to “manage” the rising trend in claims it is experiencing. Compare this to private insurers who saw claims rise only 0.2% between 2004 and 2005 according to Office of the Superintendent of Financial Institutions (the federal regulator of insurance companies) site. In light of this, how can it be said that government run auto can better control costs?

• The 2004 report of the New Brunswick Select Committee on Public Automobile Insurance recommended that the province adopt a Manitoba-based model of government-run auto insurance. KPMG, the independent actuaries hired to review the findings of the committee, determined that the cost of establishing a public insurance system would outweigh the claimed benefits.

  At a very minimum, the cost of a government-run auto insurance system to taxpayers would equal the cost of operating expenses (such as occupancy, advertising, furniture and equipment, and head office overhead), acquiring office space, and foregone insurance taxes and health care levies, which a government would have to recoup elsewhere. In NB, these costs and lost taxes and health levies would have amounted to at least $140 million in 2004, potentially having an adverse effect on the funding of other public services.

  In addition, despite paying back start-up loans, every government-run insurer in Canada has required a taxpayer bailout, whether through direct cash injections or through dedicated tax revenues। In early 1976, less than two years after its inception, ICBC required a 25% rate increase and a bailout of $181 million ($627 million in today’s dollars). None of that money was ever paid back.

The fact is that MPI in 2001, and ICBC in 2000, did pay dividends to policyholders. However, advocates of government-run auto insurance have failed to mention that MPI had a deficit of $97 million following that surplus distribution and had to transfer $93 million from its capital surplus reserves to pay for it. This reserve declined steadily from $143 million in 2001 to $42 million at the end of 2003. Increasing claims pressure (claims costs in 2001 were $30 million more than expected) and a severe weather event would drain this reserve very quickly. MPI estimates that a severe hailstorm could increase claims by as much as $50 million (2001 annual report).

In ICBC’s case, the corporation lost $250 million in the year following the dividend. It couldn’t afford the dividend but paid it out prior to an election. In exchange for the $100 each received, drivers had their deductibles doubled and premiums raised and many were transferred into more expensive rating territories. ICBC paid for this giveaway through a reduction in reserves, which are now at dangerously low levels. This dangerous, politically motivated "dividend" is a perfect example of what is wrong about government-run insurance, not what is right about it. This is not how to run a business.