For most of the past decade, Alberta insurers have been forced to manage through extended periods of government intervention on auto insurance rates. In early 2023, the government announced a freeze on any rate filings, which was followed by a 3.7% rate cap that came into effect in 2024. While these political decisions aim to provide immediate relief to drivers, the long-term consequences have proven harmful. Alberta’s history of utilizing auto insurance price controls, as well as a similar experience in California’s auto insurance market from 2020 to 2022, show that these interventions drive up premiums and reduce market competition, ultimately hurting consumers.
What are rate caps and rate freezes?
Auto insurance is mandatory for anyone who drives in Canada. Each province has its own system, and provinces have total control over the legislative and regulatory framework that governs their auto insurance system, the coverage that is sold to customers and the price of coverage.
Insurance companies cannot increase auto insurance premiums without approval from the government’s auto insurance regulator.
In Alberta, the Automobile Insurance Rate Board (AIRB) reviews all rate filings based on the claims-to-premiums cost relationship of the individual insurer and a reasonable level of profit. The Office of the Alberta Superintendent of Insurance is responsible for all insurance sector regulatory compliance activities. These two agencies are the referees that ensure Alberta drivers are receiving fair and competitive auto insurance prices.
When a government chooses to implement a rate cap, they limit how much an insurer can increase the cost of premiums in a given period, even if claims and expenses increase in excess of the cap. The goal of this market intervention is political, not practical. But the outcome is predictable. Arbitrary premium rate caps force difficult financial conditions on insurers. In response, insurers are forced to make business decisions about their presence and capacity in the market. As we’ve seen in Alberta recently, some insurers made the decision to withdraw from the market or reduce the coverage they offer to consumers.
A rate freeze goes a step further than a cap by prohibiting any increase in premiums for a specific period. This forces insurers to maintain rates at an artificially low level, even as claims costs continue to rise.
Rate caps and freezes can distort the market and often result in sudden and sharp price increases once they are eventually lifted.
In Alberta, following the introduction of the rate freeze and rate cap, auto insurers have paid out more in claims and expenses than they earned in premiums.
This is not sustainable. No business can operate effectively when the product they sell costs more than the price they are allowed to charge.
Alberta’s experience with government rate intervention
Alberta has experience with the consequences of political intervention in the insurance market. Between 2017 and 2019, the previous provincial government imposed a rate cap on auto insurance without addressing the underlying costs that were driving up the price of premiums. As a result, pressures built up in the system, and insurers were forced to reduce coverages to remain viable and ensure they could continue to pay claims. This meant many drivers couldn’t secure the coverage they needed, while premiums still increased 12% on average during that rate cap.
Insurers, unable to adjust rates to cover rising claims costs, began reducing the availability of coverage, limiting policy options and, in some cases, withdrawing from the market altogether.
The current government’s more recent market interventions have once again placed significant financial strain on insurers, many of which have faced escalating claims expenses due to rising legal costs, inflation and rising repair costs.
According to a recent MNP report, over the past 18 months, premiums have increased 12% under the rate freeze and the rate cap. Worse, drivers that fall outside of the rate cap are seeing their premiums increase by an average of 15% annually.
To date, three carriers have exited the Alberta market entirely, citing unsustainable operating conditions. More could make a similar decision in the coming months. The result: fewer options for consumers and increased auto insurance premiums because of decreased market competition.
Politics trump reform during affordability crisis
The politicization of insurance is heightened in times like today when consumers are facing many affordability challenges. However, no matter where you live in Canada, the provincial government controls the rules and regulatory oversight of the mandatory auto insurance product.
In a recent report, economist Jack Mintz, School of Public Policy, University of Calgary, noted that Auto insurance premiums have been a contentious issue perhaps due to it being a mandatory expenditure regulated by governments rather than being a significant expenditure for consumers (roughly 2 percent of average consumer expenditure). Rising auto insurance costs due to inflationary pressures including litigation costs, bodily injury costs, income replacement costs, car repair costs, and auto thefts have put pressure on the Alberta government to respond to affordability pressures.
The costs that drive auto insurance premiums are beyond the control of any individual insurer. Inflation, legal costs, auto theft and the increasingly sophisticated nature of vehicles all contribute to rising claims costs.
When a government intervenes in the pricing model of auto insurance, in many cases it forces insurers to lose money on the sale of a mandatory product. There are very few examples in a free-market economy where the government imposes an artificial price on a product or service.
When insurers are forced to lose money, they will look to deploy capital to other lines of business or in other jurisdictions with less interventionist governments. These actions impact the level of competition for auto insurance, which typically serves as the equalizer between supply and price.
In a competitive market, the goal of insurers is to increase the number of consumers they can add to their book of business. The price of an auto insurance product is simple – premiums are set based on expected claims costs plus a profit margin for the company. The level of profit an insurer can earn through providing auto insurance to consumers is also mandated by the government.
Alberta drivers are now at risk of facing higher premiums when current rate interventions are inevitably lifted, as insurers will need to recover losses incurred during the cap and freeze periods.
California’s auto insurance freeze: A case study
California’s experience with auto insurance during the COVID-19 pandemic offers a cautionary example. In response to reduced driving during lockdowns, the state imposed a two-year freeze on auto insurance to keep premiums from rising. While this seemed like a win for consumers in the short term, the freeze backfired.
As driving patterns returned to pre-pandemic levels, insurers struggled to manage rising claims without the ability to adjust rates. Several large insurance companies, including State Farm, AllState, Farmers, USAA and Kemper, announced they were either departing from or significantly reducing coverage in the largest auto insurance market in the United States. To be blunt, the crisis in the market was the government’s own making.
A lack of competition, combined with mounting cost pressures, led to increased premiums once the freeze was lifted. California consumers were left with fewer choices and higher costs. This is what we may end up seeing in Alberta as a result of the government’s repeated intervention in the auto insurance market.
Alberta’s path forward
Alberta should learn from its own history and California’s recent experiences. Government rate interventions distort the market, and reduce competition and consumer choice, leaving consumers to pay the price unless reforms are immediately implemented and the intervention is removed. Instead of imposing rate caps or freezes, Alberta should focus on promoting a competitive insurance market that allows insurers to price policies based on real risk factors.
Importantly, the government should implement reforms that reward good drivers, while ensuring that drivers with infractions, accidents or poor driving behaviours pay high premiums to reflect their risk to public safety.
Addressing the root causes of rising premiums creates a healthier, more sustainable auto insurance market. By allowing insurers to compete and innovate, Alberta can protect consumers while avoiding the negative, long-term consequences of price controls.
Alberta’s auto insurers have proposed reforms that will help address costs and deliver immediate and long-term relief to drivers. These reforms will improve affordability while enhancing the care and benefits available to those injured in a collision. To learn more, visit www.betterwaytosave.ca.
