Auto Insurance Premiums: A Mortality Warning for Ontario Motorists

Auto insurance is set to become a centrepiece policy for the upcoming provincial election. Not only are people hopping mad across the province as they face rising premiums, but there is also a neat answer to the issue of the day offered by Howard Hampton and the NDP: public insurance.

Driving the Hampton way apparently means lower costs, low and stable premium rates, and fairer insurance access. Or at least that is what the NDP web site advertises. As the man says so often, the answer is "publicpower", a code word for nationalizing private sector activity.

Can the solution really be so easy? Eliminate the activities of over one hundred Ontario insurers, none of whom dominate the market. Replace it all with a centralized government bureaucracy, paid for by the taxpayer. Have politicians set premiums and civil servants provide customer service. Presto, whammo, the result is supposedly a better auto insurance system for all. You must admit, this policy solution does not automatically conjure up images of either low cost or high quality service.

But, then, neither do the solutions offered by the other two major political parties. Both the Liberals and the governing Conservatives have auto insurance policies that essentially promise more government interference into the marketplace.

The Ernie Eves Tories have an action plan to limit the right to sue for damages, while at the same time mandating more automatic benefits for victims. If their anticipated cost reductions do not translate into lower premiums, the Government will take action, including rate caps, rate freezes or rate roll-backs.

By comparison, the Dalton McGuinty Liberals are Tories in a hurry. They commit to freezing premiums immediately, forcing premiums 10 per cent lower within 90 days, and siccing an Auto Insurance Watchdog on the industry to further manipulate premiums in the future.

New research from the Fraser Institute should give all of these politicians pause for thought.

The simple truth is that messing around with premiums in a complicated business like insurance can have lethal consequences. In fact, a study out this week study estimates that a completely public insurance system, based on something called social risk pricing, could lead to 50 more deaths every year, and 3,900 more injuries, for young people in this province. The overall number of vehicle collisions could also rise by over one-fifth.

One starting point to understanding why government intervention is not the better way is to realize that auto insurance does not require the state's rough touch. There is no market failure to address and no overriding public interest that must be defended, aside from fiscal solvency for insurers, which is a consideration across all sectors of the finance industry. The very thin reed supporting government intervention is that auto insurance is mandatory. Then again, eating is mandatory (or least recommended), and it is not therefore required that the government should either produce, distribute or price-control food products (though food standards regulation is quite sensible). If Britain, Germany, and American states can do without state-dominated auto insurance, then so can we too.

A second reason to fear the effects of politically motivated (and usually well-intentioned) government measures is subtler. Here is where social risk pricing comes in. The insurance business is all about measuring and matching premiums and costs to risk. If young males cause more accidents (and they do, owing to inexperience and behaviour), then that risk should be paid for directly through higher premiums. This is how Ontario's market basically works now.

Social risk pricing does away with this risk matching with an arbitrary wave of the politician’s wand. In the name of preventing discrimination, premium rates are set the same for motorists, regardless of age or gender or marital status (or sometimes even location). Everyone essentially pays the same, thus leading safe drivers to subsidize dangerous ones, and leading to an incentive for more of the most dangerous class of drivers (inexperienced young people, especially males) to hit the road.

The evidence across public insurance and market insurance provinces is rather compelling. Fatality rates from vehicle collisions in British Columbia, Saskatchewan and Manitoba (the public insurers) are 18 per cent higher than the other provinces. Deaths per kilometre travelled are one-third higher in the three social risk pricing provinces. Hospital collision admissions are almost one and a half times higher - and admissions for young males are 59 per cent higher.

A look across all of the possible explanations for these differences - demographics, urbanization, education, income, weather, traffic conditions, crime, alcoholism, and access to medical services - reveals that social risk pricing is the likeliest explanation.

Taking the collision gap between the two sets of provinces (represented by Saskatchewan and Manitoba on one side, and Alberta, Ontario and Nova Scotia on the other, since those places provided the most detailed data), one can estimate the impact of moving Ontario to a public insurance environment. The results? Vehicle collisions rise by 17 per cent, property damage collisions rise by 21 per cent, and collisions for young people aged 16 to 24 rise by 41 per cent.

In an effort to provide politically pleasing answers, arbitrary government interference with risk pricing produces more deaths, injuries and property damage, especially for young drivers. This is as true for those advocating a full publicly owned insurance system, as for those merely forcing premium rates on insurers. It is too steep a price to pay for equal access to the privilege of driving. Politics does not belong in auto insurance.