The following is an opinion piece written By Sean Widdess of Lowestrates.ca.
The last few years in Alberta’s auto insurance market have been a test in resilience.
More sophisticated vehicle technology has meant more expensive parts to replace, and higher instances of vehicle theft, especially in rural parts of the province, have left the province’s insurance providers and brokers battling high loss ratios — paying out more in claims than they’ve been able to recoup in premiums.
Regulations around minor injury claims costs is one such example. The cost for settling a bodily injury claim now averages $75,000, up previously from $40,000. And because there’s a two-year statute of limitations for pursuing legal action in such cases, insurers need to keep enough money in their reserves in case they’re sued close to the statute’s expiry, which often happens, and leaves them on the hook for high retroactive interest payments, too.
The combination of these issues has alone made for a hard market in the province. To make matters more difficult, though, when insurance companies went to get approval for the rate increases they needed to offset these rising costs, they were faced with the former NDP government’s 5% rate cap, which prohibited the province’s auto insurance regulator from approving rate hikes of any more than that.
“That was sort of the final nail in the coffin,” says Stephen Savage, principal broker for Direct Rate Insurance Services Inc. “The rate cap made it incredibly difficult for insurance companies to recoup those losses.”
Insurers had to resort to alternative measures throughout the province. These took the form of increased premiums, decreased coverages, stricter underwriting guidelines, and, eventually, the outright cancellations of contracts with local brokerages. The cap was, in many ways, the final element of a perfect storm that left business across the province in a deep freeze.
It wasn’t a perfect solution for consumers, either. The exodus of insurance companies contributed to an increase in private passenger insurance rates. According to the Insurance Bureau of Canada (IBC), the average premium grew from $1,251 to $1,316 between 2017 and 2018. And our data shows that in the second quarter of 2019, consumer insurance rates jumped 16.2% in the province. Fewer companies offering auto insurance in the province meant less competitive pricing for consumers. “The cap was a short-term solution,” says Savage. “But it actually did more damage than good.”
The good news is: we’ve learned this lesson — perhaps the hard way — but learned it nonetheless. And now that the rate cap has expired, a move implemented by the current United Conservative Party, inklings of hope are beginning to emerge that Alberta’s insurance market is steadily improving, with the worst hopefully behind brokers and insurance companies alike. The recovery won’t happen overnight, but high loss ratios are slowly starting to relax. And, while insurers still aren’t eager to rush into the market, there’s at least one reason for them to start making their way back.
“Brokers are optimistic that the market is slowly showing signs of improvement,” says Savage. “But that won’t happen overnight.”
The question now, for government and for organizations like IBC and IBAA will be: how do we revamp Alberta’s auto insurance model so that band-aid solutions aren’t relied on again?
“That’s a big question that doesn’t, unfortunately, have a clear answer at the moment,” says Savage. “Many provinces are facing hard auto insurance markets right now. They will likely need to look to one another for strategies in coming up with a sustainable solution for consumers and insurance companies.”
When that happens, and insurers confidently re-enter Alberta’s market, we should be optimistic that this reinstated competition will pay off for consumers, too.
“More competition is always a win for consumers,” says Savage. “In the meantime, brokers will need to be flexible and find a new way forward.”
Sean Widdess is Vice President of Strategic Partnerships at LowestRates.ca.
