Canada’s auto insurance sector is grappling with escalating costs and mounting financial pressures, driven by a combination of supply chain disruptions, inflation and changing consumer behavior, according to a study from Statistics Canada.
Personal auto insurance, which covers private passenger vehicles, has become significantly more expensive, with higher premiums for consumers and challenges for insurers trying to maintain profitability.
According to the study, the surge in auto insurance premiums can be attributed to several factors. The pandemic, which caused widespread economic disruption, led to a rise in vehicle repair costs, parts shortages, and increased vehicle prices.
Supply chain issues, particularly the shortage of semiconductors, further exacerbated the problem, contributing to higher costs for both new and used vehicles, the study revealed. These higher costs, along with rising claims due to extreme weather events and thefts, have made owning and insuring a vehicle more expensive.
In Canada, auto insurance is provincially regulated, and each province sets its own minimum coverage requirements, Statistics Canada said.
In provinces like British Columbia, Manitoba, and Saskatchewan, government insurers provide mandatory coverage, while in Alberta, Ontario, and the Atlantic provinces, private insurers dominate. The regulatory framework requires provincial approval for any premium rate changes, making it challenging for insurers to keep pace with rising operational costs.
As of 2023, Canadian private passenger auto insurance saw revenues and expenses nearly balancing out. In provinces like British Columbia and Saskatchewan, government insurers, operating as not-for-profit entities, reported that expenses exceeded revenues. This trend highlights the strain on both government-run and private insurers, who are grappling with the dual pressures of rising claims and regulatory constraints on premium hikes.
Claims severity has also been a significant issue, with an uptick in vehicle-related incidents, extreme weather, and thefts, according to the report. The frequency of claims increased as more vehicles returned to the roads following the pandemic, with new vehicle registrations showing steady growth. This increase in vehicles on the road raises the potential for more claims and further inflates insurance premiums.
The study also noted the growing number of electric vehicles (EVs) on Canadian roads. Although still a small percentage of the overall vehicle fleet, EVs are becoming more prevalent, particularly in provinces like British Columbia, the study revealed.
While the initial cost of owning an EV is higher than traditional internal combustion engine (ICE) vehicles, the long-term costs may be lower, given lower fuel consumption. However, the shift to EVs also poses new challenges for insurers, as EVs tend to require more expensive repairs due to their specialized parts.
Meanwhile, the claims ratio, a key indicator of profitability, rose sharply in 2023, hitting 81.2% and continue to climb into 2024, the report said.
When combined with higher operating expenses, many insurers have struggled to maintain profitability. The combined ratio, which measures overall underwriting performance, hovered around 100% in recent quarters, meaning insurers were not making a profit from their insurance business alone.
Moreover, the net insurance service ratio (NISR), which adjusts for reinsurance costs, has also indicated potential unprofitability. Ratios above 80% are concerning for insurers, as they suggest that the sector is becoming increasingly difficult to navigate profitably, Statistics Canada said.
The rising costs of claims, vehicle repairs and insurance premiums are expected to continue putting pressure on the Canadian auto insurance market.
With vehicle registrations on the rise and EV adoption slowly increasing, the sector will need to find ways to adapt to these changes while ensuring premiums remain competitive and sustainable for consumers.
As insurers struggle with the combined impact of higher expenses and claims, the future of Canada’s auto insurance sector remains uncertain, with ongoing challenges ahead.
