Alberta announced its future auto reforms yesterday, saying it will raise its auto insurance rate cap for good drivers to a combined 7.5% starting Jan. 2025. Over the long term, starting in 2027, it plans to introduce a hybrid form of no-fault model that prevents collision victims from suing drivers and their insurers, with some exceptions.
Canada’s auto insurers are concerned about the prospect of an extended rate cap, although they are hopeful a no-fault model will address the legal claims cost pressures insurers face.
However, should the government deem these short- and long-term measures inadequate in bringing down the cost for consumers, “there is that that one last step of a public insurer,” Premier Danielle Smith said in a Thursday news conference.
“We’ve told the insurers this is kind of the end of the line,” she said, when asked if the government would still consider public auto. “This is up to the industry to make this work. And if they can’t make this work, there is only one more step to take.”
What insurers, brokers, need to know
Starting Jan. 2025, insurers filing for rate increases with the Automobile Insurance Rate Board will be capped at 5%. They will also allow for an additional 2.5% rate increase so insures can file for natural disaster-related costs, meaning good drivers will see their rates capped at a combined 7.5% each year.
Alberta is extending its rate cap as an interim fix, before moving toward a predominately no-fault model in Jan. 2027.
The Alberta government conceded “the rate cap is not ideal for Albertans.”
“This wasn’t something we wanted to do,” Finance Minister Nate Horner said at a news conference Thursday. “We’re trying to protect as many Albertans as we can. We’re trying to show the [insurance] companies a path to 2027 that will somewhat stem the bleeding. It certainly won’t make them whole, but we hope that we can show them a light at the end of the tunnel, and they consider staying in Alberta until 2027 to deliver this new product.”
Under the government’s long-term reform model, injured victims won’t be able to sue the other party or their insurer for their injury. Their insurers will instead pay them out at a rate set by the government.
By cutting down on the cost of litigation, Premier Smith said insureds could save up to $400 per year on their premiums.
The government is calling this a “care-first” system, which still allows catastrophically injured victims the right to sue. Injured drivers may also sue an at-fault driver who committed a criminal offence. Injured parties would also be able to sue for out-of-pocket expenses.
The United Conservative Party originally put a rate cap in place in 2023 and renewed it again in 2024 for an indeterminate period. Renewing it once more means the rate cap will be in place for four years by the time the new reform is set to launch.
Rate cap raises concerns
But as long as a rate cap remains in place, even if it is higher, insurer profitability remains in limbo, the Insurance Bureau of Canada tells Canadian Underwriter in an interview.
“The [rate cap] we’re seeing in Alberta today is certainly one of, if not the longest period of rate intervention in this country’s history,” said Aaron Sutherland, IBC’s vice president of the pacific region. “Even at its increased level, it remains below the cost pressures flowing through the system, and that is going to continue to strain the financial viability of the competitive market.”
Auto insurers’ cost pressures include increased vehicle theft (a 5.5% increase in Alberta between 2021 and 2023, according to Équité Association); replacing damaged vehicles (between 9% and 27% cost increases); the cost of delivering care and recovery benefits to those injured in a collision (27%); and rising legal fees (19%), according to IBC.
However, if there’s any insurer upside to the extended rate cap, it’s that it might incentivize customer retention, says Matt Hands, vice president of insurance at RateHub.
That’s because under the current rate cap, if drivers shop around, change their vehicle, move neighbourhoods, or move into Alberta from out of province, they might be subject to a new insurers’ rating methodology, and the cap does not apply. So, shopping around for cheaper insurance could mean customers lose any loyalty discounts they might earn with their current insurer.
“It basically incentivizes renewing and staying with your current insurer,” says Hands, but “that’s the one area that I want to get a little bit more clarity on.”
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No-fault? No problem
The industry is receptive to the idea of a no-fault insurance model.
“In my opinion, it feels like a last-ditch effort to save this private market system,” Hands says.
Since 2018, tort insurance litigation rose more than 30% in the province, according to findings by IBC. Plus, lawsuits and legal fees associated with insurance claims account for 20% of drivers’ auto premiums in Alberta.
“Those bodily injury claims costs and those pressures don’t exist in many of the jurisdictions Alberta compares itself to, notably British Columbia, Saskatchewan and Manitoba,” says Sutherland.
Almost all other provinces use a fully or hybrid no-fault model.
The idea is that no-fault makes claims payouts as quickly as possible for insureds, because they’re dealing with their own carriers. In contrast, in a purely tort system, injured claimants don’t get compensated until the end of the litigation, which can drag through the courts for years. The knock on the pure tort system is that injured drivers don’t get the money early during recovery, when they need it the most.
No-fault “induces a speed to the system, where people can get paid quicker, and it’s more regulated,” Hands adds. “You should have a better understanding of what you’re eligible for.”
Sutherland says insurers and the association are “keen to roll up our sleeves and work with government to make sure these reforms are successful and ultimately remove or reduce claims costs to help improve the affordability of insurance.”
Most critically, he said, “it’s going to depend on government getting its legislative and regulatory changes in place in a reasonable amount of time [to give] industry the time it needs to be able to implement this.”
Premier Smith and Minister Horner acknowledged Alberta insurers will need time to transition toward a new no-fault model.
Public auto not off the table
Premier Smith acknowledged insurers are pulling out of the auto insurance market due to rate cap pressures, which reduces choice for consumers. And if insurance companies pull out, that’s one reason Alberta might go public.
“If this continues on, we end up with fewer and fewer companies, which means if that plays out, we end up with a public insurer,” Smith says.
A recent report by Alberta’s Superintendent of Insurance estimated roughly one-third of the 67 auto insurers that wrote Alberta business in 2023 lost money on Alberta auto insurance.
But Smith warned public auto would also be the government’s last resort for making auto insurance affordable.
“Because we would like to be able to build on the existing, successful industry that we have — 4,500 people employed [in the industry], multiple different providers — we have been given the assurance that this will bring rates down and deliver better care, she said.
“And if not, there is that one last step of a public insurer if it doesn’t end up working out,” she said. “So the industry knows that. They have an interest in making it work. We have an interest in making it work for ratepayers. We’ll certainly know by 2027.”
Hands emphasizes a move toward public auto “is not great for consumer choice, because now you’re forced to always purchase from the government.
“You can purchase some additional coverage above and beyond through a private insurer but specifically, you’re limiting the ability for a broker in that market to sell insurance,” he adds.
A previous government-commissioned report found the move to public auto would cost upward of between $2.4 billion and $2.8 billion to establish. At the time of the report, Smith said the UCP’s “appetite” for public auto was low.
A hail-damaged car parked on a flooded street as residents begin cleaning up in Calgary, Alta., Sunday, June 14, 2020, after a major hail storm damaged homes and flooded streets on Saturday.THE CANADIAN PRESS/Jeff McIntosh
