Alberta’s promise to cap auto insurance rate increases for “good drivers” in the province will not help consumers achieve affordability and only put further financial strain on auto insurers, property and casualty insurance industry experts warn.
Ultimately, it could lead to more insurers pulling out of the market. This means less available coverage for consumers, at higher rates.
“Rates are only likely to continue to increase as we see continued cost pressures from inflation and vehicle damage costs, bodily injury cost pressures, as well as increasing incidents of theft,” Aaron Sutherland, vice president of the Insurance Bureau of Canada (IBC)’s western and pacific region told Canadian Underwriter.
“This is kind of a band-aid,” said Logan Mendenhall, director of RH Insurance, Alberta at Ratehub. “It’s a short-term answer for what is going to be a long-term problem.”
The new United Conservative Party (UCP) government recently announced Albertans with good driving records will only see their rates increase to account for Alberta’s September inflation rate, which was 3.7%. This new rate cap is effective Jan. 1, 2024.
UCP defines a “good” driver as anyone except those who have:
- any at-fault accidents in the last six years;
- any Criminal Code traffic convictions in the last four years;
- any major traffic convictions in the last three years; or
- more than one minor traffic conviction in the last three years.
IBC says the UCP’s definition of a good driver applies to roughly 80% of drivers. Coupled with the fact that Alberta’s unique grid rating framework caps rates for an additional 10% of drivers, the definition means practically all provincial drivers fall within the criteria.
“There is admittedly a small set of drivers for whom this will not apply,” said Sutherland. “Those drivers, unfortunately, are going to see potentially significant dislocation in their rates.”
Canada’s auto insurers note a good driver’s level of risk can change rapidly. This could mean a startling change in rates for anyone who suddenly finds themself excluded from the above criteria.
Plus, insurers determine rates by applying a variety of factors, including where a client lives, what car they drive, or what age they are. Clients may still see their rates change for any one of these factors.
Being a high or low auto insurance risk is nuanced, Sutherland said. “It’s not just if you’re a driver and you have an at-fault claim. It’s something as simple as if you move, or if you purchase a new vehicle, if you’re with a company that has an approved rate increase next year.”
Drivers can mitigate the impact of rate increases through diligent driving during the rate cap period, Mendenhall suggested. He recommends an accident forgiveness policy add-on, which grants insureds protection for one at-fault accident per renewal.
“The takeaway for drivers is, everybody just needs to take accountability and take care of your driving record,” Mendenhall said. “Keep your driving record clean, so that you have access to the best rates.”
In addition to the rate cap, Alberta’s new provincial government announced amendments enhancing the powers of the Automobile Insurance Rate Board (AIRB). The proposed changes would give AIRB the authority to “return premiums to drivers” during periods of high profitability and “lower rates if necessary.”
This will put additional pressure on auto insurers, which are already losing money insuring Albertan drivers, IBC told Canadian Underwriter Friday. Over the past decade, automobile insurers in Alberta have paid out an average of $1.03 in claims, expenses and premium taxes for every $1 collected in premiums.
The current rate cap, introduced by the UCP in 2023, led to one carrier exiting the market, and left more than 16,000 drivers without coverage, IBC said.
Insurers are concerned an ongoing rate cap will impede the very function of insurance, which is to pool the premiums of the many to pay for the claims of the few.
“When you cap rates for a certain subset of drivers — in this case, a very large subset of drivers — you really are striking at the insurance industry’s ability to do that very thing,” said Sutherland. “It’s actually quite concerning.”
Better reforms needed
The industry isn’t short of ideas to solve Alberta’s auto insurance affordability issue.
The Insurance Brokers’ Association of Alberta (IBAA) believes enhanced consumer choice in auto insurance would do more to address premium costs.
“We feel that allowing drivers to choose the type of liability coverage they would like to purchase would provide more cost flexibility,” Jonathan Brown, IBAA president told CU.
“We support a model that focuses on expanded care options for injuries versus a model that pushes injured motorists into the court system as their only recourse,” Brown wrote in an email statement. “We believe that an expanded care model better addresses the impacts of injuries while reducing costs within the system.”
IBAA also advocates for long-term reform to bodily injury compensation, the removal or significant reform of the GRID program, and the reduction or removal of the provincial premium tax on auto insurance.
When asked if the UCP would consider other long-term reforms, including public insurance, Finance Minister Nate Horner said nothing is off the table.
IBAA told CU a public model is not in consumers’ best interest, however, as the costs would simply be carried over to taxpayers.
IBC says 33 cents of every dollar in premiums received by British Columbia’s public insurer goes to support its operating costs. In Alberta, private insurers spend 25 cents per premium dollar on their operations.
IBC has also proposed an Enhancing Care and Expanding Choice reform, which would give drivers more choice in their coverage options and save consumers about $200.
The P&C industry emphasizes it remains open to working on long-term reforms with the Alberta government.
Feature image by iStock.com/ipuwadol