ICBC 'fix' may be short-lived and costly

The British Columbia government’s recently-released budget projects an amazing turnaround for ICBC—that the insurer will move from a $1.2 billion loss in the current year, and total losses of $3.4 billion over the last four years, to a $50 million loss next year and into the black the following year.

The recent ICBC experience raises several questions. How did these large losses come to be? How does the government plan to roll back ICBC’s losses? Is the government’s solution more than a quick fix?

Nothing about auto insurance makes enormous losses inevitable. While both private and public insurers incur losses, ICBC’s losses are exceptional by being so prolonged and large. The current year’s loss equals $1 for each $5 in insurance premiums, and ICBC loses almost $350 on every insurance policy it writes. Hardly a recipe for a sustainable business.

Why has ICBC faced a string of large losses? A simple but incomplete answer is that ICBC is owned and controlled by the government. The answer is incomplete because ICBC had managed to avoid losses for many years. Rather government interference has been the problem. The government has required the corporation to bear the expense of licensing drivers and vehicles, and has capped the rates that ICBC can charge.

ICBC carries out the job of licensing vehicles and drivers for the government without receiving compensation. Indeed, ICBC hands over the revenues from these activities to the government and bears all the costs unlike Manitoba and Saskatchewan, which compensate their public insurers for their expenses. Supplying these services for the government cost ICBC $100 million in 2018/19.

The rate ceiling imposed on ICBC limits ICBC’s ability to meet its costs. For many years the B.C. Public Utilities Commission approved its rate requests with minor exceptions. Things changed in 2013 when the government directed the commission to set a ceiling on ICBC’s year-to-year rate changes. Costs, however, continued to grow and the cap prevented ICBC from raising rates to fully cover them. The cap acts by limiting the corporation’s revenue growth, making it fall short of the growth of its costs by more than $800 million from 2015 to 2018.

ICBC will make a number of changes to achieve the turnaround predicted in the government’s budget. It will raise insurance rates for new drivers and drivers with poor driving records to reflect their higher risks. It also plans to identify insurance more closely with drivers and their records rather than vehicles they use. Still the government appears to have had no appetite for general rate increases. A past directive, which limits ICBC’s ability to raise rates (and which caused substantial revenue shortfalls), remains in force.

So customers will bear much of the burden for getting ICBC’s budget under control, through capping compensation for injury damages. While caps can keep costs down, they come at a price. Much as a smaller chocolate bar at the same price effectively raises the cost of chocolate, providing less insurance coverage for the same cost has the same effect as raising the premium for the same coverage. Both raise the costs of protection. The difference is that raising rates will be clearly visible to the public whereas diluting protection is harder to see. It affects those unfortunate enough to be harmed by an accident.

It’s uncertain whether these measures will turn ICBC’s finances around. Even if they do, they may be no more than a short-term fix. Recent B.C experience shows that governments can be tempted to interfere with their public insurers, and may want to avoid rates increases that are so toxic for governments seeking re-election, especially when the insurer is closely identified with the government.

The government may also be tempted to saddle its insurer with extra costs or to raid the cookie jar when finances are tight. While caps on rates and cookie jar raids may have short run appeal to politicians, they have unfortunate consequences for public insurers. Of course, these raids can be prevented by making insurers independent of government.